what is the penalty and tax for early withdraw on my 410k?

Question

I'm thinking of taking out a loan from my 410k but first I want to know what the tax is and if there are any penalties, some one told me I can do it but would have to role it over to avoid the penalties is this true?

Answer 1

If you take a loan against your 401k, there is no tax and no penalty as long as you pay it back on schedule.

If you withdraw the money, not as a loan, you will pay income tax on the amount withdrawn at whatever your tax rate is - that's whether it's an early withdrawal or not. If you take money out before you are 59-1/2, then there's a 10% penalty additional on the amount withdrawn. If you roll in over into a traditional IRA, you don't pay any penalty, and you don't pay income tax until you withdraw it from there.

Answer 2

That depends on several factors. The penalty is 10% (I believe) and then you are taxed at your current tax bracket for the full amount you withdraw.

If you take a loan, however, you pay the loan back out of your paycheck and pay some interest back into your own account. Effectively you are loaning yourself money instead of borrowing it from a bank. It's still not the best option because large sums of money grow faster than smaller ones, but it's often better than trying to borrow from someone else.

IF you leave a job while you have an outstanding loan, it isn't always required to be paid back immediately. That is entirely dependent upon the options your employer chose for the 401k plan when they set it up. I had one employer that woul allow me to pay back outstanding loans before rolling over my 401k and another who didn't. Loans still aren't a great choice, but check the details with your 401k management firm (Fidelity, Charles Schwab, whomever) and ask the specifics of whether or not you can take a loan, what the repayment stipulations are, as well as when and how you're required to pay it off if you leave your current position. They will also be able to give you the specifics on the penalties for early withdrawal.

Answer 3

There are no penalties for a LOAN from a 401K because you pay it back. You also pay yourself interest, probably around 9%.

If you leave your job, you must pay the loan balance in full immediately. If you dont, then it becomes a withdrawal, and you have to pay a 10% early withdrawal penalty plus your income tax rate.

Loans from 401K's are usually a bad idea... your money is not working for you when it is not in the account. Your 401K is probably making you 12% per year....

Answer 4

Check with your employer's plan specialist. Sometimes the plans do not allow loans. If they do, there usually is a processing fee and an annual fee that is paid during the life of the loan. Also, check with the plan should you leave your employment. The amount may become due in full within a certain amount of time, the remaining amount becomes fully taxable to you or you may be allowed to make your normal payment directly instead of payroll deduction.

Also, what is the loan for? There are exceptions where you can take a distribution and not have to pay any penalty. There are several, so check with the plan specialist or your tax preparer.

If you default on the loan or you can not pay the amount owing in full, there will be a 10% penalty on the balance.

Answer 5

Sorry but there's not many ways around the 10% penalty. Very generally: 1. The holder of the account became totally and permanently disabled. 2. The withdrawl was used to pay for uninsured medical expenses that exceeded 7.5% of your Adjusted Gross Income, even if you did not itemize those medical expenses. Depending upon the type of retirement account there may be other ways to avoid the penalty such as a first time home purchase or educational expenses. Not all retirement accounts are eligible for that treatment so you probably check with a tax professional for guidance specific to your situation.

Answer 6

Loans are not taxable events because you have to pay it back. As such, if it is a loan, there are no taxes or penalties.

As a financial matter, loans from 401k's should only be done as a last resort.

Lastly, if you leave a job with a loan from a 401k outstanding, you have to pay it back imediately or else it becomes a distribution subject to taxes and penalties.