I have a 401K distribution and i want to pay off my car note because my income is fixed and i do not want to default the loan...I have at least 30k in my 401K account and I would like to take 5K from it to pay off my bills since I do not have a job and and monthly payment of 200 bucks is killing me. what should I do?
2007-08-30 02:35:42 · 5 answers · asked by wazee712 2 in Business & Finance ➔ Taxes ➔ United States
If you take distribution before 59 1/2 of age, you will be charged 10% penalty on early withdrawal. Thus on $5,000 you will pay additional tax of $500.
Also the distribution of $5,000 will be your income in the year of distribuition. If you are unemployed in that year, your total income for that year including the distribution will be small and you will pay no tax or little tax.
Now decide do you want to get $5,000 and pay $500 extra, or do you have other borrowing options.
2007-08-30 03:05:50 · answer #1 · answered by MukatA 6 · 0⤊ 0⤋
The amount of tax that you will pay on a distribution of $5K is difficult to determine without knowing what your income level and age. A fair guess would be to take your last years return and look for the marginal tax rate(the highest rate paid on the last dollar you earned). That rate, times the $5K, plus 10% of the $5K if you are not 59 1/2 years old at the time of the distribution will give you some idea what the tax will be. You may need to make an adjustment if you income will be a great deal different this year. If you state has income tax you will also have an tax and penality to pay there also. It is not at all infrequent for folks to pay as much as 45% in tax on early distributions so you may wish to look at some other means of dealing with this problem short term. If you factor in the interest you are making on the money if you leave it in the 401k a short term loan will look pretty good.
2007-08-30 05:06:58 · answer #2 · answered by ? 6 · 1⤊ 0⤋
tax will be at normal federal tax rate, and of course have to take into account state as well.
Normally there would be an additional 10% penalty if you were under age 59 1/2 but that can be waived for certain exceptions, one of which is distribution after participants separation from service (which being laid off would be).
2007-08-30 11:15:34 · answer #3 · answered by Anonymous · 0⤊ 0⤋
Income tax will be at regular rates plus, if you are under 59 1/2 years old, there will be an additional 10% early withdrawal penalty.
2007-08-30 02:46:39 · answer #4 · answered by Anonymous · 1⤊ 0⤋
Depending on your other income you can probably look at saying goodbye to about $2000 of $5000 distribution in taxes and penalties.
2007-08-30 03:05:18 · answer #5 · answered by Wayne Z 7 · 0⤊ 0⤋