My father is interested in changing jobs and with his present job he has a good build up of his 401K. If he closes the 401K account, how will the taxes be handled? Will they take taxes out before he receives the money, after he receives it, in between?? How does this work? Also, if he was to put some of the money into paying a house morage off, will he recieve a tax break? Are there any tax breaks in this? Thanks!
2007-10-19 07:36:06 · 5 answers · asked by Kayla G 1 in Business & Finance ➔ Taxes ➔ United States
Mortgage debt is good debt unless he has a high interest rate. I would keep the 401K if it is a good plan (the employer has to pay the administraive costs on the 401K) or roll into an IRA.
2007-10-19 08:43:55 · answer #1 · answered by ladyellei 6 · 0⤊ 0⤋
The smart thing is to either leave the account or have them send the money directly to either another 401K (at the new job) or an IRA. In either of these situations, there should be no tax. If the money is paid to him, they withhold 20%, and the entire distribution must be reported on his 1040, and if he does not contribute an amount equal to the entire distribution (including the part that was withheld for tax) to another 401K, etc., or to an IRA, then there is a 10% penalty. I could keep going, but I think that I have made my point that it is a very bad idea to have the money paid to him. Instead, either leave the account or have them send the money directly to either another 401K (at the new job) or an IRA. In either of these situations, there should be no tax.
The only tax break for mortgages is the deduction for the interest. There is no tax break for early payment.
2007-10-19 07:54:51 · answer #2 · answered by StephenWeinstein 7 · 1⤊ 0⤋
It depends on what he does with it. If he rolls it over into a 401K with his new employer or into a rolloever IRA, he won't owe any tax until he takes it out of those.
But if he takes any or all of it out, for example to use to pay a mortgage, he'll pay income tax for the year he takes it out. If he's under 59-1/2, he'll also pay a 10% penalty on the amount withdrawn. The trustee will withhold 20%, which might or might not be enough for the taxes, probably not if he's under 59-1/2 and maybe not even if he's older than that.
2007-10-19 07:49:16 · answer #3 · answered by Judy 7 · 0⤊ 0⤋
There are absolutely no tax breaks for cashing it out, regardless of what he does with the money.
If he is over 59 1/2 years old, he would pay ordinary income taxes on the money.
If he is under 59 1/2 and is not disabled, he would pay ordinary income taxes plus a 10% penalty.
If he cashes it out, the trustee will withhold 20% for federal taxes but this usually doesn't come close to paying the whole tax bill. Some people say goodbye to upwards of 40% of their 401k if they cash it out.
The best thing to do would be to roll it over in to an IRA. There would be no taxes and no penalty.
2007-10-19 07:43:42 · answer #4 · answered by Wayne Z 7 · 1⤊ 0⤋
He would be better off taking the money and putting it in a Roth or Traditional IRA. If he puts the money towards the mortgage, he needs to put it towards the interest as this is where the tax break usually is. As far as taxes on the 401k if the employer does not take the taxes out, he should send an estimated to the state department of revenue, if the state requires income tax, and send in an estimated payment into the IRS. good luck
2007-10-19 07:50:32 · answer #5 · answered by pitbull1969 5 · 0⤊ 3⤋