I have to withdraw on my 401K account. What will it cost me.?

Question

I'm married with 3 children. Own a home, have car payments, bla, bla,bla. I lost my Job about 3 months ago. I held of as long as I can. Other than selling my house. My only option is my 401K money.

I do not wan't to sell my house. The housing market sucks, and I'd be lucky to walk away with 20 grand after I payoff the second morgage. Plus that could take months, if the

A loan won't work because I can't afford the loans I have at the moment.

This is my situation. I have (2) 401K accounts one with $9,500 and one with $52,000.

My thinking was I would withdraw the $9,500 from the 1st account and hope I find a Job in my feild before I have to tap in to the $52K account.

Everything I have read is very vauge, I have read the after tax and penalties. I will recieve about 55% to 60% of my money.

I don't want to sound like a loser. But I have to get these creditors off my back. I am working, for a 3rd less of what I was making the economy in ohio is bad, and is not improving.

Answer 1

Sorry to hear you lost your job. However, your 401k plan is still being administered by someone. Call your ex-employer and ask to speak to the Plan Administrator. He/she can give you more details. These I'm giving are general advice.

I had to do the same thing once. You may be able to declare an "emergency" (again, ask the Plan Administrator what qualifies as an emergency) and withdraw some without as severe a penalty. But in general, if you are younger than 59 1/2, you can still cash it in with a penalty. The Plan will automatically withhold 20% of your money as withholding taxes. This is because you've not paid ANY taxes on the money yet. You will get a W-2 at the end of the year that shows you paid in the 20% taxes paid against your yearly tax bill, but the income will also be reportable on your tax return. In addition, there is a space for "early withdrawal of retirement plans". This penalty is 10% of the total amount you withdrew, but it is not payable until you file your tax return. Good luck to you.

Edit: Another thing to consider is the amount of time it takes for some companies to pay you your 401k money if you decide to withdraw it. Some plans have strict rules about when these payouts can occur. I can remember having to wait months for my check. I was required to wait until the end of the Plan's fiscal year to withdraw.

Answer 2

If you are under age 59-1/2, it will cost you a 10 percent early withdrawal penalty right off the top. In addition, you will have to pay federal income tax on the amount you withdraw just as if it were earned income (20 percent or more), and any state income tax, as well (maybe another 5-10 percent). You'll walk away with just a little over 50 percent of what you've got right now. Still think it sounds like a good idea?

Answer 3

I'm so sorry about your bad luck. I went through this a few years ago. The 401k fund will deduct about 20% but they don't always deduct the IRS early-withdrawal penalty of 10%.

Don't forget to claim this as income when you file your taxes! I forgot and had to pay about $2400 in taxes and penalties when the IRS found out. And they will find out! Also, if you live someplace that has state income tax, you have to include in your income there, too.

If you can possibly hold off till January to withdraw the money, that will give you extra time to pay the tax.

I'd recommend getting a second job, even if it is at Starbucks or as a grocery store cashier, before withdrawing the money from the 401k, but I understand that may not be an option for you.

Good luck!!!

Answer 4

401 K's are qualified fund accounts. Early withdrawal cost you 10% off the top.

Best option for you!

Do you have other funds that are not in a qualified plan? If so, open up a brokerage account.

Insist that it be a MARGIN account.

Purchase something safe like Treasury Bonds where you can borrow up to 90% of the Market Value of those bonds. You will earn the interest on the Bonds + the loan is very cheap. It is known as the Broker Loan Rate.

This is the fastest loan in the world and if you can do this it would be much more favorable than depleating your 401k's and paying the penalty.

Former Stockbroker - Member NASD, NYSE, ASE

Answer 5

You've probably read people tell you not to take the withdrawl. But it sounds like you've waited out as long as you can and are ready to make an informed decision. One thing is you won't be able to take out a loan from a 401(k) if you are no longer employed with the company.

You will have 20% of the money withheld for federal income taxes, plus any state withholding that is required. For most people, this is not enough to cover all of the taxes that are actually owed. First, the amount withdrawn will be added to your taxable income and taxed at your tax rate. So if you're in the 15% bracket, it will be taxed at 15% and if you're inthe 25% bracket, it will be taxed at 25%. Second, no matter what bracket you're in, you will have to pay a 10% penalty tax in addition to the regular tax. And third, since it is added to your regular income, it can influence the amount of your tax credits.

The last thing to consider is if after all is said and done, this leaves you owing more than $1,000 to the IRS in the spring, you may also be subject to penalty for not paying in enough during the year.

If there's anyway that you can wait January, I would so you have 15 months to make preparations for the tax ramifications. Because your 2008 taxes won't be due until April 2009. Your 2007 taxes are due this coming April.

Answer 6

You have to pay 20% federal withholding and if your state requires withholding, that'll be taken too.

10% is an option, at least it says so on the paper for the company I work for. I think people choose to take the 10% so at tax time, they owe that much less..or they get that much less back.

Although I'm not in your situation, I understand the struggle. Tapping into your retirement is something you probably thought you'd never do...you've worked hard to get that money there. Now it's time that you might need it, thankfully you have it to use or who knows what you'd be able to fall back on. If you need it, do it. Like you said, you should probably start with the smaller account and leave the bigger one alone. If you need that too - well, you know what you'll need to do.

Good luck.

Answer 7

You will pay taxes and penalties as the other answerers indicated.

I believe for certain things, you can withdraw without the penalty: education, medical and hardship.

There is also a little known mechanism called a SEPP - stands for Substantially Equal Payment Plan. This will allow you to begin withdrawing at (I think) about a percentage point below the fed rate - probably around 4%. Just the same as if you were already retired. Look into it or ask a financial advisor / accountant.

Answer 8

DON'T cash out your deferred savings... you will reg
ret it later on when (eventually) you sit down and figure out just how "rich" you'd be if you hadn't done it! (20 years from now, it will make you physically sick!)

Sell the cars, pay off the loans, buy a $400 car that works just as well, costs less to insure, and has no payments!

Stop looking for "a job in your field"....find a job you are qualified for that pays well. If people to do "jobs in your field" were in high demand, you wouldn't have lost your job (unless you were just terrible at it! In which case it's the wrong field anyway!)

You need to get rid of the loans you have already, except for the mortgage, so sell stuff (anything except the kids is fair game). Pay minimums on all except the smallest, throw everything at the smallest until it's gone...then move to the next one.

Go to the library & read any of Dave Ramsey's books for FREE... you don't need to pay for good advice!

Best wishes...

Answer 9

first i would try to talk to the creditors to give you a month or two or so time to make the payments!
Don't tap into your 401K because the penalty is already to much to pay . You would lose to much money !
If you have a newer car sell it and get a cheaper one and everubody else will have to chuip in to live on less ,That means not to buy any extras or so .
make a table to see how much you have to pay a mont and the mony you bring in.
No going to the movies no extra clothes buying etc. Pay off the highes interrest first . It will take some time but it os better than to tap into the 401 k and pay high penalty!

Answer 10

If you withdraw all of a 401(k), then the IRS typically taxes you about 20% on that money as a penalty.

When I was laid-off severa times due to the economy between 2001 and 2005, I had this happen to me twice.