I am 44 I need to cash out my 401k. I know they take out the 10% penalty off the top but what about fed tax?

Question

I left my job in March so no longer make contributions. My husband will be 50 in Jan. and can retire from his state job. He can increase his pension by "buying back" 2 years of his military service time to go towards his service to the state. I need to know if there will be enough left out of my 401k to buy this service credit.

I will not be cashing it out until Jan so will be in 2008 tax year. Our only income will be his retirement pension so how will fed tax be calculated. Will it be based on our 2007 tax rate or our expected 2008 tax rate? Also we will not owe State tax on his pension as it is from state service so how does this affect the state rate for 401k withdrawal.

Answer 1

Cashing out is a bad move, but you know that already.
There is something called Rule 72t which may be an alternative.
This allows you to take out Penalty free as long as you take at least 5 substantially equal annual dispersments. This would allow you to spread the tax burden over a longer period of time as well as avoid the penalty.
How much is your 401k worth? If it is say $500,000 then I would strongly recommend the 72t option.
You would have to first roll your 401k over into a traditional IRA, then rule 72t may be an option.
I'm not quite sure how it works, but if you inquire about it it may be the right option fo you.
Other wise figure on
10% penalty
32% taxes (on the whole amount before penalty, plus normal income)
So roughly 50% of what you have, depending on your income level, if your lucky.

Answer 2

They withhold an automatic 20% for taxes; this amount is fixed regardless of your own personal tax rate. The 10% penalty is applied when you file your taxes. Depending on how much tax you owe it could be paid with the withholding that was taken already.

using your example. If you take a distribution of $50,000 in January of 08, they will withhold 20% of it or $10,000. Then in January of 09 you will get a 1099-R showing the distribution and witholding amounts. You show the distribution amount on the 1040 separate from your salary wages and tips. However, the withholding simply gets added to any other federal withholding you have in 08 (withholding is withholding). Your taxes will be calculated based upon your total income less your deductions. At that point you'll add in your 10% ($5,000) penalty to get your total tax. If amount you had withheld still exceeds the total tax then you get a refund. If not, you'll owe more money. Hard to say how much that will be because I dont know your income nor your deduction amounts.

Bottom line is multiply your 401k balance by 80% and that's how much cash on hand you will have. But be aware that come tax time you could owe more!

and btw the rule of 72t isn't a good option for you because you're only 44 and the balance is paid based upon your life expectancy...won't give you the cash you need. Figure out how much it will take to buy back the service credit and multiply that amount by 1.2. If your 401k balance is higher then you should roll over the extra 401k. This will help lower the penalties.

Answer 3

They take the 10% off the top, then you have to pay federal tax for your income level with your 401K proceeds added to your real income. And state tax of course.

It depends on your income level and the amount in your 401K of course but you would probably have clear after taxes and penalties about 65-70% of your 401K balance.

Is there any chance you can just take out a home equity loan or second mortgage. How much of an increase would that 2 years make in his pension? Is the increase worth losing about 30-35% of his 401K balance?

Answer 4

confident. even if while you at the instant are not to any extent further with the employer, the funds on your 401K remains yours and is meant to be invested till you attain retirement age. in case you withdraw it from the fund and don't roll it over right into a clean retirement account, you will pay the ten % penalty fee and the taxes on it as properly.

Answer 5

The withdrawal will be taxed as ordinary income (federal and state if applicable) plus you'll have to pay the 10% penalty. If you live in a state without a state income tax, you'll probably end up with 60% of what you withdraw (less if you also have to pay state income tax).