Early pension plan withdrawls are subject to 20% fed tax...?

Question

including the 10% penalty -- what happens to this 10%?

How is it classified on one's income tax return?

Is all 20% classified as federal income tax -- or just 10% And if so, what happens to the other 10% - does it just disappear into the govt's pocket? I'm pretty confused

Answer 1

No, actually the 20% is just what is automatically withheld - your actual tax could be less than or more than that. The amount withdrawn is shown as ordinary income on your tax return, and is taxed at whatever your bracket is, then the 10% penalty is added. So if you are in a 15% bracket, your total tax on the withdrawal would be 25% so you'd owe additional to the 20% that was withheld.

Answer 2

The best thing to do is to roll-over the money in a Roths IRA or 401K to avoid the penalty.

If you opt to spend the money (bad idea - really bad idea) you will have to pay the Federal Penalty - if 10% was not taken from funds given you place 10% in a savings account for taxes

Answer 3

If you're referring to a 401(k) or IRA, you get hit with a 10% penalty plus the gross amount withdrawn is taxed as ordinary income. Your total net after taxes will probably be 60-65% of the gross withdrawal.