I am looking to quit my job to be a stay at home Mom and take a withdrawal out of my 401k. I have $72K in there and I would like $30K of it. How much extra should I take out to account for the initial tax penalty PLUS the hit at tax time next year???

juniormiss

You get hit with a 10% penalty if you are under 59.5 years of age and I'm assuming you are. When you take a distribution from your 401(k) plan, your former employer is required to withhold 20% from your distributions for taxes. You can request the employer to withhold 30% to help pay for the penalty so you don't have to worry about. To calculate this amount All you need to do is take 30K / (1-.30)= 42,857. (.30 is 30%representing the % of withheld from your distribution). You may want to request even more if you end up in a higher tax bracket cause by this distribution. Consulting with an accountant or financial planner would be best.

kjcrutch

I have found some things on the internet about diverting all of my 401k to an IRA and then, take a distribution out of the IRA and be hit with a smaller tax penalty. Is that true?????? I will be a stay at home Mom, so it should not put me in a higher tax bracket since I won't make any more money for the rest of the year. I am just confused on if I will have money taken out at first (20%) which it sounds like I will...and then again at tax time......I am not clear on the tax time implications if they have already taken out the 20%.

ebaines

First, there is no tax advantage between an IRA and a 401(k) - when you withdraw money from either type of plan you have to pay income tax (federal and state/local). There are some differences in the rules regarding whether the 10% early withdrawal penalty, but in your case it doesn't sound like you meet any of the exceptions. Consequently you should plan on paying 20% for federal income tax, 10% for the early withdrawal penalty, and if you live in a state with income tax another 5% or so for the state (this obviously depends on what state you live in). That's a total of about 35% that will disappear in taxes and penalties. Doing the math: if you were to withdraw $46,150, they will withhold 20% for the feds, and issue you a check for $36,920. You would then have to pay another $4,615 next April for the early withdrawal penalty, plus $2,308 for your sate income tax, which leaves you with the $30K. Note - all this assumes that your federal tax bracket is 20% and your state tax bracket 5% - your mileage may vary.

kjcrutch

On our tax return printout, it says a 14% tax bracket....is this the same as the 20% one you are talking about for tax time? Also, we live in TX, so there is no state tax.

ebaines

I'm not sure where the 14% comes from - assuming you are married filing jointly, the 15% bracket applies to incomes up to $65.1K. However, if you take $40K or so as a withdrawal, you add that to your other income for the year and if that total is greater than $65.1K you will be pushed into the 25% bracket. Since you have tax software you can run a couple of "what if" scenarios to see the exact result. Living in a state with no income tax TX will save you a few bucks.

ScottGem

The 14% is an effective tax rate calculated by your software based on your income and actual tax liability. As eb noted, the distribution could push you into a higher bracket.

But the bottomline here is that you will be THROWING AWAY about $15K to get at this money. Is it worth that much? IMHO its not the smart thing to do.

kjcrutch

I know it is not the best thing to do to get at this money, but it is worth it for us for me to be able to stay home with our baby. How would it push us into a higher tax bracket if I won't have additional income for the rest of the year?

ebaines

Since we have no way of knowing the details of your particular financial situation, we have no way of knowing what tax bracket you'll be in. All I was suggesting is that given the $40K in taxable income from the withdrawal that you are contemplating, and given that the 25% bracket starts for married couples at an adjusted gross income of $65.1K, it won't take much income from other sources to push you into the 25% bracket. Again, your tax software can help you figure this out.

kjcrutch

My husband makes $70K annually if that helps with our financial situation. We do have Microsoft Money...is there something in there that can help us with this?