Hello,
I am wondering if you can "guesstimate" what my loss would be if I chose to take out a lump sum withdrawal on my 401K. First some background. I am not close to being 59 1/2 years old (or my spouse). I live in a state with no state income tax. I have 3 children under the age of 18 and a spouse. We make about $100k yearly. We own our home (read that as mortgaged not renting). Now as I understand it my employer will hang on to 20% until after I file federal income taxes. If there is anything left after uncle sam helps himself then I get it back. Up front I pay 10% penalty for early withdrawal. When do I have to pay the 10%? Also the amount in the 401K before the withdrawal is about $170K. What other marginals can I expect? I have my reasons for considering what others are calling suicidal financial sense. What might my net amount be after the penalties etc?
Thank you.:)

You make over $100,000 a year and you NEED to take the money out?

I hope your reasons are good ones because it is NOT a good idea to take the money out.

You said you have $170,000 in your account.

So, the 10% penalty will come to $17,000

Now, since you live in a state which has no income taxes, then the only income tax you will have to worry about is federal.

Your income for 2006 normally would be $100,000 (or whatever you make).

However, your new income for 2006 will be $270,000.

So how much extra tax is that? I don't know what US Federal tax rates are.

20% of it, $34,000 will be withheld for tax purposes, but the amount could be higher.

So,

$170,000 – Penalty 17,000 – Federal Tax 34,000 (possibly more) = $119,000 (or possibly less if your tax rate is higher than 20%)

Thank you CaptainForest for your reply. I roughly figured about $119K as well. Roughly mind you. My annual federal tax return usually results in a modest refund from uncle sam. Any US tax experts on board here? Can any of you offer anything other than the obvious that the Captain and myself are calculating? I never said I needed to take out the money. My reasons are my own. Thank you again.

Your reasons may be your own, but I don't like giving advise that is damaging. Why would you throw away $17K? If you want to throw that much away, I take Paypal ;)

As for the tax liability, remember the amount of the withdrawal is added to your income. So it may bump you up a bracket, which means your overall tax liability is increased.

If you need funds, try a loan against your 401K. But frankly, withdrawing the funds is just a stupid idea.

Thank you CaptainForest for your reply. I rougly figured about $119K as well. Roughly mind you. My annual federal tax return usually results in a modest refund from uncle sam. Any US tax experts on board here? Can any of you offer anything other than the obvious that the Captain and myself are calculating? I never said I needed to take out the money. My reasons are my own. Thank you again.

I know you never said you "needed" to take the money out, and that's about the only good reason to take it out, only if you really needed the money desperately such as a financial emergency not for what you might consider a financial opportunity, the penalties are just too substantial, it's special money, money for you when you need it most, at retirement. It's like paying extra taxes when you apparently can avoid them since you do not need the money. I am sorry but it's just that simple, therefore, why calculate your losses ?

Ok so now that everyone agrees it is a stupid idea... :o Advice is only damaging if one acts on it and it is always a good idea to understand the downside to any problem. Is this not due diligence? 401K money is special money indeed. Designed to grow under tax protection laws and to discourage the weak hand trying to access it early. So we all understand there are penalties. ***

Scott Gem can you please post more about a loan against a 401k?

Thank you all :)

UncleSamSux,

It's great that you have not acted on surrendering it ! And great that you are delving into all aspects, one massive problem we have in society is people will not question or attempt to learn, I deal with it everday in my property and casualty insurance business ! But please do not think we are calling you "stupid", not you, just the idea, really try to avoid it, and as to your question to ScottGen about a loan, that was a great question. I will let him answer as I have read his some of his prior answers to other questions and I have an ideas that he's a trained perhaps certified financial planner and if I am correct, others pay him a fee for his advice. It's great to at least put in my two cents and even greater to learn what others have to say.

Most plans have a loan provision. Basically how it works, is you can access a certain percentage of your vested balance by taking a loan. The amount borrowed is considered an asset of your plan. Interest is charged at a "reasonable" rate. Depending on the plan provisions the rate is usually close to average prevailing rates for a secured loan.

The main thing is that the interest is being paid to yourself. The full amount of your interest goes back into your account. Since you are borrowing the money from yourself, you pay yourself back. So your retirement savings grow even more.

The disadvantages are two fold. First, if you change jobs or lose your job, you will need to pay the balance back or it will be counted as a withdrawal with the same penalties discussed above. The second is the potential loss of investment income. The amounts borrowed are taken out of whatever they are invested in.

You should talk to the plan admin who can give you the details of how loans work within your plan.

P.S. I agree with Richard that we were not calling you stupid, just the idea of withdrawing 401K fiunds. And I'm not a financial planner by trade. But I spent 10 years earlier in my career administering pension plans.

My 401k, allows me to still take out a regular payroll deduction and the loan was repaid separately, so talking to your plan administrator is the thing to do for options. I am allowed a loan of 50% of the balance with 12% interest. Early withdrawal will result in a higher tax as this is considered income and this is not a good idea. Scott is right, Think long and hard ABOUT TOUCHING THIS MONEY BEFORE 59 AND A HALF. I am 52 retired for 4 years and waiting and hoping for my money in 7 years free and clear.

Wow. Great input from everyone. Thank you. I will have to check with my plan administrator. However I have a feeling they have VERY strict guidelines for loans against my 401K. So if I should leave my current employer and be in a situation where I would need to move the 401K into another administrators domain then perhaps the guidelines will not be as strict. Also, would it work if I made it a self directed 401K after I leave my current employer and become say self employed? Is this a penalty free transfer/rollover?
Thank you.

If you leave your current employer you can roll over into an IRA. If you switch jobs, you can pay off the loan, rollover into your new plan and take a loan from there. So you would only have to borrow for a short term. I've done that when switching jobs with a loan balance.

Loan provisions are regulated by law. A plan can not include a provision, but if they do, there aren't many ways they can restrict it.

You have 60 days to redeposit this money once you withdraw it and the penalties and taxes come due.

Yes, you can ALWAYS roll the money over from the 401K when you leave the job, be it into another 401K or into a rollover IRA.

Exactly WHY do you need the money?