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View Full Version : Early liquidation of a 401k


lkcrkh
Dec 2, 2008, 06:21 PM
Hey all,
I understand there are some exemptions from paying early liquidation fees from a 401k. I'm in my mid-20's and have about 2k in a 401k account that's not doing much. Even with compounding and the fact that I'm not longer with the employer, I just want to liquidate and help pay for school (graduate school). Isn't there an exemption for higher education? And in that vein, would all of my penalty fees be the state/local taxes?

Thanks!

ScottGem
Dec 2, 2008, 07:36 PM
Nope You would still pay the 10% penalty, plus taxes on the income.

MukatA
Dec 3, 2008, 03:44 AM
You will pay $200 early withdrawal penalty. Also $2000 will be counted towards your income.

AtlantaTaxExpert
Dec 3, 2008, 10:21 AM
LKCRKH:

If you want to save the $200 Early Withdrawal Penalty, roll the 401K money into a rollover IRA.

Then (and only then) do you withdraw the money early to pay for the higher education. What Scott and MukatA say is true: there is NO EXCEPTION to the Early Withdrawal Penalty for higher education costs when you withdraw from a 401K.

However, an exception for higher education expenses does apply when you withdraw from an IRA.

So you simply need to put the 401K into an IRA FIRST!