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    HbCa1's Avatar
    HbCa1 Posts: 2, Reputation: 1
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    #1

    Aug 26, 2010, 01:46 PM
    Withdrawing 401k
    I want to withdraw my 401k, do the penalties and fees come directly out of that same money? Now, I understand that there's a sixty day replacement period, if not do they take it from your tax refund? Someone please give me an accurate answer with numbers as an example. I'm very new to all this 401k issue and I'm having a hard time making a right decision towards withdrawl. Thanks!
    ebaines's Avatar
    ebaines Posts: 12,131, Reputation: 1307
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    #2

    Aug 26, 2010, 02:01 PM

    When you take a withdrawal they will automatically withhold 20% for federal income tax. This is similar to how your employer withholds taxes rom your pay check. They do NOT withhold specifically for the 10% early withdrawal penalty, nor do they withhold for state/local income tax. As with all withholding, this is just a down payment on taxes owed, and not necessarily the actual amount of taxes due.

    When you file your taxes you will add the full amount of the withdrawal to your income, and calculate an initial tax amount based on your adjusted gross income including this amount. Note that if you take a large withdrawal it may push you to a higher tax bracket than you are used to. Then you include the amount withheld as taxes already paid, along with your other withholding and any estimated tax payments you might have made. The difference between your initial total tax amount and taxes already paid is your initial tax bill (or refund). Then you have to add the 10% early withdrawal penalty as additional taxes owed.

    Depending on your state, you will also include the full withdrawal as income that the state taxes. Because there was no withholding for state purposes, you may have to write the state a check in April 2011 when you do your taxes.

    Here's an example. If you take a $20K withdrawal from your 401(k), they will withhold 20% for taxes and send you a check for $16K. Next April you will incliude the $20K as income and the $4K as taxes already paid on that income. After you calculate the balance of tax due, you then add 10% of the $20,000, or $2,000 as additional taxes due for the early withdrawal penalty.

    For state/local it's similar, except there is no early withdrawal penalty.

    Hope this helps.
    HbCa1's Avatar
    HbCa1 Posts: 2, Reputation: 1
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    #3

    Aug 26, 2010, 03:41 PM

    So, in my case if I withdraw my entire account of 14k, I'll get a check of like 11-12k, and at the time of taxes,they'll deduct the remaining 2-3k from my refund? Am I understanding this right?
    Fr_Chuck's Avatar
    Fr_Chuck Posts: 81,301, Reputation: 7692
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    #4

    Aug 26, 2010, 06:25 PM

    Ok, the entire amount of the 401K is income on your income tax, so if there is additional taxes due, it will reduce the amount of your refund,

    Remember, your refund is merely your money that is held out of your check, and not everyone gets refunds, many may havve to pay , depending on how you do your withholdings
    ebaines's Avatar
    ebaines Posts: 12,131, Reputation: 1307
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    #5

    Aug 27, 2010, 06:13 AM
    Quote Originally Posted by HbCa1 View Post
    So, in my case if I withdraw my entire account of 14k, I'll get a check of like 11-12k, and at the time of taxes,they'll deduct the remaining 2-3k from my refund? Am I understanding this right?
    You'll get a check of 80% x $14K = $11,200, and at tax time you will have to add $1400 to your tax bill. Whether you still get a refund, or have to write a check to the IRS for taxes due, depends on whether the amount withheld by your employer from your wages plus the $3,800 tac withhlolfoding from your 401(k) covers your total tax bill. It's impossible for us to say. And again, depending on the tax laws of your state, you may well owe several hundred dollars in additional state taxes.
    ScottGem's Avatar
    ScottGem Posts: 64,966, Reputation: 6056
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    #6

    Aug 27, 2010, 06:29 AM

    On your tax return you will have to check off the box that indicates you withdrew from your 401(k) (I forget which line that is). You will then add $14,000 to your taxable income. So lets say you earned $30K in salary, you will now be reporting $44K. You will then figure out your tax liability based on the $44K. You will then add $1400 to that figure for the 10% penalty. Finally, you will deduct the amounts withheld from your salary and distribution. The difference will be either a refund or what you have to pay.

    You then do the same (except for the 10% penalty) for your state and local taxes (if any).

    Withdrawing from your 401(k) is a last resort type of thing. What you will lose in terms of penalty and taxation is onerous. Have you seen if you can take a loan against it? This is a much better option.
    morgaine300's Avatar
    morgaine300 Posts: 6,561, Reputation: 276
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    #7

    Aug 27, 2010, 09:24 PM

    I don't know much about 401k's but I can follow what ebaines and scottgem are saying and figure out how this is going to impact you and your taxes.

    Even if you were to be getting a refund, keep in mind it's not like "oh well, so I don't get a gift this year." It's money that was taken from your checks during the year, and then you just get it back. If this is going to be taxable, or partially taxable (not under exempt limits), and it comes off a refund, you still have paid out of your pocket cause you don't get the full refund - which was your money the government took.

    And don't forget that humongo penalty.

    Keep in mind the following is just for illustrative purposes and is not meant to represent what would actually happen to your taxes. Also note that I am using real 2010 numbers, but am only counting such exemptions and things that everyone gets. I don't know your income, and you could have deductions, credits or other taxes impacting this, and maybe a lot for all I know.

    I'm using the $44,000 total from the example above.

    Let's say you're single with no dedendents. Including the $1400 penalty, this is $5843 total liability. $3563 of this is from the 401k, which is 61% of the total liability! Pretty hefty. But single pays the most taxes, but don't have anyone else to support.

    OK, now let's make it married with 2 kids & same $44,000. That results in $2463 total liability. And ALL of it is from that 401k. It's possible at that level there could be a deduction for earned income credit, but I couldn't find the 2010 charts/instructions & it would only be low 100's.

    Remember that "tax liability" is your actual bill, and says nothing about what of it was already withheld, and therefore what you may still owe or get back. But even if a refund covered it all, it's still your money and came out of your pocket.

    Even if I knew your actual income, I can't tell you your tax bill because there's way too many factors - that's why taxes are so complicated. Someone has to sit down and do your taxes to know these things. I just did this illustration to show what impact this could have on your taxes.

    Even if you had zero other income, it's just hard to get around that penalty.

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