I have a 401K question about early withdrawal.
I quit my job about 5 years ago where this 401k is. (I do have a new employer.)
I am allowed a full payout, with the penalties.

401K balance - $5000.00 (apprx)

I have the understanding that 20% is immediately taken out for federal taxes with an early withdrawal, which would be in this case $1000.00, and that would make the distribution check $4000.00.
My questions are:
When does the 10% penalty come into play?
Is it 10% of the total balance? Or what was already taxed?
Is the penalty taken out of your refund? Or when will I have to pay it?
I am just confused about the extra 10% and when I need to pay it. The guy at fidelity said the 10% also depends on what your tax bracket is, so you might owe more or less. So now I am totally confused.
I do not want to roll this over to an IRA. I need this money to pay medical bills.


Thank you so much!

Four words: DO NOT DO IT!

The 20% that would be withheld when you took the early distribution is JUST A DOWNPAYMENT on the taxes you would owe.

First, you would owe a 10% Early Withdrawal Penalty. That is (in your case) a $500 penalty that MUST BE PAID even if you owe no other taxes.

Next, you would pay federal income taxes on the $5,000 at your marginal tax rate (that is the tax rate you pay on the LAST dollar you earn in the year). More than likely you are in the 15% tax bracket, but you could be in the 25% or higher bracket.

Finally, you would have to pay STATE income taxes, against at the marginal tax rate.

At a MINIMUM, you can expect to pay 25% of the distribution in taxes. It could be as high as 50%.

All of these taxes would be paid when you file your 2007 tax return early next year. At the minimum, your refund would get cut to a very small amount. You MAY end up owing a few thousand dollars, and you do NOT want the IRS to be your creditor!

Better that you go to Consumer Credit Counselling Service and ask them to set up a low or no-interest payment plan to address your medical bills.

Leave the 401K money where it is, or roll it over into an IRA. If you absolutely have to access this retirement money, roll it over FIRST. It gives you more options.

I would like to close my 401k early. Can I do this and how. Thanks