Would anyone be able to explain to me the whole tax & penalty process for withdrawing a 401K before 59 ½ years old? I have been able to figure out pieces but I want to put the whole puzzle together to make an educated decision about this possible withdrawal. I know there is a 10% penalty, I know taxes have to come out up front but not how much, and I need to know if the net payout now becomes taxable income on my annual return.
Thanks,
Nikadee

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Originally Posted by Nikadee

Would anyone be able to explain to me the whole tax & penalty process for withdrawing a 401K before 59 ½ years old?? I have been able to figure out pieces but I want to put the whole puzzle together to make an educated decision about this possible withdrawal. I know there is a 10% penalty, I know taxes have to come out up front but not how much, and I need to know if the net payout now becomes taxable income on my annual return.
Thanks,
Nikadee

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The tax on a nonqualified withdrawal is taxed at your current tax rate plus a 10% penalty of the withdrawn amount.

The plan adminstrators are required to withhold 20% of the gross distribution towards your tax liability. The actual amount of taxes you will owe is dependent on the rest of your income. The 401k distribution is added to your other income to determine the actual tax liability. So you won't know exactly how much you will owe until you file your tax return.

In addition, there is a 10% penalty that you will need to pay. It is rarely a good idea to take an inservice withdrawal. Taking a 401k loan is usually a better alternative.

I agree with Scott.

Actually a loan is out of the question as my husband doesn't work there anymore and we were going to roll it over. Now we had some roof damage due to weather and the cost of the new roof has put us in a bad position. We are able to cash this one out without totally damaging our retirement plan. I just need to understand the procedure. Thanks so much to you both for answering me.
Thxs,
Nikki

Ok so a loan is out of the question. But do you REALLY want to throw away 10% of your money, not to mention the extra taxes for this? You may be able to borrow the money (home equity loan?) at a cheaper cost.

Scott is right! Do NOT take this distribution until you examine all other possible loan options.