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Jimfer · Jun 5, 2007, 10:37 AM

I am looking to take an early withdrawal from a former Co. 401K account. I am aware of the need to taking Federal, State, and 10% penalty and plan to do this up front. My question is, when I file my taxes what do I claim as income... the full amount of the account or since I paid up front my taxes/penalties, do I claim what I receive for actual income(minus the taxes and penalties). The full amount is aprox. 25K and I anticipate receiving approx. 16K in cash.

ebaines · Jun 5, 2007, 10:50 AM

Originally Posted by Jimfer

My question is, when I file my taxes what do I claim as income...the full amount of the account or since I paid up front my taxes/penalties, do I claim what I recieve for actual income(minus the taxes and penalties). .

At the end of the year the plan administrator will send you a form 1099-R which will detail how much you withdrew from your 401(k) and how much taxes and penalties were withheld. You simply use these values when you complete your form 1040 for 2007.

Jimfer · Jun 5, 2007, 10:58 AM

Thank you, so if I withdrew 25K that is what I record as income and since I paid the taxes up front, I shouldn't have to pay it again, it is only a matter of filing what I took out and paid.

Would it potentially impact the tax bracket I am currently in based on income. Meaning if I gross 70K this year for income would I now be considered to have earned 95K and have to pay at a higher tax rate? I think I will be OK, I am using this $ to offset loss of income while on a Leave of Absence and not receiving my full paycheck.

ebaines · Jun 5, 2007, 11:20 AM

The 1099-R will list the $25k as income, which you enter on Form 1040 as income, line 16. The form will also show how much tax was withheld, and you show that as taxes already paid on line 64. Finally, the 10% penalty is added on at line 60.

The $25K is indeed included in your adjusted gross income, so it may push you to a higher bracket, or put you higher into the phase-outs for certain tax breaks. Also, it's possible that the amount withheld by the 401(k) administrator may not be adequate, again depending on your situation, so be prepared to possible pay a bit more next April.

jstrike · Jun 5, 2007, 11:28 AM

Originally Posted by Jimfer

thank you, so if I withdrew 25K that is what I record as income and since I paid the taxes up front, I shouldn't have to pay it again, it is only a matter of filing what I took out and paid.

Would it potentially impact the tax bracket I am currently in based on income. Meaning if I gross 70K this year for income would I now be considered to have earned 95K and have to pay at a higher tax rate? I think I will be OK, I am using this $ to offset loss of income while on a Leave of Absence and not recieving my full paycheck.

I just took an early withdrawal from my 401K in 2006. You pay taxes on it when you withdraw it, I'm pretty sure those taxes are not based on your tax bracket so you may have to pay more at the end of the year. The money is considered income so it can push you up into another tax bracket if the amount is sufficient. When you file your taxes you will pay the penality.

Jimfer · Jun 5, 2007, 01:00 PM

Thank you, one other option is to rollover to existing company 401K and take out a loan and pay myself back including interest. This being said, do you know if I have to consider the loan amount as income and do I pay taxes on this or is it just a matter of pushing me into a different tax bracket?

jstrike · Jun 5, 2007, 02:09 PM

No, the loan is not considered income.

The nice thing about the loan option is that you pay yourself interest. Most plan's I've been in will only let you borrow up to 50% of the vested balance. Just something to consider as well if you rollover another 401k.

ebaines · Jun 5, 2007, 02:22 PM

As a former employee you may not be able to take a loan - most plans require that you bde on roll, so that they can make sure you pay the loan back (through payroll deduction). So check your plan documents, or call the administrator to ask, whether this is something you can do.

AtlantaTaxExpert · Jun 5, 2007, 04:23 PM

All issues properly considered. I have nothing to add.

jstrike · Jun 5, 2007, 04:36 PM

Originally Posted by ebaines

As a former employee you may not be able to take a loan - most plans require that you bde on roll, so that they can make sure you pay the loan back (through payroll deduction). So check your plan documents, or call the administrator to ask, whether this is something you can do.

Good point. If you have a 401k from a former employer you will need to roll it over to your current employer in order to take out a loan. Since the re-payment happens by payroll deduct you should talk to you're your administrator/HR dept to see how they will handle that while you are on a leave of absence.

And if you leave the company before the loan is paid off it becomes due. If you can't pay the outstanding balance back in full then it gets reported as and early withdrawal subject to all the aforemenioned taxes and penalities. (I learned that one the hard way!)

AtlantaTaxExpert · Jun 5, 2007, 08:36 PM

Noted!

Jimfer · Jun 7, 2007, 06:25 AM

Thank you all

We are now considering refinancing. We have an existing 30 year mortgage, a home equity that is interest only payments(not ideal) and recent credit card debt.

Trying to decide if it is beneficial to roll all into one refinanced mortgage or just he mortgage and home equity and pay off credit card debt with the 401K loan.

I look at it as either we are paying off our credit debt over 30 years or 5... the loan maximum time frame is 5 years.

If we roll all into one mortgage, it increases our payments approx 600/month(inlcluding taxes, etc.) but we currently are paying more/month and getting no where between the interest only home equity payment and credit card debt due to hardship issues.

Has anyone explored other options of paying down debt aside from refinancing a mortgage?

jstrike · Jun 7, 2007, 06:55 AM

I did a 401K loan in the past to get out from under a pile of debt. The nice thing is that you pay yourself interest and you're out from under it in a pretty short time. You also need to consider the amount of interest you're paying. If you add $20000 on your mortgage at 6% over 30 years by my calculations (which are not always accurate) you will be paying out over $23000 in interest. For a 401K loan of $20000 over 5 years at 9% you are paying out just under $5000 in interest and even then that 5K is in your 401K. (Someone please check my math and let me know if I'm wrong)

AtlantaTaxExpert · Jun 7, 2007, 08:57 AM

Jimfer:

Refinancing to capture your home's growing equity to pay down credit card debt is a good idea ONLY IF you adopt a budget and stick to it.

Otherwise, you will rebound into MORE credit card debt and be right back where you are now in about five years.

You might consider get credit counseling from one of the accredited non-profit credit counseling services (avoid the one who advertise on TV).