Ask Experts Questions for FREE Help !
Ask
    parmeshv's Avatar
    parmeshv Posts: 2, Reputation: 1
    New Member
    		  
    #1

    Jan 18, 2008, 09:13 AM
    Taxes during 401K withdrawal-dependent on tax bracket?
    Hello -

    I am trying to understand how much I would lose if I withdrew all the money from my 401K account. I am currently employed but I soon plan to quit and go to school full time. What would be a good time to withdraw the money? Now or when I am in school or it doesn't matter?

    I understand there is a 10% penalty and 20% tax withholding, but when I am in school next year, I would be in a much lower tax bracket than I am now. Will I get a refund on some of that withholding?

    I'd appreciate any direction you can provide.

    Thanks.
    AtlantaTaxExpert's Avatar
    AtlantaTaxExpert Posts: 21,836, Reputation: 846
    Senior Tax Expert
    		  
    #2

    Jan 18, 2008, 12:56 PM
    FOUR WORDS: Do NOT Do It!

    You will get slaughtered by the tax bill.

    Let's assume you withdraw $8,750.

    Even if you have no other source of income and your personnal exemption and standard deduction completely offset the income taxes on this $8,750, you would STILL have to pay the 10% Early Withdrawal Penalty of $875, because that tax CANNOT BE MITIGATED!

    Get student loans and work part-time while you go to school. Leave your 401K alone and let it grow for your retirement. That is the reason you set it up!
    MukatA's Avatar
    MukatA Posts: 7,110, Reputation: 176
    Tax Expert
    		  
    #3

    Jan 18, 2008, 10:37 PM
    Quote Originally Posted by parmeshv
    Hello -

    I am trying to understand how much I would lose if I withdrew all the money from my 401K account. I am currently employed but I soon plan to quit and go to school full time. What would be a good time to withdraw the money? Now or when I am in school or it doesn't matter?

    I understand there is a 10% penalty and 20% tax withholding, but when I am in school next year, I would be in a much lower tax bracket than I am now. Will I get a refund on some of that withholding?
    I'd appreciate any direction you can provide.
    Thanks.
    You will pay 10% early withdrawal. Then the money will be taxed as income. If as a student you don't have any income, then you won't pay much in taxes except for 10% ealy withdrawal.

    Another option is to roll over it to Trad IRA. Then if you withdraw money to meet your education expenses and meet other requirements, then you will not pay penalty:
    "There is no early withdrawal penalty if the expenses are related to enrollment or attendance at an eligible postsecondary school. It includes tuition and fees, books, supplies and equipment."
    That means you need some planning.
    AtlantaTaxExpert's Avatar
    AtlantaTaxExpert Posts: 21,836, Reputation: 846
    Senior Tax Expert
    		  
    #4

    Jan 19, 2008, 10:51 AM
    Agreed. The IRA aspect is an option if you absoultely MUST access this money.

    Student loans are a better option, though!
Not your question? Ask your question View similar questions
 

Question Tools Search this Question
Search this Question:

Advanced Search

Add your answer here.


Check out some similar questions!

401k penalities/taxes for withdrawal [ 5 Answers ]

My husband is losing his jobthe end of April. Rather than lose the house we would like to refinance by using some of our 401k's. If we take the money out, are there still penalities if we use the money for the down payment on a refinance? Thank you

401k withdrawal taxes [ 6 Answers ]

I want to withdraw from my 401k to prevent foreclosure and was told I would need to pay taxes up front and a penalty. Does this mean I have to pay the taxes before I can withdraw the money or do they deduct the taxes/penalty from my acct ?

401K early withdrawal and taxes. [ 1 Answers ]

I have dual citizenship (US and Russian). Currently I'm living in the US (Florida resident) and planning to move to Russia permanently. I know, that if I withdraw from 401K before retrirement age I will have to pay penalty (10%?) and federal and state taxes (something like 30%?) What if I...

401K withdrawal and taxes ? [ 7 Answers ]

I'm a 37 year old male... single (not married)... factory worker for about 19 years... took out a 26K 401K hardship withdrawal last year. Out of the 26K, they sent me a check for 22K and some change... This means they kept about 4K. If my salary was 33K, not counting the withdrawal money, what am I...

View more questions Search