[Fitz071669]

Hello. I have a question about early withdrawal of my 401k due to changing employers. I am fully vested at my current company. I took a loan out from my 401k probably 6-8 months ago for personal reasons (not mortgage, etc.). Here are the details for that: I took out a loan of $2,868.01 and through bi-weekly payments of $25.65, still owe $2,647.20.

I currently have $6,476.31 in my 401k. This is how my contributions break down:

EMPLOYER MATCH: $2,070.42
EMPLOYEE PRE-TAX (1-4%): $1,664.12
EMPLOYEE PRE-TAX (5-25%): $1,132.91
EMPLOYER BASIC: $1,061.26
EMPLOYEE AFTER TAX: $547.60
TOTAL: $6,476.31

Can anyone help me in understanding exactly how much money to put aside for next tax season? I know that I will get hit with all sorts of taxes and penalties due to both the loan I took out (which will now qualify as early withdrawal) and the remaining amount I will withdraw. I am looking for a round-about amount that I should set aside for owing next tax season. This would be greatly appreciated. Thanks.

[ScottGem]

Since 401K proceeds are not taxed at all, the entire amount should be considered taxable income. In addition, there will be a 10% penalty.

Why not just rollover the distribution into your new company or an IRA?

[taxsearcher]

I think your goal here is to do everything possible to minimize your exposure to any tax. The first thing you should look into is a rollover into an IRA. So follow up on that one.

Presumably your company will want you to repay the loan before you leave but even if they do not, it seems it would be a good idea to repay it and then rollover the full amount of your 401(k) to avoid penalties and taxes.

If a distribution is taken you will pay tax (at your regular tax rates) on anything that has not already been taxed plus you willl be subject to an extra 10% penalty.

If you want to take a distribution, then you need to look at Publication 575 at the IRS site (www.irs.gov).

[fredg]

Hi,
I agree with rolling it over to your new company, if possible. You could contact the Plan Administrator of your old company, see if it's possible.
Normally, 20% for Federal Taxes will be withheld if you withdraw it, and I know that in the State of VA, you should request another 4% withheld for State Taxes, if in VA.; not to mention the 10% early withdrawal.
Best of luck.

[ScottGem]

First, taxsearcher makes some good points. Its not clear whether you have actually taken this withdrawal or not. Hopefully you haven't yet and can repay the loan, then take out a new one from your new company after the rollover. That's what I did when I changed jobs while I had an otustanding loan.

I disagree with the suggestion that you request additional witholding. Having taxes withheld from any income is making an interest free loan to the government. Why should you do that? Yes, you should estimate out how much tax you will owe and put that money aside, but put it aside so it will benefit you, not the gov't.

[Fitz071669]

Ok, the original loan for 2,868.01 I took out already and have been repaying it.

The remaining amount in my 401k is the 6,476.31 . I have thought about rolling it over to an IRA because I know I am going to get killed on taxes, but I need the money. The 6,476.31 is still in my 401k as I am not leaving my company for another 2 weeks.

Here is how I see it, and please let me know if you guys agree. The 6,476.31 plus the 2,647.20 which I still owe on the original loan I took out, comes to a total amount of 9123.51. 10% early withdrawal penalty, plus 20% federal taxes, plus another 3% or so for state is about 33%. So 33% of 9123.51 is 3010.76.

In my eyes, I should have 3010.76 set aside for next tax season. But like ScottGem said, I want all the 6476.31 now so I can benefit from that amount and then will plan to set aside the 3019.76 at my own expense.

Do you guys agree? Thanks all.

[taxsearcher]

If you do a withdrawal then they will automatically withhold 20% as the earlier posted pointed out.

[ScottGem]

No, I don't. What I would do is pay off the loan. Rollover the money into the new company, then take out a loan for $6K. No penalty, no tax and you have a loan where you are paying yourself interest.

[Fitz071669]

I like that idea ScottGem. If I am not able to roll over into my new companies' 401k, can I roll over into an IRA and take out the same loan? Thanks.

[AtlantaTaxExpert]

No, you cannot take a loan out from an IRA. However, most companies allow you to take loans from the 401K.

All the advice given above is good and valid! It looks like I will not be missed!

[ScottGem]

I agree with ATE. I used to administer 401K plans and it was a rare plan that did not have a loan provision and I believe they have to allow rollovers by law.

I've changed jobs twice while I had outstanding 401K loans. In each case, I borrowed money for the short term to pay off the loan, then rollover and take a new loan.

[AtlantaTaxExpert]

Heed Scott's advice.