[sstory05]

My husband recently lost his job and we were looking at closing his 401k account to help while he looks for a job. He has about 50000 in currently and about 6000 left on a loan. What would the penalties be for withdrawing. We live in Nevada with no state taxes.

[ebaines]

First, since he is no longer an active employee he has something like 60 days to pay back the $6K outstanding loan into the 401(k) plan. Otherwise the loan will be reclassified as a withdrawal, since only active employees are allowed to have loans. When the loan is reclassified as a withdrawal he will then owe the IRS income tax on the $6K, plus a 10% early withdrawal penalty (I am assuming that your husband is less than 55 years of age). This would have to be paid as part of your 2010 taxes. So as of now he already owes perhaps $1500 to the IRS (assuming your in the 15% tax bracket). Unfortunately I know that this tax bill is the last thing you need when you are out of work, but this is one the hidden dangers of taking a loan.

As for any additional withdrawals - the 401(k) plan administrator should automatically withhold 20% on any withdrawals for federal income tax. Whether this is the appropriate amount or not depends on your tax bracket situation. They will typically not automatically withhold the additional 10% penalty, so be sure to save enough of any withdrawals to be able to pay the amounts due. My suggestion would be to file estimated income tax forms and send in a check as soon as you get the withdrawal so that you don't inadvertentlt spend it all and come up short in your tax payment at the end of the year.