[Adamp1911]

Hello. I have a question regarding implications on my tax return, and which option is the best for me. Please refrain from the obvious. That is, "You should never withdraw funds from a 401k or cash it out blah blah blah." I understand all of that. Anyway, I am curious about how dramatically my return would be impacted if I took a very minimal withdrawal from my 401k account. I am married and we file joinlty, and the amount I am considering (likely 2,000 to 3,000) would not put me in a higher tax bracket. I understand that this would have to be taxed along with regular income and likey come with a penalty, but how do I know how much I would end up paying on it and how do I know how much my annual return will be impacted? Can I pay the associated penalty for early withdrawal AND the income tax up front to negate the impacts to my return? If so, how do you do that?

The other option is to take a loan from the account to avoid penalties. It is well within my means to repay the loan through payroll deductions, but I am unwilling to lock myself into this company for that period, since I am very close to finishing a degree in an unrelated field and would likely change employers before the loan term.. Can you roll over loans along with a 401k?

[ebaines]

First I would challenge whether you really have these two options to chose from. Very few plans allow active employees to take a withdrawal from their 401(k), unless you are at least 59-1/2 years of age. So I doubt that the first option is available to you. But for the sake of discussion let's assume that you do have this choice: the amount of taxes you will owe for your federal return is equal to the withdrawal amount times (your tax bracket + 10%). The 10% is the early withdrawal penalty. Without knowing your adjusted gross income (AGI) I can't tell you what your tax bracket is, but here are the rates for married filing jointly:

AGI Range: Bracket
$0 - $17.4K: 10%
$17,401 - $70,700: 15%
$70,701 - $142,700: 25%
$142,701 - $217,450: 28%
$217,451 - $388,350: 33%
>$388,350: 35%

Depending on where you live you may also have to pay state and/or local income taxes. Of course the amount depends on the rates.

When you take the withdrawal the administrator should automatically withhold 20% for federal tax. Whether this is sufficient to cover the tax + penalty depends again on your tax bracket. It may be possible to request that they withhold more if you want - give them a call to see if you have that option.They will not withhold anything for state/local taxes, so be prepared to pay that when you file your taxes.

As for taking a loan - no, you cannot roll a loan over. If you quit the company while you have a loan outstanding you have the option of either (a) repaying the outstanding amount within 60 days, or (b) not repaying it, in which case the loan is considered to be in default and is reclassified as a withdrawal. So at that point you would be on the hook for federal and state taxes and the 10% penalty.

As for which option is better - I recoomend taking the loan, as you pay no taxes or penaltty on it, and the interest you pay is to yourself.