Let’s just say that I have about $30k in a former employer’s 401(k) plan. I know I can roll it over to my current employer’s plan, but I’m curious about the cashout option.
Looking at the website for the plan, it says that the federal government withholds 20%, and the state government (Illinois) doesn’t withhold anything.
So what’s going to happen April 15th of next year? I know Illinois is going to want their cut. Anyone have any idea how much I should set aside for Illinois? Are the feds going to want more? Does it depend on my overall income for this year?
You need some professional advice. The first thing the professional will tell you is, “Don’t do this.”
IANATA but the following is my understanding:
The 20% is a withholding, just like withholdings out of your paycheck, and has nothing to do with the actual taxes you will owe. Because you did not pay taxes on the money contributed to the 401(k), nor on the gains it accrued, you will be taxed on your withdrawal as regular income by federal and state. Depending on your tax bracket you could owe the feds more than the 20% withholding. To the point of your question, your federal taxes will be at your marginal rate, whatever that is when you factor in your taxable income. Same answer for state taxes.
You will also have to pay a penalty of 10% of the withdrawal to the federal government. That’s over and above any taxes. (According to the site below you do not have to pay a penalty if you are 55 or over, but you will still have to pay the taxes.)
IANATA either, but CookingWithGas has it right, as far as everything I’ve read has said: It will be treated as income, so you’ll have to pay tax at whatever your marginal income tax rate is. Plus you’ll have to pay a 10% penalty for early withdrawal.
I also agree that this is a really bad idea. Roll it over into an IRA or a new 401(k) or leave it where it is. Whatever you were planning to use the money for, it’s not worth it.
And if you’ve already taken money out of your 401(k), get your professional advice now. You only have 60 days to roll over the distribution into a new plan, or risk getting hit with an IRS penalty.
The other issue is dipping into your retirement savings, penalty and taxes aside. It’s not a good idea to spend the money you would have used to pay for your cataract surgery when you’re 80, unless you have some very compelling and urgent need. But the tone of the OP sounds like it’s burning a hole in your pocket.
Don’t think of it as $30,000. Think of it as about $450,000 30 years from now. That is what it would grow to with average rates of return, without adding another dollar to it. You’d also get to withdraw it at retirement tax rates.
I’ll just second all the advice given here. You definitely don’t want to do an early withdrawal - that’s a good way to make a healthy donation to Uncle Sam. And, as CookingWithGas pointed out, spending it now will cost you a whole lot more than $30,000 in retirement income. If you are young, that amount could easily quadruple be the time you are 65 even if you don’t add any more to it (which hopefully you are, in your new 401(k).
If you really need some quick cash, check and see if your current 401(k) allows you to borrow from the amount you rollover into their plan. The plan I managed allowed employees to borrow up to 50% of their rolled over money plus up to 50% of their new-plan money. You would avoid paying taxes, and loan payments (plus interest) would come out of your paycheck and go back into the plan (as an after-tax deduction). It’s not as good as leaving it alone, but a lot better than taking a payment.
I’m lucky to get about 3% on my “investment”. Just about everyone else I know that has been making contributions over the last 10 or so years have seen the value steadily decrease. My brother’s 401k is almost down to zero.
Swell. I would check out the cash out option and seriously consider it if you can live with the hit. Good luck.
I haven’t withdrawn anything yet. I’m doing the homework to see what my options are.
Yeah, I’ve lost a bit of money too. And I can’t say it’s be growing very much in the three years since I left that company.
However, most of the 401(k) is in some kind of mutual fund, invested, right? So would I have to claim any capital gains if I were to bite the bullet and cash out?
It appears that you and he are the ones daydreaming here, if you’ve left your 401k money under the control of someone who’s investing it that badly.
Heck, just walking into a bank you can buy CD’s at around 4% right now!
Dump this investment guy, and move it elsewhere. Get professional advice, as people have said, on how/when to move it. But do it!
And you ought to complain, loudly, to your employer about paying a investment fees for a service that produces worse results than buying CD’s at your local bank!
Not if you keep the money in the 401(k) (but in another investment). It’s tax deferred until you withdraw it. But if you actually cashed out of the plan, you wouldn’t get away with capital gains rates; you’d have to pay full taxes on the income.
Add me to the ones confused about those who are making terrible returns on their 401(k) investments. Most of mine is invested in a few index funds. Very low fees, and the overal performance tracks the market.
Depending on how old you are, and what you think the long-term fiscal stability of the US is, this isn’t necessarily a benefit.
Let me second t_bonham: If your 401K investments have been going DOWN over the long term (and ten years is a long time), you’ve either been astoundingly unlucky, invested exceedingly badly, or been the victim of some sort of fraud. This is NOT the normal behaviour of 401Ks.
Sure, there are local downslides (2000/2001 was one, and the last week or two has been pretty dismal) in the markets, but they’ve returned in excess of 10% on average for many, many years. In the last three years, my 401K value has more than tripled (starting from a large rollover amount from my previous 401k), and more than doubled even if you ignore the new contributions. I invest using all the savvy of a dartboard, too - aside from diversifying investment types, I’m pretty much just picking stocks and funds that appeal to me.
I doubt my results are atypical, except in that many people don’t invest in 401Ks at all.
That represents a 9% return, which is the average return of a balanced portfolio over the last 75 years. I’d bet that’ll be pretty close to the average over the next 30 years.
For the record, my employer lets me put my money in “emerging market” mutual funds.
I keep 30% of my investment in these.
I see much more potential for growth in politically stable countries without running water and electricity than I do in the US market…
Well, here’s the rub. Without getting into too many specifics, I need to replace my garage. I just bought the house last year, knowing it was a fixer-upper, but now I’m not sure how much longer the garage will last. We don’t have much attic space, so most of our stuff is in the garage. And since the house is a fixer-upper, I need a place to keep my tools and space to work out of the rain. I was hoping to get a few more years out of it, but now I cringe everytime a storm blows through.
Pricing it out, I need $15,000 to $18,000 for a new slab and garage. Since I just bought the house, I don’t have the equity yet and the contractors won’t finance. Even just going with a couple of sheds big enough to work in is out of my price range at the moment. So it’s not like the money is just burning a hole in my pocket or anything.
Looking at this link, I would normally be in upper third of the 25% tax bracket even with any deductions. By cashing out, I would move into the 28% tax bracket after deductions. Illinois taxes at a flat 3% regardless of income [cite]
So if I had my 401(k) provider withhold 38%, I should be able to cover the 28% in federal taxes and the 10% early withdrawal penalty and it would leave me with enough to pay for the new garage and cover the 3% for Illinois.
Is this math correct?
Granted, this is not the optimal way to go, but this is not my entire retirement nest egg and I’m still young enough to build it back up (even without this money, I have more put away for retirement than most people my age).
Why don’t you take out a home equity loan, or even a personal loan if you don’t have any equity. The rates, last time I checked, on the personal loan are like 10% at that loan level. It’s a bit steep, but it’s better than going through the 401(k) cashing out process. My sister took a loan to pay for her down payment on her house. I remember her telling me what a monster pain in the ass it was.
A loan from your 401(k) is a better option than a cashout, if it is available. Check your current employer’s plan. No taxes, and you pay the interest back to yourself.
Second on the loan idea. If you were to take out 15K for five years, you would pay about $155 twice a month, for a total cost of the loan of around $3,800. That’s a heck of a lot less than the $11,400 you would pay in tax and penalty this year.
The 401k loan is a good idea, but I believe the loan would have to be against the 401k at your current employer, and I think you’ll have to pay it back immediately if you leave your current job. I don’t think you can borrow against a 401k at a previous job.