So I want to take some money out of my 401(k). Let’s say I need $10,000. I also want to cover the tax on this distribution. Assuming a 15% bracket, I need to take out an additional $1,500, so I really need to withdraw $11,500 to net 10k.
But wait. I also have to take out 15% to cover the taxes on the $1,500, so another $225 for that. But now I need 15% of that $225. Etc.
Isn’t there a formula to do this? I could do it in Excel, I suppose, and just reiterate it 5 times and then round to 2 decimal places, but that seems inelegant.
Just a couple of warnings: If you are still employed by the company that sponsored the 401(k) and under retirement age (as defined in the plan), you may not be able to take money out. 401(k) plans are not as easy to take money out of as IRAs are.
The federal government will withhold 20% of the taxable portion of your distribution and your state may or may not withhold some additional portion. This, again, is different from an IRA. And, yes, the money withheld will be taxable, too. This 20% may be more or less than you actually owe in taxes. You will settle up when you file your 1040 at the end of the year.
If you have any other option available to you, please look into it.
Taking money out of a 401k/IRA before age 59 1/2 is about the most expensive money you can spend. Even a loan from your retirement fund (sounds good, you pay yourself back) is usually a really expensive loan.
Because you cared enough to offer this good advice, I feel I should put your minds at ease by mentioning that–as young as my screen name makes me look–I can, with mixed feelings, admit to being past 59 1/2.
So, in my case it is an actual “normal distribution” and taxed at my nominal rate. I figured that, given the correct formula, I could easily substitute my state tax rate as well.
Thank you all. So if I wanted to put it into words, it would be:
(Desired net amount) / (1 - (tax rate expressed as a percentage))
I did a co6iple checks and it works right. I’m sure this was in a textbook I long ago recycled as I’m also sure I once knew it. But I haven’t needed it in so long I’d not only forgotten it but couldn’t even remember what it was called.
And to that, Hari Seldon I tried looking up “standard series” but don’t get the right results.
Don’t forget the 10% penalty for early withdrawal taken right off the top before taxes. Also don’t forget that extra $10k (or $11,500 + 10%) can put you into another tax bracket. So 15% might not be enough anymore.
I don’t think it’s any kind of a standard formula that needs to be memorized. It’s just a word problem like you did in eighth grade.
Let’s say the amount you need to withdraw is “x” – the unknown quantity.
When you take away 15% of “x” you want to end up with $10,000.
x - .15x = 10000
(1 - .15) x = 10000
now divide both sides by (1 - .15):
x = 10000/(1 - .15)
But I want to remind you of one thing: Even if you are over 59 1/2, the IRS requires the plan administrator to withhold 20% of your distribution. If you are only in the 15% tax bracket, you will get back the extra 5% when you file your tax return at the end of the year. So, if you have an immediate need for $10,000, you should be using 20%, not 15% in your calculations.
Odd. I requested a distribution, on-line, and it asked me what amount I wanted withheld. It neither suggested nor enforced a minimum 20%. But thanks for the information. I will investigate and remember for any future distribution.
I searched for the text you quoted and I found it in the section of the Fidelity web site about IRA withdrawals, not 401(k) withdrawals. Is this an IRA or a 401(k)?
I did find this on the Fidelity One-Time Withdrawal form (pdf):
The rules for withholding on IRAs and 401(k) plans are different.
My bad. It is an IRA, not a 401(k). After all those years of contributing to the 401, my brain conflated the two items into a single concept. In reality, I had converted my 401(k) to an IRA when I left their employ.