The title pretty much says it all. If I withdraw some money from my 401[k] now instead of waiting to be eligible to receive it, what will the penalty be? Thanks.
IANAAccountant, but my understanding is that the withdrawal is considered taxable income, and there is an additional 10% penalty assessed for early withdrawal. So, assuming your income has reached the 25% marginal rate, if you withdraw $10,000 you will hand Uncle a check for $3,500.
My wife cashed hers in when she stopped working 2 years ago to raise our kid, and JohnM is correct. If you do this, be sure to set aside enough for uncle sam.
The penalty is 10% but the real kicker is that you will owe taxes (Federal and State) on the amount withdrawn. Remember, the 401(k) was taken out pre-tax and the government will want an adjustment when you change your mind. I don’t know if the taxes are calculated at the bracket you were in when you made the contribution, or the bracket you are in when you cash out. There are some conditions where the IRS will forego the penalty (but not the tax).
From what I’ve heard, you can expect to lose about 40% to 50% of the money you take out of the 401(k).
Unfortunately it’s the bracket you are in when you cash out, as it’s added to your income on your taxes for the year you recieved the money.
I’m kind of curious about an aspect of this. I’ve got a 401k, but I’m not vested yet (will be vested after 5 years, so I’ve got about 3 years to go). I work for a hotel chain, and the company has decided to put the particular hotel I work for up for sale.
If the hotel does indeed sell (not guaranteed in this economic climate), I will be out of a job, though it’s likely that I and most of my coworkers would be immediately hired by the new company — they’ll want to keep the hotel running without interruption and you don’t just replace 100+ employees and train the replacements overnight. Anyway, I’ve been given to understand that “penalties for early withdrawal” apply to the interest. IOW, since I’m not vested I would forfeit any interest and employer contributions anyway, and the fund would simply return my own investment to me (which would then be counted as taxable income).
At this point my actual contributions to the 401k are a trivial amount. Since at this time I’m not entitled to withdraw any interest or employer contributions, is it safe to assume that any “penalty” will be limited to taxes owed?
If you withdraw the money and aren’t rolling it over, the IRS regulations state that 20% is immediately witheld for the federal tax.
If you are in a higher tax bracket than 20% in the year you took the withdrawal, you will end up paying the difference when you file for the year. The withdrawal counts as income for the year, so it may actually raise your tax bracket.
In addition to the the taxes, if you are under age 59.5, you may also pay an additional 10% early withdrawal penalty when you file. There are a few exceptions to this penalty, however.
Regulations regarding state taxes vary by state - some require witholding up front, others do not.
I work with 401k accounts and answer this questions many times a day!
Penalties for early withdrawal apply to anything you have coming to you from the 401(k). Vesting only applies to any money your company contributed to your account in matches. If you put money (from your check) into the 401(k), you own both principal and interest on your contributions and have to pay taxes and penalty when you withdraw it before age 59-1/2.
Phase42, are you saying that you’ll need to draw down your 401(k) in order to survive if you lose your job, or are you thinking you would be involuntarily cashed out if the hotel shut down? Because that wouldn’t happen.
I was thinking the latter. At this point I’ve only contributed to the plan for two years, so the current balance is remarkably tiny (my total contribution in 2007 was $204.78) and nothing I could survive on anyway at this point 
So if I do end up out of a job, I can just leave my money in there indefinitely (assuming I don’t find another job with a 401k to roll over into - the likely scenario in my line of work/geographical location)?
And a possible state penalty and taxes also. Generally, you will lose about **half **to taxes and penalties. :eek:
I lost a job with a very nice 401[k] plan, so I’m in a position to answer this. While you can take the money (and split it with Uncle Sam and probably your State Treasurer), you’re entitled to roll it over into an I.R.A., with no penalties.
To the best of my knowledge, such a rollover doesn’t “count” towards your maximum I.R.A. cap for the year, but that didn’t affect me, so it’s possible I’m speaking out of my nether regions on that particular question – check with your I.R.A. rep, at the bank when doing it, or with a tax accountant or professional tax preparer you trust, if it’s likely to be an issue.
You’ll have to check with your 401K plan. It is common for the plan to state that small accounts can be dissolved by the plan at termination of employment. My company’s plan, for example, states that upon termination you may keep your money in the plan unless your account is worth under $5,000. Accounts worth under $5,000 are dissolved and a check is issued to the employee. The employee may roll this check into an IRA account to avoid paying the taxes and penalty.
If your account balance is in the hundreds of dollars, they will probably issue you a check. You may roll it into an IRA account, though it may be too small for many institutions. I would just pocket the money if it that’s small.
Just a bit to add to Polycarp’s answer. It is very easy to move (roll-over) a 401(k) or 403(b) from a former employer to your own financial account if you shift jobs. In fact, on Sound Money on National Public Radio they suggest this as your former employer (or their retirement plan) really has no reason to look out for your best interests. I’ve done this several times. Just check with you r financial planner on how have the check made out. (Properly made out will reduce the possibility of IRS confusion and them thinking you cashed out instead of rolling it into another qualified account.)
If you don’t have a financial planner, get one! If you don’t feel you have enough money to warrant a full fledged financial planner or retirement portfolio, most banks make it easy to set up a simple IRA account.
Thanks for the information. I really should look into it myself to get all the specifics. If it makes any difference, I believe my 401(k) is “controlled” through my union (as is my health insurance) rather than my employer. So I imagine I could keep the account as long as I kept paying my union dues even if I was no longer employed by the hotel. Then again, that might be silly to do, since my hotel is, AFAIK, the only local hotel represented by this particular union, so it’s not like I can utilize the union to get me a job somewhere else nearby.
If they do issue you a check, chances are they’ll withhold some income tax from it (the 20% someone mentioned, I think). So if your balance is 500, they might issue you a check for 400. Better to arrange for them to roll it over to some financial institution which can hold it in an IRA, if possible. A bank, or brokerage house.
If you get issued that 400 dollar check, and put it into an IRA yourself, REMEMBER: The withdrawal is 500 dollars. As unfair as it seems, that hundred-dollar difference is treated as a withdrawal, and taxes and penalties apply - unless you can come up with the hundred yourself when you deposit the 400 into an IRA. Otherwise, you’re out 10 bucks (penalty), plus the federal taxes on the hundred, plus state income taxes as well.
A friend had something like that happen. She got a check for, say, 4,000. She knew the actual closeout amount was 5,000 and she happened to have the extra grand so she included that when she set up the IRA. Net result: IRA which was worth the full value of the now-terminated 401(k), so no penalty; a hefty prepayment on her tax bill for the year (that thousand was treated just as if she’d withheld from income, or paid via quarterly estimated), and nice tax refund because of the prepayment.
Whatever you do, don’t just pocket the money even if it’s a small amount. A small amount can grow quite a bit over the years. Far too many people do just that and wind up with far too little socked away. Treat that money as G.O.N.E. Gone.