401k Early Withdrawal

Frequently Asked Questions

1. QUESTION:
   Early 401K withdrawal-paying the penalty fee upfront with the 20% tax?
   I need to do an early withdrawal from my 401K-cash out. I understand that they will automatically deduct 20% for tax purposes. My question is that can I have them take the additional 10% penalty fee along with the 20% at the same time so I don’t have to worry about the penalty fee when tax time comes around? It is necessary for me to withdraw from my 401K at this time due to some hardship.

   • ANSWER:
     You will have to speak to your 401-K administrator. They should be able to take 30% out instead of the 20%, but each administrator has it’s own set of rules.

     If they do not take the 30% out, you can calculate the 10% amount and send that amount to the IRS with a 1040ES form. Look at www.irs. gov – click on forms – and you can print out the form needed to mail in your payement.

2. QUESTION:
   How do you take out an early 401k withdrawal?
   I see all over the internet people mentioning cashing in their 401k early to pay off debt. I just tried to do that exact same thing, yet according to my representative, (who put me on hold to verify with someone else) there is not one single legal way I can cash in my 401k early without qualifying for a Hardship Withdrawal and providing proof from a very limited list of acceptable documents for them to investigate.

   Which is the truth here: Have people closed out their 401k early to pay off debt, or is there no legal way to do so?

   • ANSWER:
     Are these people cashing in their 401k early, people who are older and retired? As Plea_of_insanity states, there is no legal way to withdraw from your plan (while still employed) unless you qualify for the Hardship withdrawal or take a loan on your 401k.

     BTW Plea_of_insanity, you tricky tricky man. Asking questions you already know the answer to! Tsk Tsk! ;P I wondered why you looked familiar…

3. QUESTION:
   What is the penalty for taking out a 401k early withdrawal?
   I am in my mid 20”s, I live in california and I am single. After penalties, federal tax, and state tax. How much would I have for myself. if lets say my 401k is 10,000 dollars. The reason is because I might be laid off and might need to tap into my 401k to support me.
   To add additional details, I make 40-55 K a year. hope that helps.

   • ANSWER:
     The penalty is payment of taxes on the amount withdrawn plus an extra 10% penalty…figure on seeing ,500 or less of that ,000

4. QUESTION:
   How do I keep from having to pay on a 401k early withdrawal if I forgot to delare it on income tax return?
   I paid the taxes upfront when I took the withdrawal but I didn’t know I needed to declare it as income and now I’m being told I owe money on my 2007 return.

   • ANSWER:
     You didn’t pay the taxes, you had some taxes withheld from the distribution. This is just like your paycheck. Do you neglect to include your pay on your tax return just because you had taxes withheld?

     In either January or February of 2008, you should have received a Form 1099-R showing the income and taxes withheld. You need to find it or get a copy from the trustee of the 401k plan.

     The IRS matches everything on your tax return to the various forms filed by employers, banks, etc. When a discrepancy is found, a notice is generated. The IRS may not have found a difference in your tax withholding. Also, the IRS will notify your state tax agency. As such, you should file an amended return with the state. Some states have a place for you to reveal that your amended return is the result of changes made by the IRS.

     If you were under the age of 59.5 in 2007, you will have to pay a 10% penalty tax on the 401k distribution unless you qualify for one of the exceptions (first time homebuyer, medical expenses in excess of 7.5% of your income, etc.) or if the distribution was part of a series of Substantially Equal Periodic Payments (SEPP) http://www.investopedia.com/terms/s/sepp.asp

     I hope this helps.
     Gary

5. QUESTION:
   How is interest paid on an early 401k withdrawal?
   I am thinking about withdrawing a small percentage of my 401k to pay off all of my debt. I am wondering if “they” will take the taxes out before I receive my withdrawal or will I be responsible for paying the taxes at the end of the year?

   • ANSWER:
     Taxes are withheld. At the end of the year, you include the income on your taxes and usually the withholding is NOT enough.

6. QUESTION:
   How can I get the early-withdrawal penality waived from withdrawing on my 401K early?
   I have a medical and financial hardship — lost my job and have to pay for medical expenses for a health problem that recently came up. My former job insists that I have to pay the penality on withdrawing my 401K early.

   Would my situation qualify as a hardship that would waive the early-withdrawal penalty? How do I get this waived? What do I do if my former job still does not accept this waiver?

   • ANSWER:
     You can’t. This is not a decision made by your former employer, this is a federal rule being enforced by them. Funds in your 401K are for your retirement, not an emergency. For an emergency you should have had an emergency fund. Also, it is unlikely you would be able to take out a loan as you obviously do not have the means to pay it back.

7. QUESTION:
   Can we use our early 401k withdrawal as a Medical deduction on our taxes to avoid the 10% penalty?

   My husband and I closed our 401K plans to have IVF treatments done and to pay other medical bills. We both paid the 10% federal tax but were wondering if there was a way we could use the medical deduction portion to avoid the 10% early withdrawal fee?
   The first 401k was actually rolled into a trad ira before i closed it whereas my husband was an actual 401K account. So do the same penalty fees apply?

   • ANSWER:
     VB is right…IRA or 401k it doesn’t matter…both are qualified plans for this purpose. And it is subject to that 7.5% AGI limit. Basically works out that whatever amount that you could use as an itemized deduction you can also avoid paying the 10% penalty on. Given the possible expense of IVF it’s very possible it’s a substantial amount.

8. QUESTION:
   Do I have to pay back an early withdrawal of my 401k?
   So I have to pay taxes on this 401k withdrawal? What exactly does this mean? Is this a bad thing?

   • ANSWER:
     If you take money out of a 401K, it’s called a distribution. You must account for the distribution on your tax return.

     For most of us, 100% of the money is taxable and if you are younger than 59.5 years of age, a 10% penalty generally applies.

     The bad things:
     1. You are taking money out before retirement. Do you plan to work forever?
     2. You are paying a 10% penalty.
     3. When you put money into the 401K, it reduced your tax and possibly put you in a lower tax bracket. When you pull money from the 401K, it increases your tax and usually puts you in a much higher tax bracket than you “saved” it to begin with. (Not always true, I put $$$ into a 401K when I had a high salary and when I was unemployed, I rolled a chunk to a ROTH and didn’t very little in tax.)

9. QUESTION:
   401K early withdrawal penalty tax and disabled?
   I am 50 years old and have been taking money out of my retirement account and taking 20% federal tax out and 10% additional penalty each time since I have been disabled and out of work since Nov 2006. I just had a hearing to get my SS disability, if I get approved back to my onset date of Nov 2006 can I get the penalty tax I paid back to that date?

   • ANSWER:

10. QUESTION:
    Can my employer deny my early 401k withdrawal if I’m ok with the penalty and tax?

    • ANSWER:
      Valid reasons for a hardship withdrawal generally include:

      1. Expenses for medical care for yourself, your spouse, or your dependent.

      2. Costs directly related to the purchase of your principle residence, excluding mortgage payments.

      3. Tuition, related educational fees, and room and board expenses for the next 12 months of college education for yourself, your spouse, or your dependent.

      4. Amounts necessary to prevent your eviction from your principle residence or foreclosure on the mortgage of your principle residence.

      5. Payments for burial or funeral expenses for your deceased parent, spouse, or dependent.

      6. Expenses for the repair of damage to your principle residence that would qualify for the casualty deduction under the Internal Revenue Code.

      Unless one of the above applies to you, your employer is allowed to deny your request for early 401(k) withdrawal.

11. QUESTION:
    How can you offset the penalty of early withdrawal of your 401K?
    If you plan to invest these money into the business? Any ideas how to decrease the amount that goes to uncle SAM when getting your 401K money early?

    • ANSWER:
      you can only offset with either losses or other credits/deductions like:
      child credit
      investment losses
      real estate interest
      business expenses

      I am sure that there are others, but those are the most common.

12. QUESTION:
    Early 401k Withdrawal Penalties?
    Hi I am a student and I was wondering what the total penalty is for 401k early withdrawal? I am no where close to 59 so lets say for example if I had ,000 in my 401k how much of that would I lose? Im just trying to see what the total percentage is 30%? 35%? and if it’s worth taking that out..

    Thank you

    • ANSWER:
      The amount you withdraw from your 401k is added to your other income. This means that you may be thrown into a higher tax bracket. In addition you will have to pay a 10% penalty on the money you withdraw.

13. QUESTION:
    401K early withdrawal (no hardship)?
    I may want to take an early 401K withdrawal. I am very much in debt and am not worried about any penalties. I just need the money and it would only be about 00 (after penalties). I need to know if I do decide, should I be allowed to withdraw all the money even though I don’t qualify for the hardship requirements?
    Thanks for the input. Any suggestions as to what the better options are at this point?

    • ANSWER:
      If you have to, draw out as little as possible from your 401K. You can also draw it out as a loan, which means you pay yourself back typically at 10% interst to yourself, with automatic withdrawl from your paycheck over a 5 year period. This minimizes penalty.

      If at all possible, try to get a consolidation loan rather than draw from your 401K. Most of all realize that you need to figure out how to live within your means if you want your debt to not recurr. Start by making a detailed budget with some allowed for savings and then stick to it. Otherwise the habits that got you in debt are likely to land you back there again.

14. QUESTION:
    Taking money out of a 401K, early withdrawal?
    It is my understanding that you can begin taking money out of a 401K, WITHOUT PENALTY, if you are 55, retired and setup withdrawl payments over a period of time. Is this correct ?
    Jim W, thanks for the link but you need to read it yourself befor saying 55 is not 59 1/2. The link you sent says you can withdraw at 55 if you “sepereate from service” ie: retire.

    • ANSWER:
      Hi There,

      I have some information for you, yes you can do this via what is called a 72t election:

      ****Rule 72t for those under age 59½*****

      If you need IRA distributions prior to age 59½, the IRS does let you tap your plan and also avoid the 10% penalty for early IRA distribution. The simple rule is to set up a stream of lifetime equal distributions. For example, if your life expectancy at age 59 is 20 years and your IRA is 0,000, then it’s okay to take 1/20, or ,000 annually. Of course, the calculation is a little more complex than this as the IRS must be assumed to earn interest that is not more than 120% of the federal mid-term rate (published monthly by the Federal Reserve).

      You can change the amount under the above calculations after 5 years and attainment of
      age 59½.

      Here’s an IRA distribution example for a client age 52, spouse age 48, joint life, assuming lump sum of 0,000 and a projected interest rate of 6.72% (which is the IRS guideline). The 72t IRA distributions could be any of the following:

      * Minimum distribution method – ,845
      * Amortization method – ,451
      * Annuitization method – ,616

      Note the age of the client in this example is age 51. He and his wife also had a college-age child. To create flexibility, the qualified plan distributions can be rolled into multiple IRAs. In this example, the client actually rolled the IRAs into three separate accounts utilizing the 72(t) option for two. The first was on a monthly basis; the second paid annually, and the third remained intact so the account could grow. Since no payment was being made from the third account it could be used for college funding, if needed. (Remember, higher education expenses are one of your exceptions under the 10% penalty rules). This is a great way to create IRA distribution flexibility under the 72(t) election.

      I hope this helps you, let me know if you have any questions and I will try to answer them.

      Thanks.

15. QUESTION:
    How an 401k early withdrawal is reported as w2 or 1099?

    • ANSWER:

16. QUESTION:
    401K early withdrawal taxes: how much do i owe?
    On my 1099-R form, it shows that 20% of my gross distribution was withheld for federal income tax. I am currently overseas and need to transfer money on any taxes I may owe tomorrow and I haven’t heard back from my tax preparer. If my gross distribution was about ,500, what would be a good estimate of amount due?

    • ANSWER:

17. QUESTION:
    401K early withdrawal versus early annuity withdrawals?
    I have been out of work a while and need to close an Annuity or my 401K. Both accounts were opened with WAMU which is now Chase. My 401K was a rolled over. I have heard that there is a 10% penalty for both options. The 401K is not doing well. Its actually has less money that what I started with. The annuity on the other hand is doing much better. Can someone please advise me

    • ANSWER:

18. QUESTION:
    How are taxes calculated on 401K early withdrawal?

    • ANSWER:
      To discourage early withdrawals, in some cases the IRS imposes a hefty financial penalty. Two types of hardship withdrawals are permitted from 401k plans. One is called a financial hardship withdrawal. It is subject to applicable income taxes and a 10 percent early withdrawal penalty if you are younger than 59 1/2.

      The other is a penalty-free withdrawal made under Section 72(t) of the Internal Revenue Code. With this, you pay applicable income taxes but not an early withdrawal penalty. Financial hardship withdrawals are allowed for the following reasons:

      1. to buy a primary residence
      2. to prevent foreclosure or eviction from your home
      3. to pay college tuition for yourself or a dependent, provided the tuition is due within the next 12 months
      4. to pay unreimbursed medical expenses for you or your dependents

      You may qualify to take a penalty-free withdrawal if you meet one of the following exceptions:

      1. You become totally disabled.
      2. You are in debt for medical expenses that exceed 7.5 percent of your adjusted gross income.
      3. You are required by court order to give the money to your divorced spouse, a child, or a dependent.
      4. You are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later.
      5. You are separated from service and you have set up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy. (Once you begin taking this kind of distribution you are required to continue for five years or until you reach age 59 1/2, whichever is longer.)

19. QUESTION:
    Max out 401k now and pay early withdrawal penalties later? Or invest excess into a brokerage account?
    If I’m planning to retire early (45-50), is it better for me to max out my 401k now and pay the 10% penalty when I begin withdrawing early? Or is it better to invest the extra money in a taxable brokerage account that won’t charge penalties upon withdrawal?

    • ANSWER:
      If you get a company match, contribute enough to the 401k to take full advantage of the match. Think about it–if the company match is, say, 25%, and you later pay a 10% penalty, you still come out ahead.

      Put the rest of your money (or all of it, if there’s no match) into a taxable account. If tax-efficiency is an issue for you, you could look at some tax-managed mutual funds, such as those offered by Vanguard. You’d still defer most, if not all, of your taxes on gains (not principal) until you need to sell, and then you’ll only pay long-term capital gains taxes, as opposed to paying taxes at your full income tax rate like you would with the 401k.

      Another option (if you qualify) would be a Roth IRA. When you’re ready to retire at 45-50, you could withdraw your PRINCIPAL with no penalties or taxes, and if you wait until age 59 1/2 to withdraw your gains, those will be tax-free too.

      Perhaps a combination of the above would work for you. Good luck!

20. QUESTION:
    401k early withdrawal taxes/fees?
    From what I understand, early withdrawal of your 401k results in 20% mandatory tax withholding plus 10% penalty. I’ve heard that more taxes can be taken out later. Is this true? And if so, how much?

    • ANSWER:
      You will get hit with the 10% penalty and then you pay normal taxes on the amount your with draw.

21. QUESTION:
    tax implication for early 401k withdrawal?
    A little background.
    Im 50 yrs old on social security disability. I need to withdrawal 00 from 401k with no plan of paying it back. My annual SS inclome is roughly 000. I realize there is a 10% early withdrawal penalty.
    My question is what federal tax liability am I responsible. Do I have to pay taxes on the full withdrawal amount to the feds or will standard tax deductions lessen the burden?
    Thanks for any info.
    If anyone needs a little more info let me know.
    A little background.
    Im 50 yrs old on social security disability. I need to withdrawal 00 from 401k with no plan of paying it back. I realize there is a 10% early withdrawal penalty. My annual SS inclome is roughly 000 plus long term disability annually payments of 20. I’m divorced. Filing Head of Household w/ my elderly aunt as a dependant who recieves 56 annually. My question is what federal tax liability am I responsible. Do I have to pay taxes on the full withdrawal amount to the feds or will standard tax deductions lessen the burden?
    Thanks for any info.
    If anyone needs a little more info let me know.

    • ANSWER:

22. QUESTION:
    401K early withdrawal?
    How much will my taxes be if I made an early withdrawal of ,000.00
    from my 401K?

    • ANSWER:
      It depends on your other income. Since the early withdrawal will be added to your other income, it may push you into a higher tax braket. Don’t forget you will have a 10% early withdrawal penalty on top of the tax.

23. QUESTION:
    401k early withdrawal penalty?
    i withdrew my 401k (im stilll under 59 1/2 y/o). deductions include only the state and federal tax. however, the early withdrawal penalty was not deducted, (its not that I dont want it) but as i understand it, this should also be deducted.
    considering this, how will this be paid?can i just include it on my 2010 tax filing as ‘earnings’?or should i pay for it NOW (i already filed the tax return for 2008 prior to my receipt of my 401k check)?
    i appreciate the help.
    thanks in advance.

    • ANSWER:
      If you took the money out in 2008, you were to show it on your 2008 tax return.

      If you took the money out in 2009, it goes on your 2009 tax return.

      To show it on the tax return, you were to file a 1040, show the withdrawal on line 16b, the early tax on line 58 (I think) and the withholding, if any, on the withholding line.

24. QUESTION:
    401k early withdrawal made in Feb 2008 – will I incur penalties if I wait to pay taxes until Apr 2009 ?
    I withdrew 00 from a 401k from a former job in Feb 2008 to pay off high rate debt. I asked this question previously with less detail and everyone assumed that 20% was withheld – there was NOTHING withheld. I had the option online for how much if any I wanted to have taken out, I said [FAQ-QUESTION] and got the full 00.

    So far in 2008 I am on unemployment – that is my only source of income (besides this withdrawal.)

    I believe that the 00 would be added to my earnings for 2008 and those taxes would be due April 2009, along with the 10% early withdrawal penalty on the 00. What I don’t know is the rules that determine whether I need to make an estimated payment or not. It’s not an issue from a discipline standpoint, I just need to know if I wait to pay until near the deadline of April 2009, am I screwing myself because when I do my taxes then I’ll find out that have created a situation where I should have been making estimated tax payments and have incurred penalties ?
    To whoever (whomever? grammatical weakness) answers, particularly those with relevant knowledge: thank you for your time and help!
    I am having income taxes taken from my unemployment.

    I was initially given clearly very bad advice about when the taxes on that withdrawal would be due. This advice did not come from Yahoo Answers, it came from the financial people that handle the 401k that I spoke too when I made the withdrawal (more than one, I asked multiple people that I dealt with there) – one of the major companies that I won’t name. They did warn me that taxes were not their specialty, but this after telling me that I should be fine with waiting to pay the taxes on the withdrawal until April 2009, knowing my full situation. Thankfully I knew that I needed to verify this information.
    My apologies…..I forgot a key detail, which I would assume makes the lack of withholding legal. On the advice of the people at the company I was dealing with (that manage the 401k), they created an IRA for me and I moved the amount that I was going to withdraw to that account as an intermediate step before I withdrew it. I forgot about this, as in my mind, I was withdrawing from the 401k all along. Hope that helps clear up what happened at least. Thanks again for the help.

    • ANSWER:
      Tax payments are due when the income is earned not on April 15. Usually this is handled through withholding. If there is no withholding or not enough, quarterly payments are required.

      If you wait until April 2009, you will probably have penalties added to your balance due.

      It is not likely, but the IRS can calculate penalties on missing quarterly payments from the dates the payments are due until they are paid.

      Payments are due April 15, June 15, Sept 15 and Jan 15. You said the withdrawal was made in February, therefore the estimated payment would be due on April 15. There is still time to make it and not be late.

25. QUESTION:
    401k early withdrawal tax question?
    I’ve been a tax preparer for years but I was recently posed a question that I can’t find documentation for my line of thinking. (The question came from my husband so don’t think I’ve given poor tax advice and I’ve also stated that I will need to fully research my answer).
    He was thinking about making a withdrawal from his IRA and wanted to know the tax implications. I said it would be taxable income at our tax bracket and subject to a 10% early withdrawal penalty or a 25% penalty if it is a SIMPLE IRA – which is probably not likely.

    His question: why wouldn’t it be subject to capital gains rates?

    Turns out his IRA had been used to purchase stocks, which have since been sold, and now there is just cash sitting in the IRA earning a small amount of interest.

    I can’t find anything to indicate why a 401k would be hit with capital gains, but I also can’t find anything to show why it would not.

    Do any of you tax-guru’s out there have any thoughts/ideas or links to tax topics, pubs or forms that might help me answer my husband’s question?
    Thanks!!

    • ANSWER:
      Capital gain, dividend and interest taxation does not apply to transactions within tax-deferred retirements accounts. All distributions are taxed as ordinary income at the time they are made.

26. QUESTION:
    Federal tax payment – 401K Early Withdrawal?
    I had taken a small early withdrawal from my 401K plan from a previous employer plan. The company JP Morgan Chase sent me my withdrawal but for the full amount. They didnt take out ANY
    Federal or NY State early withdrawals penalities from the check. When I called Chase they told me I could pay the early withdrawal penalities ahead of the ending tax season to the IRs and NYS authorities but they couldnt give me the name of the forms I can use to send in the payments? Can anyone help me?
    Thank you.

    • ANSWER:

27. QUESTION:
    early 401k withdrawal for a 30 year old?
    im 30 years old and have some credit debt and was thinking about withdrawing 401k funds from a previous employer. the total monthly payments are 600 dollars. I have worked out budgeting myself but cannot put more towards balances but would look at increasing my current 401k payroll deduction. where i understand that there are penalties and taxes it seems silly to trudge along. basically my question really is if 30 years is enough to build back up my retirement fund.

    • ANSWER:
      Yes it’s enough time to build it back if you intend on working until you’re 65. You’ll rule out early retirement. Even if you can build it back you don’t want to do that without careful consideration…How much is in the account now? To withdraw funds means you’re missing out on the compounding interest on that amount over the next 30 years. That coupled with the penalties for withdrawing early and the taxes isn’t worth it. Make a budget for yourself by accounting for how you currently spend your money (down to the penny) keep a running monthly log of this over the next 12 months so you can truly see how you are spending your money.. then be vigilant about reducing unnecessary expenses and reallocate that money towards your debt. You might be surprised to find out how much frivolous spending actually goes on!

      Also see if there are ways to make extra money on the side. Can you do some consulting on the side or are there some items that you can sell to make extra cash?

28. QUESTION:
    Early withdrawal of 401k. When to report it on taxes?
    Last week I received my check in the mail on my early withdrawal for my 401k. Of course, I incured the heavy tax penalty but when do I need to report it on my tax return? This year or next year?

    • ANSWER:
      If you just got the check in 2011, it goes on next year’s return.

29. QUESTION:
    Could I negate a 401k early withdrawal fee/tax with a tax credit?
    I am leaving my job and will attend graduate school in the fall. I do not expect to earn much income this year, and I expect that I will be eligible for a 00 Lifetime Learning tax credit. Can I use this tax credit against the 10% penalty on my 401k withdrawal and in effect withdraw the money tax-free?

    Key details:
    I don’t expect to earn more than ,000 this year.
    The 401k is valued at approximately ,000.
    I should be eligible for up to a ,500 Lifetime Learning tax credit.(I can’t use this credit against future taxes, can I?)

    Thanks!

    • ANSWER:
      The problem you run into is your low income. Your Lifetime Learning tax credit is actually reduced based on income limitations. So all though the tax credit does offset the early withdrawal fee you will not receive the complete ,500. If you make ,000 your education credit would actually be around 0 (total estimate, not exact). So, yes your credit will reduce the early withdrawal fee but your credit is not going to be ,500 based on only making ,000.

30. QUESTION:
    What is the penalty for early withdrawal in 401k?
    the amount taken out would be about 24k.

    • ANSWER:
      You may only be able to take out half that amount if there was a company match.
      It can take years for the company amount to become vested.

      The penalty (which you pay at tax time on April) is 10% government penalty, and your current tax rate – lets say 25%.
      So if you take money out – put that 35% aside for tax time – you will get hit hard.

      There is another option.
      You can make a loan from your 401K.
      You will have to talk to your HR person and prove hardship such as medical debts, or overwhelming credit card debt.
      The loan, would be your best option, since you would pay back yourself with interest.

      Now, the markets are poised to jump and perhaps skyrocket in the next year.
      Are you sure you want to take the money out now?
      Not to mention you will regret this decision when you get older.
      /

31. QUESTION:
    can i reverse 401k early withdrawal(brother) due to his mental capacity caused error.?
    employer is sending check minus 20% for IRS when hardship and mental state confused him resulting in error.he thought he had time(60 days) to rollover before any tax deduction would take place. can i intervene and ask employer to reverse withdrawal to same as before or rollover.

    • ANSWER:

32. QUESTION:
    What are penalties for early 401K withdrawal?

    • ANSWER:
      You will have to claim the amount you remove as income in the year you take the withdrawal. Plus, there’s an additional 10% IRS penalty on top of that. If you’re desperate for cash, why don’t you check with your 401k provider about taking a loan. Taking a loan from your 401k is not something you should do unless you absolutely have to, but it beats taking an early withdrawal.

33. QUESTION:
    Should I file for bankruptcy or make an early withdrawal out of my ira or 401k to survive this economy?
    I can take an early withdrawal and just pay the taxes or I can file for bankruptcy and save the 401k and ira. Which one makes more sense?

    • ANSWER:

34. QUESTION:
    401k Early withdrawal?
    I’ve decided after going from 30k to 20k over the past year even while contributing, i am going to withdrawal completely from the 401k program. Not rolling over, and not filing hardship. Just withdrawaling. How much of a penalty can i expect to pay? Thank you!

    • ANSWER:
      10% early withdrawal fee plus ordinary income tax.

35. QUESTION:
    When i make an early withdrawal from my 401k, can I elect to not have taxes taken out?
    Lets say I have, 14,xxx in my 401k. If i were to get fired or leave the company, I know the company will most likely give me the option of what to do with my 401k. If i request a check, can i elect not to have taxes taken out? I know i have to pay taxes eventually but I wonder if I can just deposit it into my checking account and payoff some credit cards. thanks!

    • ANSWER:
      Normally, when you receive 401k payments early, the taxes are automatically taken out because there is a ten percent penalty that you will already be paying for taking the money. There is no way to elect no taxes be taken. I separated from my company two years ago, and received all monies in my pension and 401k. To elect no taxes was not even an option.

36. QUESTION:
    If I take an early withdrawal from my 401k and pay the penalty, does this mean I would owe money?
    Do I owe money on my income tax return?

    Do I need to pay the withdrawal back or is it mine to keep?

    • ANSWER:
      Unless you’ve left your employer, there is NO EARLY WITHDRAWAL. You can quit contributing to it.

      You will owe 10% early withdrawal penalty, then state & federal taxes.

37. QUESTION:
    how long do i have to pay the 10% penalty for early 401k withdrawal?

    • ANSWER:
      It goes on your taxes for the year when you withdrew it. If you took a total distribution from your 401-k when you left a job, the 401-k trustee was supposed to withhold 20% of it, which “pays” it right then.

      However, even with the withholding from the distribution, you’re still not out of hot water. The total amount of the distribution is considered income in the year when you took it, and you have to pay taxes on it. So, a total distribution of a ,000 401-k account could wind up costing you ,000 in taxes and penalties, if you’re in the highest marginal tax bracket. For the “average” 25% bracket, it’s still a hefty ,750 for penalties and taxes (and this doesn’t include state and local taxes that could also be imposed).

      Even losing up to half of your 401-k to taxes and penalties isn’t the worst part. Once you’ve taken a total distribution, you can never put it back, and you forgo all of the future benefits of tax-deferred growth. You have some time to roll it over into an IRA, but not a lot (and you have to make up the 20% withholding from your own pocket).

38. QUESTION:
    What is the penalty for early withdrawal of my 401K?
    I am 61..looking to get out of my 401k alltogether..do not want to roll it over into an IRA..I just want to take the money out. What kind of penalty, or tax is involved..and do you only get your vested amount less penalty and taxes…or account value less penalty and or taxes? Any information would be appreciated.

    • ANSWER:
      You can only withdraw, if you’ve left your employer & retired. If you are still employed, not gonna happen. If you are eligible, you must pay state & federal taxes.

      Why not just move to the safety of money markets and/or bonds??

39. QUESTION:
    Early withdrawal? 401K or IRA?
    Due to financial problem, I have decided to make a full early withdrawal of my 401K. Which one is better? Withdraw it right from 401K, minus TAX plus 10% penalty? or rollover to an IRA first then get it from there? They said early withdrawals from IRA still have TAX and penalty. I don’t wanna do a loan so don’t bother.

    • ANSWER:
      If you take the entire withdrawal directly from the 401(k) administrator, they are likely to withhold not just the 10% but also another 20% for taxes. It depends on the particular rules of the plan administrator.

      A better route and one that offers more control is to do a rollover to an IRA and THEN take the distribution. You will be better able to decline to have taxes withheld by an IRA custodian if you so desire and you can worry about them later. Just remember to make sure you have enough put aside in a savings account or somewhere to cover the tax liability next April. A brokerage or bank acting as an IRA custodian can not force you to have taxes withheld. They will send you and the IRS a 1099 form early next year so you can not avoid paying the taxes, you just don’t have to pay them now.

40. QUESTION:
    Question Regarding How to Assess 10% Penalty on Early 401k Withdrawal?
    I am younger than age 59 ½ but had to take an early withdrawal from a 401(k) plan in 2009 due to financial difficulties. I am trying to figure out how much of the withdrawal is subject to the 10% penalty associated with early withdrawal. Does the following statement from the IRS website (which lists one of the exceptions related to assessing the 10% penalty) mean I can exclude all of my withdrawal from the 10% penalty, or does it mean I can exclude only the amount by which I am over the 7.5% threshold for deductible medical expenses?

    ” . . . Distributions that are equal to or less than your deductible medical expenses, that is, the amount of your medical expenses that is more than 7.5% of your adjusted gross income. You do not have to itemize to meet this exception. For more information on medical expenses, refer to Topic 502″

    • ANSWER:
      Exclude only the amount OVER 7.5%

41. QUESTION:
    Can a non employee take an early withdrawal from their 401k?
    if they no longer work at their place of business?

    do you need a reason to take it out?

    • ANSWER:
      If you make a withdrawal prior to age 59-1/2 you will be subject to a 10% early withdrawal penalty and the amount will be subject to income taxes.

42. QUESTION:
    401k early withdrawal made in Feb 2008 – do I need to make a tax payment now or can I wait til Apr 2009 ?
    I have withdrawn money from a 401k at a former job in order to pay down high rate debt. I waited to do so until into 2008 so this would not be part of the 2007 tax year. My thinking was that this way it would be part of the 2008 tax year and so the taxes would not be due until April 2009. But then the warning as I made the withdrawal online scared me, and wasn’t very clear. Basically can I wait to pay the amount that I owe (including the 10% penalty) until sometime before April 15, 2009 or am I completely screwing myself if I wait ? (No taxes or penalty have been taken out or paid yet.)
    Multiple answers have assumed that 20% was automatically withheld – as I said in the details above, this was not the case. Maybe it doesn’t usually work that way, but I had the option to choose what I wanted withdrawn from the amount, and I choose [FAQ-QUESTION] at that point, on the previous advice that I had and until I could get further info like some of the answers here.

    I wish I could get more of the tax experts from the site to chime in….but thanks everyone for your help!

    • ANSWER:
      Distributions have tax withheld at 20%. This isn’t enough for most folks to cover the tax plus the penalty so there will be more due than was withheld. That could trigger penalties and interest for underpayment of tax when you file next year depending on how the numbers work out.

      If your debt at filing time is greater than ,000 then you MIGHT owe penalties and interest unless you fall into one of the Safe Harbor exceptions. If you have paid in at least 90% of your total tax liability then there won’t be any penalties regardless of what you owe, assuming that you pay the entire debt by April 15th. Alternatively if you’ve paid in 100% of LAST YEAR’S liability there won’t be any penalties either.

      Make sure you’ve paid in either 90% of your 2008 liability or 100% of your 2007 liability by Jan 15, 2009 and you should be safe. Of course, make sure that you set aside enough to cover the entire debt by April 15, 2009.

      If you have any doubt about your ability to discipline yourself to set that money aside, just go ahead and make a single estimated payment using Form 1040-ES by April 15, 2008 to play it safe.

43. QUESTION:
    can I take an early withdrawal from 401k to pay delinquent taxes and not pay penalty?

    • ANSWER:
      Your company’s plan might or might not let you take an early withdrawal if you still work there. But if they do, you’d owe the 10% penalty if you’re under age 59-1/2.

44. QUESTION:
    Will I get tax a refund? Early withdrawal on 401k. NY Resident single.?
    Hello,

    I am single, living in NY. if my only income for the year is an early withdrawal from 401k of 00 will I get a refund?

    20% will be withheld for federal taxes and the only other deduction is student loan interest payment.

    Thanks

    • ANSWER:

45. QUESTION:
    Is an early 401k distribution already included in your wages on a W-2 form?
    If an early 401k withdrawal was made during 2009, is it already counted in the “wages, tips, and other compensation” box on the W-2 for that year?

    • ANSWER:
      A early distribution amount withdrawal from your 401K account will not be reported to you on your W-2 form at all.
      Any taxable early qualified withdrawal distribution amount that you have received will be reported to you on a 1099-R that you will receive after the end of the tax year with the information that you will use to report the distribution withdrawal from the 401K on your 1040 federal income tax return in the year that it occurred in and if you were under the age of 55 and still an employee of the company the taxable amount will be subject to the 10% early withdrawal penalty plus federal income tax at your marginal tax rate.

46. QUESTION:
    What is the penalty for early withdrawal from your 401k?
    What % will I be penalized?

    • ANSWER:

47. QUESTION:
    what would be the 10percent tax fee on an early withdrawal of 401k of about 0?
    just wanted 2 know how much i would owe?? i took about 0 withdrawal of my 401k! [

    • ANSWER:

48. QUESTION:
    401K early withdrawal penalty?
    Okay, I need an answer from someone who KNOWS FOR SURE about this rule. I already withdrew my 401k when I left my employer this year. I am filing taxes, well my accountant is. The plan holder took out 20% for Fed tax. Some people say this may be enough to cover the penalty , or may not be enough. What does this may/may not stuff mean? Dont they take out 20%, then tax you another 10% of the original principal amount? Example: I have 10,000 in 401k , get 2,000 withheld from fed tax upfront, then get another 1,000 (10% of 10,000) in April for a total of 30% of the original amount? Or am I misunderstand this rule?

    • ANSWER:
      You will owe income tax at your highest marginal rate plus 10% of the withdrawal.

49. QUESTION:
    What are the penalties for early withdrawal from a 401k?

    • ANSWER:
      If you are under age 59.5, the penalty is 10% of the withdrawal. As with all withdrawals, the amount will also be taxed as ordinary income.

      If the purpose of your withdrawal is to retire early, IRS code 72(t) allows you to withdraw a stream of income in “substantially equal payments” without penalty. Most financial advisors will be able to help you with the calculation at no charge.

50. QUESTION:
    Is it a good idea for 401k early withdrawal?
    I would like to withdraw from it for a down payment on a new house. My wife is pregnant and we need a bigger home.
    Unfortunately with house prices falling we have lost the equity on our current house and will most likely break even.
    I need 3.5% down for an FHA loan on our next home and I am a few thousand short. I am wondering if it would be a smart move to withdraw my 401k?
    The reasons that I am interested in doing this, despite the taxes and the penalties, are because we have found a great deal and will have instant equity in our new home, and I only need 3 or 4 thousand.
    Thanks for your advice.

    • ANSWER:
      I would rather you take out a home loan from a bank than to withdraw from the 401 (k). The reason I say that is because that retirement plan is compounding right now, and you don’t want to cut into that. I’d go for a fixed rate home loan, that’s if you can get approved. Good luck.