401k Penalties

Frequently Asked Questions

1. QUESTION:
   What are the exact and full 401K penalties for full withdrawal?
   Help settle a debate now with a friend. She (age 29) has right at 100K in her 401K, and for reasons that don’t matter to the debate were guessing if she cashed out her entire 401K, it would leave her with about 70K. The basis for this is her understanding of how the full withdrawal works. She reads her company would keep 20% for federal tax, and you have the 10% early withdrawal.

   I am telling her it would be more than that amount. I estimate her salary would put her above a 20% federal taxes hit, and was thinking it was more like 24%, and the state of IL would hit her for an additional 8% in taxes. I estimated she would be looking more at 58K after all was said and done with.

   I also understand her company locks her out of the 401K plan for a full year. It is obviously a big mistake to totally drain her 401, but who is closer to the correct ‘end’ amount, after ALL taxes and penalties?

   • ANSWER:
     You are far closer to correct. Actually, it’s probably a bit worse than you stated and worse than the above poster stated.

     The withdrawal is fully taxable at her marginal rate. On top of that, there is a 10% penalty tax since she’s under age 59 1/2. Her marginal rate is determined by her taxable income PLUS the 401(k) distribution. Here’s a link to the tax rate table for 2007. http://www.irs.gov/formspubs/article/0,,id=164272,00.html

     In most cases a 0k withdrawal would span 2 or 3 tax rates but most of it would probalby fall in the 28% bracket. Using that for argument’s sake as it’s close, the total tax will be ,000 on the early distro — 28% tax rate + 10% penalty tax.

     The distribution will be subject to withholding at 20% but the total tax liability will be determined as stated above. She’d probably have a tax bill at tax time of ,000 or so since not enough will be withheld when she receives the distribution. She’d also have the state tax to contend with. If her state marginal rate is 8%, that’s another ,000 down the pooper, leaving her with a total tax bill of about ,000 and only ,000 of her 0,000 left for her.

     If she’s still employed, the company is under NO obligation to allow the distribution at all. She would have to quit her job to make the withdrawal under the rules of every 401(k) that I’ve ever dealt with.

     A far more intelligent option if she needs some quick cash would be to take a loan from her 401(k). Those are done at attractive interest rates (7% it typical) and the interest paid goes back into the account so it really costs you nothing at all. The only catch is that if she leaves the job, the entire loan must be paid in full or it will be treated as an early distribution at her age and taxed as above.

     As you can see, taking an early withdrawal form a tax-deferred retirement plan is never a good idea financially today and will have disasterous consequences at retirement time. That 0k in the account today will probalby double 5 or more times if no further contributions are made. It could be worth well over ,500,000 at retirement time even using very conservative rates of return. If she takes it out today, of course it would be worth [FAQ-ANSWER] at retirement.

2. QUESTION:
   Would allowing a one time limited amount withdrawal from 401k plans without penalties be helpful to economy?
   In the present economy, what would be the impact of allowing folk a one time withdrawal from their 401k plans without the penalties to pay down debt, catch up behind payments, do home repair or to make targeted purchases to help stimultate the economy. I’m thinking a maximun of 20% of their present balance. And write into law that this can only be done during national emergencies and only in 10 year time spans.

   • ANSWER:
     Doesn’t that just delay the problem – so instead of not having any money now, you don’t have any money for later in life? The problem I see with it is that it does not force people to take responsibility for their finances now. If you are living beyond your means, you need to come up with a plan and budget to live with the money you make. People are so used to having everything that sacrifice, work, and budgeting are forgotten concepts. It may not be easy now, but if everyone who are having these issues addresses the probelm and takes responsibility, it will only help in the long run. Bailing people out in the short term does no good.

3. QUESTION:
   How do I use 401k money to start a business without any taxes or penalties.?
   I’m starting a new business. I have already invested K of my own post tax money but I need to buy a new vehicle that will be predominantly used for business. I would like to take K out of 401k without taxes or penalties. How can I do this. I would rather just get the money rather than do a loan as I’m trying to keep my monthly outlay low while I get the business off the ground.

   • ANSWER:
     I doubt that you can take your 401K money to start a business without taxes or the 10% penalty. Only the following reasons escapes the penalty:

     1. If you have extraordinary out-of-pocket medical expenses one year and your medical expenses exceed 7.5% of your adjusted gross income, you can withdraw funds to pay those expenses without paying a penalty.
     2. An IRA distribution for first-time home purchases also escapes the penalty.
     3. Distributions for qualified higher educational expenses also are exempt.
     4. IRA distributions made to unemployed individuals (unemployed for more than 12 weeks) for health insurance premiums aren’t subject to the 10% penalty tax.
     5. If you receive a distribution due to “separation from service” (you’re no longer at the job) in or after the year you reach age 55, you escape the penalty.
     6. Distributions due to your death or due to total and permanent disability also avoid the 10% penalty tax

     Even then, the above techniques may spare you the 10% penalty tax, but there is still no escaping the regular income tax that’s owed when you start withdrawing funds from your retirement plans. Unless your money is parked in a Roth IRA — which is after-tax contributions — you’re going to pay a tax.

     CNN Money has a comprehensive article on the topic http://money.cnn.com/2000/07/31/pensions/q_retire_withdrawals/ . They suggest that if you need a quick fix loan, you can “withdraw money from your IRA for 60 days without penalty if you replace the money before the end of 2 months and you don’t do it more than once a year.”

     I feel your pain …

4. QUESTION:
   Can someone please help with early penalties on my 401k?
   I live in ohio and my plant announced it will be closing in 6 months.I have about 70,000 in my 401k and I am afraid i will have to withdraw it to help pay my mortgage and bills.I am only 33 years old.What will the penalties and taxation be.Does anyone have any other options?

   • ANSWER:
     Withdrawal rules can vary from 401K to 401K. Assuming you have a traditional 401K, you can call your plan administrator (and I suggest your income tax accountant) to confirm, but for the most part, here are the rules:
     1) 10% withdrawal penalty if you are less than 59 1/2 years old and withdraw early. ALSO: Note that in addition to the penalty, you have to pay the IRS your normal federal taxes which can amount to a HUGE amount of money.
     Exceptions:
     A) You are completely and totally disabled (which is my case)
     B) Made after the death of the contributor
     C) As a result of a domestic relations order (divorce or child support issues)
     D) For qualified medical expenses that exceed a certain amount of your income

     The government did permit some hardship rules, but not all plans honor them. This is what I could find out for you (but again, you have to confirm with your plan administrator) about early withdrawals for hardship:
     A) You can withdraw if you have an IMMEDIATE and severe financial need (but you can’t do it because you THINK you might have a need in 9 months.) You have to provide it.
     B) You must prove you have no other funds available
     C) You can only take what you need (e.g., one month’s mortgage payment, that kind of thing)
     D) You must have exhausted all other options (e.g., taking out a loan using your 401K as collateral instead of early withdrawal option, even if it means paying interest). This, to me, would be a better option in the long run because you would maintain your 401K retirement options for later in life.

     There are other options as well, but the most important thing to remember is that the 10% penalty (even if your company doesn’t take it) will be expected by the IRS unless you are absolutely sure your withdrawal qualifies as not requiring the penalty. Be careful, and be sure, before making any decisions.

     Here’s hoping and praying that you will have a new job before the 6 months is up. A new job in the pocket is much better than unemployment pay, time off, and no job at all Best wishes!!

5. QUESTION:
   How do you make early withdrawals from a 401k? What are the penalties?
   I’m unemployed and I think I may need to dip into my 401k for money. How do I go about withdrawing the money and what kind of penalties are there?

   Thanks

   • ANSWER:
     You contact your plan administrator (phone no. on your quarterly statement).

     Any money you withdraw will be taxed as ordinary income at your rate (15%, 28%, etc., but adding the 401k money may push you into a higher tax bracket), plus a 10% penalty if you are under 59-1/2. The plan administrator will withhold 20% for taxes on any money you pull out.

     There are no special exceptions for people who need the money because they’re unemployed. You can set up a plan to withdraw money in equal monthly installments for either 5 years or till your age 59-1/2, whichever is shorter Ask the plan administrator.

     Good luck, because it’s tough these days.

6. QUESTION:
   When will I have to pay taxes and penalties on my 401K distribution if I do not take it out until mid Nov?
   I am unemployed and want to have my 401K disbursed to me at this time. If I do not need to roll it over for 60 days, will I need to pay taxes and penalties on it for 2008? or 2009? I need the money now, but do not know if I will use it all. I may roll some of it over within the 60 days.

   • ANSWER:
     You pay taxes based upon the cash disbursement date. If you only need some now then I’d take part in cash and then roll over the rest in a direct rollover. Although the law says that you have 60 days to roll it over, when you take a distribution in cash the assumption is that you will not be rolling any over so they withhold 20% from total distribution.

     So let’s say you have 10k. If you took it all in cash you would receive only 8k. If you turned around and rolled 5k into an IRA you would get penalized and taxed on only 5k and since you already paid 2k in taxes you’d likely get some of that back. In other words you’d get 3k now and then maybe some later after you file your taxes.

     If you took 10k all in cash and didn’t roll any over with in the 60 day windo you’d receive 8k and be taxed and penalized on the entire 10k. You may or may not owe additional txes depending on your income and withholding from your job.

     However, if you take 5k and roll 5k over you’d only have 1k withheld and you’d get taxed and penalized on the 5k. TYou’d have 4k now and may or may not owe some slight additional tax depending on your tax level. Benefits of this scenario is that come January 1, if you need additional funds, you’d be able to take a distribution from your IRA and that wouldn’t be taxable until April of 2010. In other words, you’ve spread your tax liability.

     keep in mind that Obama wants to remove the early withdrawal penalty on 401k distributions. this wouldn’t occur until he becomes president in January so if you don’t really need the money I’d wait until then. No need to pay that extra tax if you don’t really have to.

7. QUESTION:
   What are tax penalties when borrowing from 401K to pay for home, then laid off ?
   I borrowed from my 401K to purchase home. The terms of loan were payoff over 5 years. I was just laid off. I have to now pay back the amount in full. BUT I am also being told I will incur tax penalties. I thought there were no tax penalties when the loan is used for the purchase of a home ?

   • ANSWER:
     Well, however told you that there were no tax penalties for borrowing from your 401k was wrong. It must be repaid with in a certain time frame. You’re getting laid off has nothing to do with your decision to use 401k money for a purchase of a home, it just makes things more complicated. Call IRS or see a tax preparer.

8. QUESTION:
   What is another way to save/invest money that would be accesible. Like a 401K but without the penalties?
   I have a 401K and I like the way it works. Except for that it is locked up and not accesible without penalties. What is another way to set up an account similar to this where I can invest by paycheck deductions or payments and have easy access to withdraw from it.

   • ANSWER:
     I don’t know what question these other folks are answering, it is not yours! Use an automatic investment plan through direct deposit or automatic investement with Vanugard or a broker. A Roth locks up your money for retirement just like a 401(k). The other answers are about rates of return, and who knows what they’re talking about – look for a stock investment, like an index fund, and keep making regular deposits. Vanguard is a good place for this sort of thing with a low minimum.

     Good Luck!

9. QUESTION:
   if i do a early total disbursment of my 401k what penalties can i expect to pay ?
   i will withdrawl 10,550.00 i am 30 yrs old . i am unable to work due to degenerative disc disease . wife is barley paying the bills. and i expect to run into trouble soon . with medical bills piling up atleast 2,300.00 left we are paying on and a loan of 9,000.00 . what penalties and taxes should i expect if i do a total disbursment ? and will i qualify for a hardship?

   • ANSWER:

10. QUESTION:
    Born in 1950′s what is retirement age to cash in 401k without taxes or penalties?
    I was born in 1950 and have heard different ages for retirement, in order to cash in my 401k without taxes or penalties.What is my retirement age?

    • ANSWER:
      As others have stated correctly, you cannot avoid taxes on the money you take out from a traditional 401k. You can avoid the penalty at age 59 1/2 or as early as age 55 if you terminate employment at that time and you take the distribution at that time.

      If your 401k is a Roth 401k, which has only been available for a few years, then you have funded the Roth 401k with post-tax dollars. In that case, if you wait until age 59 1/2 (or age 55 if terminating employment and withdrawing at that time) your withdrawals would be tax-free.

11. QUESTION:
    401k distributed early but penalties were taken when it was distributed? Do I still claim on taxes?
    I had an early distribution of my 401k. When it was distributed, the company said that I could elect to have all the taxes and penalties taken out at the time of the distribution instead of waiting until tax time. I had them do this, but now I’m wondering what do I put on my taxes? Do I claim it still even though I was already penalized? Is there a special form?

    • ANSWER:
      They will report the amount taken out as Federal withholding. You will need to report the amount on your return and may need to file form 5329. You should check to see if you qualify for one of the exceptions to the 10% penalty. First time homebuyer, medical, job loss (There are a couple but I think I got them all). You can find the exclusions in the instructions to form 5329 or ask the person who maintains your 401(k) at work, they will be well versed on the issue.

12. QUESTION:
    What are the penalties and taxes for early withdrawl/default on 401k loan?
    I left employer with a balance of approx. 4,000 on a 401k loan. What are the penalties and taxes that will need to be paid for this tax year?

    • ANSWER:
      As long as you don’t withdraw that money and invest it in some type of IRA product, you don’t owe any taxes. If you withdraw the money, then you will owe income taxes on it as well as a 10% penalty.

13. QUESTION:
    What are the tax penalties for early withdrawl of 401k?
    After a year of unemployment and now taking a job paying significantly less than I previously made, I’ve finally decided to withdrawl part of my 401k to try to get myself straightened up financially. I know they will withhold 20% for taxes straight away, but what are the other penalties for early withdrawl?
    Thank you everyone….

    If I’m able to find a better job and put the same amount of money into a new 401k or IRA, will the penalty be adjusted accordingly?

    • ANSWER:
      The total tax hit will depend upon your total income for the year.

      The actual penalty is 10% but you also have to pay income taxes on the withdrawal (typically 15% or 25%) plus state taxes (if applicable).

      For most people, the 20% withheld isn’t quite enough to offset the entire tax bill.

14. QUESTION:
    How can I switch my 401k to a rooth IRS with out penalties?
    My cotributions to my 401k are before taxes, generating about 13% rate per quaters.
    I heard that I could get a higher percentage in some Rooth IRA’s. I need to know wich IRA”s and how I could transfer from my 401k to the IRA with out penalties.

    • ANSWER:
      A roth account might be good or bad for you. They’re not good for everyone.

      A 401k or IRA is just a type of account, and has nothing to do with how much of a return you can get from your investment. If you are investing in mostly a diverse mix of stock funds, you should expect a long term average return of 7-9%. In some years you will get more (like 13%), and some years you will lose money). In either type, you’ll be investing in a mix of mutual funds. The benefit of a roth IRA has to do with taxes.

      Here’s the benefit: With a 401k or traditional IRA, you pay no income taxes now on the money you put in. You pay income taxes when you withdraw the money in retirement. With a roth IRA, you pay the income taxes now, and pay no taxes on the money you withdraw in retirement.

      If your income tax rate is lower now than it will be in retirement, you do not want a roth account. If your income tax rate will be higher in retirement than it is now, then a roth account would be good for you.

      HERE’S HOW YOU SWITCH:
      You “rollover” your 401k balance to a traditional (pretax) IRA. That means you tell the company that has your 401k to transfer the money directly into an IRA. As long as you don’t receive a check payable to yourself, you’ll pay no taxes or penalties. You then “convert” the traditional IRA to a roth IRA. This is something the company that handles the IRA does for you. Basically, they take taxes straight out of the IRA and send them to the IRS. This makes the money in the IRA after tax, or “roth” money.

      BUT…

      To be able to transfer the money from the 401k to the IRA, you’ll have to have already stopped working for the company. AND your company might have the “roth 401k” feature, which allows you to contribute to your 401k plan with after tax money and have exactly the same benefit as the roth IRA. ALSO if your company matches your contributions to your regular 401k, that will probably outweigh any benefit you could possibly get from the roth IRA.

      You need to talk to the company that manages your 401k plan to find out what your options are. And call a company that does IRAs to find out more details on the roth IRA to find out if it would be a good fit for you. Try Fidelity or Vanguard.

15. QUESTION:
    Is it true that you can start withdrawing money from a 401k plan at age 55 without penalties?
    I was told that if you leave a 401k plan at a previous employer, at age 55 you can start withdrawing money without paying penalties. Is this factual?

    • ANSWER:
      Yes, under certain conditions, if you retire before 59 1/2 you can start getting your money out of a 401K without penalty. You have to be on a fixed payment plan where the payments are linked to your life expectancy — the jargon for this is Substantially Equal Periodic Payments (SEPP). There are many rules to follow such as you must keep on doing it for at least 5 years or until 59 1/2, etc., and you WILL pay a penalty if you screw it up. So go read up on it on the IRS or other sites. Here’s a brief explanation:

      http://www.401krolloveradvisors.com/distributions2.html

16. QUESTION:
    Is profit sharing subject to the same penalties of withdrawal, as 401K?
    My company folded in 1500 shares of company stock I had accumulated profit sharing over 18 years of employment, into my 401k. Are those assets now subject to the same penalty as the rest of my 401k funds, because they were combined three years ago? Also, I have since left my employer, and the 401K custodian does not offer a distinction between the profit sharing funds. I would like to access funds to pay for my Daughters school. (,000) Help?

    • ANSWER:
      Generally speaking, yes, once the funds go into a 401K, or any tax-advantaged account, withdrawals are subject to tax and penalty. You may, however, be able to withdraw funds for college without penalty under certain circumstances. Either discuss with your tax adviser/lawyer or download IRS publication 590 from www.irs.gov.

17. QUESTION:
    how much should i expect to pay in penalties for cashing my 401k early?
    i am quiting my job in a few months. to be a stay at home mom. i have 17000 in my 401k, i also have a loan for 6,000 out right now. i know there is a 10% penalty for cashing out early, but how do they fingure the taxes you will be charged for it?

    • ANSWER:
      this is how it will be calculated if you process the withdrawal:

      000 + ,000 = ,000 (This will be reported to IRS as income)
      ,000 * 20% = 00
      ,000 – 00= ,400

      00 will be sent to the IRS as a down payment on your federal income taxes. You will get a tax form in the mail in Feb. You will file it and pay any additional income taxes based on your tax bracket and the 10% pentalty. You don’t pay the penalty until tax time.

      Basically, a 20% withholding is mandatory up front for income taxes for the loan balance and regular 401k balance.

      And I’ve never heard of a form to sign to get out of the mandatory tax withholding.

18. QUESTION:
    What are the taxes and penalties for cashing out some of a 401K?
    I have too much credit card debt and was considering using a portion of my 401k to pay off the cards in full. I have never done that before, and since the 401k is with my former company, I can’t take out a loan so my only option is to cash out some and roll over the rest to an IRA.

    Does anyone know the taxes & penalties the IRS would charge for that, and have an opinion about whether that was a good strategy?

    • ANSWER:
      20% of the amount taken in cash will be withheld for Federal Income Taxes. However, you won’t know your actual tax rate until you prepare your taxes next year. The cash withdrawal gets added to all of your other income and taxed at that rate. Once you’ve determined your taxes you’ll add a 10% early withdrawal penalty to that tax owed. 10% of the cash piece, not the rollover piece. This will get you to your total tax. Add your withholding piece to your withholding from your job to get total withholding. If total tax is higher than total withholding then you owe more. If it’s not, you’ll still get a refund.

      It’s not a good strategy…better to stop making 401k contributions and apply that to debt then to take a withdrawal, increase your taxes owed, and owe a 10% penalty. That being said, at least you’re only taking what you need and rolling the rest…I’d equate that to hitting your finger with a hammer rather than smacking your entire hand.

19. QUESTION:
    What are the taxes and penalties if I take money from a 401K account?
    I am in the middle of a divorce and do not have a job. I will get half of a 401K account but it looks like I have to use that money to pay bills and find a place to live. What are the taxes and penalties if I take the money from the 401K instead of rolling it over?

    • ANSWER:
      It will be treated like income and there will be a 10% penalty.

      Before you spend any, do a mock tax return and figure out the bill.

      The custodian will withhold 20% (1/2 for tax and 1/2 for penalty). If you have ZERO other income, you may come out okay. However, if you take too much and have no kids, you could owe when tax time rolls around. The 10% tax rate only goes up to 50 of taxable income.

20. QUESTION:
    Can I roll my 401K into my student loans without any penalties?
    One of my 401K accounts is closing and I would like to pay off student loans with it without taking any penalties. I know I’m reaching for the sky but it’s worth a shot.
    One of my 401K accounts is closing (my company was acquired) and I would like to pay off student loans with it without taking any penalties. I know I’m reaching for the sky but it’s worth a shot.

    • ANSWER:
      A 401K is closing on you?

      You can not take money out of a 401K without paying taxes and penalties.
      Even if you open a roll – over IRA account, you will still have to pay taxes and that 10% penalty.

      Why not keep the student loans?
      I bet you that you are getting a sweet deal on that interest rate.
      And student loans are installment loans – unlike credit cards – revolving debt which is harmful to your credit if you carry balances.

      If you cash in this 401K, you will also regret it.
      More than you will ever think you will when you retire.
      Roll it over to an IRA account with a discount broker.
      If you are 25 today, you will need at least 2 million to retire above the poverty level.
      Google “retirement calculator”
      /

21. QUESTION:
    Can money be moved from a companies 401k without penalties if invested in an IRA if the employer no long?
    The company doesn’t contribute to the 401?

    • ANSWER:

22. QUESTION:
    When closing an IRA, do you face the same penalties (& taxes) as when closing a 401K?
    I have an old 401K that was rolled over into an IRA when I left my previous employer, there is very little in there as I opened it late in my employment and wasn’t completely vested. Now I just rather take the cash but I know the fines and penalties when closing a 401k are boarder line thievery but not sure if its the same with a IRA…

    Thanks in advance for your help…

    • ANSWER:
      The amount of the withdrawl and any outstanding loan/loans from it will be considered as taxable income in the year in which you take the withdrawl. The 20% is just a withholding (pre-payment of federal taxes) if you owe more, they will want more, if you owe less you will get some back. It depends on your personal tax bracket. You will also pay a 10% pentality if you are not above 59-1/2 (there are some exceptions to this. (talk to tax advisor, or view the special tax notice 402F notice). You will also need to pay state taxes if it was not withheld up front (if your state has taxes, such as TX and FL doesn’t).

      If you think about it it is only 10% more than you would normally pay, the catch is when you take large amounts of money from your 401K it can increase your over all tax braket for that year…. something most people do not prepare for in advance.

23. QUESTION:
    What penalties will I incur if i cash out my 401k?
    I was considering cashing out my 401k to go into business for myself. What penalties would i be facing?

    • ANSWER:
      What ever you take will be added to your ordinary income and taxed (by Fed, State and local) accordingly. On top of that, if you are less than 59 1/2, there is 10% mandatory penalty.

      Depending upon the dollar amount a good rule of thumb initially should be 40 – 45% in taxes and penalty.

24. QUESTION:
    I have a question bout 401k Penalties?
    My dad is 50 years old he has been working in the same company for 10. He wants to withdraw his money from 401k to pay the house off. If he has 23,000 how much would he get after penaties?

    • ANSWER:
      If your dad is still working for that company, he cannot withdraw from his 401k except for a hardship such as medical expenses or to avoid foreclosure, etc. If he terminates employment, he can cash in (take a distribution) his 401k.

      The penalties are 10% plus the full amount is treated as regular income for federal and possibly state income taxes. Depending on his tax bracket, he might only end up with 50% of what he cashes in.

      He may be able to borrow from his 401k to pay off the house, but most financial advisers would tell him not to do that.

25. 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!

26. QUESTION:
    What penalties would I incur if I withdrawal from my 401k after tax monies?
    Here is my question. Say I want to withdrawal a certain amount of money from my 401k after tax money, would I have a penalty in doing so? I am not knowledgeable about this and looking for info.

    • ANSWER:
      You would pay taxes on it at your regular tax bracket rate, and if you are under 59 1/2 and don’t meet certain exceptions for using the money (first time home buyer for one, medical expenses for another, etc) there is an additional 10% penalty that you would have to pay on top of the tax.

27. QUESTION:
    I want to pull out my 401k, how much penalties charges are there?
    I’m interested in pulling out my 401k and I want to know how much penalites charges will there be…if i just want to pull out k. Essentially all the money in my 401k has been contributed by me because the company i worked for only matched 1%.

    • ANSWER:
      There’s a 10% penalty for early withdrawl and of course you have to pay income taxes on it. Figure another 20% at least, depending on your state tax rates.

28. QUESTION:
    If half of a 401k was rewarded due to a divorce in Tennessee, do I still have to pay the taxed and penalties?
    There are supposed to be taxed and penalties paid when you take the money out of a 401k, but is this also the case if this is due to a divorce ?
    @Other Email, just for general information, he divorced me for a younger woman after 29 years of marriage and six children together…just thought that you might like to know…

    • ANSWER:
      The QDRO initially directs that an account be set up within the 401k plan for the alternate payee (the spouse). Then the assets are transferred from the payee’s account into the alternate payee’s account. This is a non-taxable event as the funds have never left the trust…simply moved into the spouses account. At that point the spouse can then apply for a distribution. The spouse has the exact same options as an ex-employee – rollover, cashout, partial cash and remainder rollover.

      However, unlike a distribution for a regular ex-employee, if the cash option is taken there is NO 10% early distribution penalty. There is an exception to the penalty in the event of a QDRO distribution from 401k’s ONLY – it does NOT apply to IRA’s. The IRS knows this is exempt from the code on the 1099-R. If you don’t get a distribution code of 2 (if it’s a cash distribution) then talk to the administrator to get it corrected.

      The monies are still taxed for cash withdrawals.

29. QUESTION:
    I am broke. If I cash in my 401k what penalties should I prepare for.?
    With the economy the way it is, I find I am losing money in my 401k. I would rather take the loss in a penalty for early withdrawal. I don’t know what penalty I would encounter.

    • ANSWER:
      You would lose almost 30 percent of the account’s value to regular income taxes, depending on your tax bracket. You would also lose another 10 percent to an early distribution penalty.

      It is very foolish to do this and lock in your losses, plus lose all that money to taxes. If you are young, and you have a ten to twenty year time horizon before you need that money for retirement, it is very likely that you will recover your losses and make more money over the long run by staying in an equity (stock market) investment.

      If you are too nervous to do that, at least consider your other investment options offered by your employer’s plan.

      Another option is to borrow against your 401k. But that is not a good choice unless you are facing a severe financial emergency, and you are able to pay it back while still in your job.

30. QUESTION:
    Can i withdraw my 401K money without any penalties and taxes since i am leaving the country for good?
    My Work Visa expires in April 2007. So i may have to go back to my country. Is there any way i can save on this 401 K money. I can keep it as it is in 2007 and take it out in 2008. In 2008, i won’t have any income in the United States and so whether i will save on taxes for 401K?

    • ANSWER:
      If you are going to leave the country and never come back then withdraw it in 2007 because it won’t be reported until the end of the year. If you have a base in it then you can deduct your base off the total and the penalty will be less. If you plan on working until April 2007 then you would want to file a return in 2008 just to get any refund back even though you are out of the country, but if you aren’t worried about a refund then take your 401K and run. Of course if you ever came back to the US and tried to work they might get you for income tax evasion.

31. QUESTION:
    Can I withdraw money from an IRA and repay a 401k Loan without penalties.?
    The ira is my wife’s. The 401k that has a loan is mine. My theory is I can transfer assets from one place to another and free up my monthly cash flow. I might even get a tax write off for assets that have taken large dips and I am not really selling. I am transferring them.

    • ANSWER:

32. QUESTION:
    What are the tax penalties for a 401K withdraw?
    I need to withdraw from my retirement account to buy my college kid a safe car, what are the panelities involved?.

    • ANSWER:
      if you are under 59-1/2 by 12/31/08, you would get hit with the 10% early withdrawal penalty at tax return time plus fed inc tax at whatever tax bracket you wind up at when you add the full withdrawal amount to your other income

33. QUESTION:
    We want to close out my wife’s 401k account. What kind of penalties, taxes should we expect ?
    It has only roughly 00.00 in it. She left her employer & instead of rolling it over, we want cash value. What would be a safe guesstimate on the final value in our hands ?
    Company that has 401k plan is Nationwide
    State is New York
    Thanks !

    • ANSWER:
      The ,900 is added to your ordinary income and you will pay an early withdrawal penalty to both the feds and the state. Not knowing your total taxable income there is no way to determine what portion you will see. I believe they will take 20% withholding for the feds but that will not cover your total tax liability. A good guess is that the total tax will be between 50 and 65%

34. QUESTION:
    What are tax penalties for taking a loan from 401K ?
    I took out a loan from my 401K, and I am currently paying back the loan weekly. I just received a letter from the IRS staring that you owe more then 50% of the loan amount in taxes. Can I be penalized this much if I am within the terms of the loan payback?

    • ANSWER:

35. QUESTION:
    What are federal and state tax penalties for early 401k withdraw for my first residence in maryland?

    • ANSWER:

36. QUESTION:
    Should I close out my 401k account and pay the penalties and taxes to pay off credit card debt?
    I have 13,500 in a 401K. I have 8,500 in credit card debt. Should I close out my 401k, and pay the taxes and penalties in order to pay off my credit cards?

    • ANSWER:

37. QUESTION:
    What are the penalties for cashing out my 401k?
    I want to pay off debt, and start my own business. I do not want to take out a loan.

    • ANSWER:
      The company that is holding the 401K will take out at least 20% for withholding tax. Then when you file your tax return next year, you will owe another 10% penalty to the IRS. (These amounts may have changed since I had to cash out mine over 10 years age.)

38. QUESTION:
    What is the penalties for an early withdrawl of you told 401K and company cash pention?
    Due to the outsourcing of my companies manufacturing business (IMATION). I am being laid off, but as part of my severance package I am able to withdraw my cash pension, plus whatever I contributed to 401K which totals around ,000.00. What would i end up paying if i withdraw all this and not roll it over?

    • ANSWER:
      YOu should roll over your pension and 401 k to a qualified plan. Your bank’s financial advisor can help you with this. Do not cash them out. You’ll pay up to 50% in taxes and penalties by the government. Ask an advisor before you do anything. They are free to you initially. Good Luck.

39. QUESTION:
    Can you withdraw your contributions from a Roth 401k prior to 59 1/2 without penalties?
    If I begin putting in money into a Roth 401k now, can I withdraw the money I contribute prior to 59 and a half? I know I cannot withdraw the growth.

    • ANSWER:
      The tax payer relief act of 1997 states you can withdraw early with no penalty, except on the earnings of course.

40. QUESTION:
    Is it true i wont pay penalties on early 401k withdrawl if the company i work goes out of business?

    • ANSWER:
      No unless you are over 55. You will still have to pay taxes on the money. If the company does go out of business you may have trouble accessing your account. I would be printing off statements weekly in case there is a problem. Usually there is not but I have heard horror stories.

41. QUESTION:
    If depleting your 401K while unemployed , any hardship criteria to offset taxes and penalties for early WD ?
    In order to avoid bankruptcy, during a 9 month period of unemployment, It was necessary to take early distribution monthly from 401K for income. Are there any hardship provisions for this type of “forced” early distribution?

    • ANSWER:
      Early Withdrawal is subject to 10% penalty. Also the withdrawal will be taxed at your normal income tax rate. However, in some case there is no penalty on early withdrawals.
      *If distributions are not more than your qualified higher education expenses,
      *You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income. The distributions are not more than the cost of your medical insurance.
      *You are disabled.
      *You are the beneficiary of a deceased 401k owner.
      *You are receiving distributions in the form of an annuity.
      *You use the distributions to buy, build, or rebuild a first home.
      *The distribution is due to an IRS levy of the qualified plan.
      *The distribution is a qualified reservist distribution.

42. QUESTION:
    I’m on SSDI only income and borrowed from 401K, they withheld taxes and penalties will i have to pay snc disbl
    My only income is SS and I borrowed from 401K due to financial hardship, will I still have to pay taxes since my SS is only income and I’m on SS disability

    • ANSWER:
      If you’re on disability you’re probably no longer employed by the sponsoring employer of the 401(k). As such you cannot “borrow” from the plan. Money borrowed is not taxed but distributions are; that’s why tax was withheld. The distributions are fully taxable however you may be able to avoid the 10% penalty tax as you are disabled. Whether any of your SSD is taxable will depend upon your total income.

43. QUESTION:
    What type of penalties are there if I cancel my 401K and withdrawal the money.?
    I’m 27 years old and have been enrolled in my 401k for 4 years. I did get a loan of ,000. And I now have 5,000 in my 401k account. Money is tight right now and I could really use every dime. Currently, 0 is taken out of my paycheck each month. I’m not sure if this is the right decision. Will I regret this when I’m trying to retire?

    • ANSWER:
      Here is the bad (good) news: You can’t cancel it and you can’t get all your money out of it right now.

      A 401K is designed to be a retirement fund. You can’t just cancel it and cash out before you are 59 1/2.

      The only time that can be done is when you quit your job or get laid off. In that case your loan would come due immediately and then if you still insist to cash out the rest you can expect to pay 10% penalty to the IRS immediately and when you file your taxes you will owe even more because they take the whole amount (before the 10% penalty, etc.) and add it to your yearly income and then you owe taxes on the whole lot.

      Since you are smart and won’t quit your job just to get at a measly couple of thousand dollars – it is best just to forget about that money right now and deal with life as it is.

      Just forget you have that money… that is how this fund is designed so that you don’t get tempted all the time to take it out.

44. QUESTION:
    what are the penalties for closing a 401k account?
    well the stock market is just losing so much money that i have lost 30k more than i started with.(most have) where can i go to find out how much money i will lose by closing that account and using the money to pay off my house? can someone tell me? thanks

    • ANSWER:
      10% penalty plus you will be taxed at your normal rate for income so the true penalty is about 50% in most cases

45. QUESTION:
    Can I take out money or use all of the 401k for business purpose while paying penalties or taxes?
    I want to start a business and someone told me I could do that.

    • ANSWER:
      There are some creative ways to use your 401(k) funds to start a new business while avoiding any penalties and taxes.
      Check this site:

      http://www.guidantfinancial.com/products/audeo/default.aspx

      They charge a steep fee for their “magic” but it’s still much cheaper than paying the tax and penalties.

46. QUESTION:
    I lost my job, late last year and had to cash in my 401K. Is there a way to recoup any tax or penalties?
    My job in the auto industry was eliminated in September of 2008. I ended up having to cash-out my 401K to live on, until I could find another job. I paid huge taxes and penalties at the time of the disbursement, and upon filing my 2008 taxes, I found that I owed another 10% of the total amount.
    Is there any way that I can recoup any of the tax or penalties?

    • ANSWER:

47. QUESTION:
    what are the penalties against employers that dont contribute employee 401k contributions on time?
    I recently asked a question if the employer could use employee 401k contributions to pay business expenses. I did receive great answers as to knowing my rights. After further investigating at websites about 401k contributions, there is deadline of 15 business days to put the money in from the employee contribution. It also says that the employer can’t do that just for the conveinence of having the extra 15 days. My question is what are the penalties against the employer for not having the money put in on time even after the 15 business days? On January 17th there was a contribution in my account which was for the entire month of November. As of Today they still dont have December’s contribution in my account. Where can i find information about penalties against employers on the 401k account? I visited www.psca.org for the info on how soon the money should be put in. It was under the FAQ’S I will be bringing this to their attention as I get more facts. Thank you

    • ANSWER:
      This is what is called a prohibited transaction. Essentially they have taken a loan (that they are not allowed to do) from the plan and in order to correct it they have to go through the PWBA’s VFC program.

      To correct they have to make the deposits, add the interest, and if necessary pay the excise tax. If they do that then they will obtain VFC approval of the correction and life goes on. Failure to do that can result in additional excise taxes.

      They’ve already made the deposits so the next step is the interest…they may owe additional interest to your account. They will owe you the greater of the actual interest lost or the IRC Section 6621 for late payment of taxes. If your account would have suffered a loss then it can be argued that simply making the deposit brings your account to whole.

      Once the deposit is done and the interest is paid then the Excise tax will automatically waived if this is the first time they have gone through the program and the deposits were not more than 180 days late. It’s likely the case with your employer.

      So….definately not worth causing a fuss over. Simply ask that they comply with the rules from here on out. Do not go at them with all of the “would’s, could’s, and maybe’s” Reality is that they likely will pay minimal in taxes and interest. And your loss is not as large as you might think. 10% return for a 0 deposit that is 30 days late is a whopping .33. Is it really worth pissing your employer off over .33???? If so, you’ve got more to worry about then this late deposit!

      If you want to know more…go to the EBSA website and look through the VFC program. That’s the Voluntary Correction program for retirement plans.

      And remember, they may still have put the money into trust. Just because it’s not in your account doesn’t mean its not in trust. And if this is the case then you’re going to cause a fuss over nothing.

48. QUESTION:
    can i use my 401k fund to buy a house for the first time , without penalties?
    My wife and I are planning to buy a house in Austin TX, we are first time buyers, and I want to use my 401 k fund,can I do it with no penalties?

    • ANSWER:
      Some employer’s 401K plans you to borrow or take out a loan again your 401K. In my area Boeing is a large employer & many employees take advantage of that.

      Not all employers 401K plans can do it or offer it. I’d ask your employer.

      http://www.401khelpcenter.com/loans.html

49. QUESTION:
    Can I roll over my traditional IRA to a 401k without tax penalties?

    • ANSWER:
      Yes you can…and there are reasons that you might want to. 1) If you need access to cash in the short term you might (if the plan allows) be able to take a loan. No, it’s not the best thing to do but if your job is safe AND the loan is for a short term (no more than 3 years) then it’s a way to get more $$ into the 401k which given the current state of affairs isn’t a bad idea. and 2) If you are nearing age 55 and plan on retiring early then you’d want Enough cash in your 401k to live on for the next 2-3 years…as you can take a lump sum withdrawal penalty free. This keeps you from having to completely deplete your after-tax account so early…you can use mix of pre-tax and after-tax…

50. QUESTION:
    Are there any state (NY) penalties for early withdrawl from 401k, or only the 10% at the fed level?

    • ANSWER:
      No, but there is both state and federal income tax (in addition to the federal 10% penalty).