401k Withdrawal Penalty

Frequently Asked Questions

1. QUESTION:
   First time homebuyers: No IRS penalty on 401k withdrawal?
   I jointly own a house with my wife, who is divorcing me. We are under age 59. Can I avoid paying the 10% early withdrawal penalty if I use the 401k funds to become the sole owner of the house? In other words, would I qualify as a first-time homebuyer, since I’ve never owned a house by myself?

   • ANSWER:
     No. Your 1/2 interest is already owning a house.

     Besides, even if you didn’t own a house, it’s money from IRAs, not 401Ks that had such an exception on the penalty.

2. QUESTION:
   Will my mortagage penalty & interest offset my 401K withdrawal penalty and added income ?
   Well before I make the big plunge I am in need of some help and second opinions are always handy. I am buying a home and must pay 20K in prepayment penalties and another 17K in closing costs. To get the montlhy payment I can afford on a 440K loan I will need to withdrawl from my previous employers 401K plan. My plan is to pull out the minimum amount to cover the closing and to pay off car/visa debt that I am inheriting. If I pull out K (only 8K after tax) from my 401K how much will I need in mortgage interest & points to completely offset what is withdrawn from the 401K for the purposes to determine adjusted . The goal here is to NOT owe any fed/state tax. BTW I live in California. If I don’t make this withdrawl for 1 I won’t be able to afford the mortgage and secondtly I’ll continue to pay up to 10% interest on the debt I’ve inherited. So if anyone has any brilliant ideas I’m all ears.

   • ANSWER:
     Personally, I think you are in over your head on the mortgage. If you take out money from your 401k, even though you are “paying yourself back” as people say, you are losing opportunity cost of the earnings you are not gaining on those dollars for the rest of your life. Is it worth it?

     If you inherited debt (can’t figure out how that would happen — if someone died and left a debt, the estate would pay it or if there was no money in the estate the debt would be canceled by the company… they can’t go after a dead person), you could just take out a non-secured loan, assuming your credit is good (which I assume it is since you are qualifying for a 0k mortgage) to pay off that debtor and then pay off that loan at a more reasonable schedule.

3. 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.

4. QUESTION:
   Does the weatherization energy credit reduce the amount of a 401k hardship withdrawal penalty?
   Made a 10k 401k w/d this year. Thinking of putting in new patio doors. Should I consider making that transaction before the end of this year?

   • ANSWER:
     No. The penalty still applies. So does the tax credit, if you qualify.

5. QUESTION:
   I am 51 & disabled, but haven’t been approved for social security. I have to make a 401k withdrawal. Penalty?
   Is there any way to avoid penalty on early withdrawal?

   • ANSWER:
     Depends on the terms of your plan. Most plans allow you take out loans. But few allow it unless you are still working at the company. If that’s that case, you could take out a loan, with very low monthly payments, until SSA approves your disability, or you turn 55. Either way you can cash out without penalty. (It’s normally 59 1/2, but federal law allows withdraw at 55 without penalty if you no longer work at the company. 59 1/2 you can withdraw while still working at the company)

     Hardship can be claimed. But you must prove you are in danger of foreclosure or eviction, or have substantial medical expenses (usually defined as 10% or greater of annual gross income). Otherwise if you can hold on until SSA approves you (or borrow against it until they do) , you can withdraw without penalty.

6. 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:

7. QUESTION:
   401k withdrawal after retirement penalty?
   I’m 68 years old and would like to take some ,000 from my 401K and buy an investment property. What should I expect at the end of the year? Are there going to be any penalties as well?

   Thanks for advice.

   • ANSWER:
     There are all sorts of if, and or but. Contact an adviser. Your 401K may allow the distribution. There are differences if you are retired and withdrawing before age 70 1/2. Some suggest to do 401k rollover into an IRA or a solo 401k (if you are planning to open your own one person business).

8. 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.

9. QUESTION:
   I read that I am required to pay tax and a 10% penalty fine to the IRS for premature 401k withdrawal.?
   On what income do I have to pay tax? Only that year’s (in which I withdrew) or entire period during which I kept my money in the 401 account? Also the 10% penalty is on what amount exactly?
   Thanks!

   • ANSWER:
     It has nothing to do with your income. You pay the taxes and penalty on the amount you withdrew.

10. QUESTION:
    What is the penalty for early withdrawal in 401k?
    does the penalty depend on how old one is and/or how much one is withdrawing. Is it calculated or it is a fixed penalty no matter how much. Lets lay you’re 40 year old and you’re withdrawing 100,000 from the 401-k. I need a clue of the penalty since the person is not up to 59.5 yet.
    THANKS

    • ANSWER:

11. 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

12. 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.

13. 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??

14. 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.

15. QUESTION:
    does the 10 percent early withdrawal penalty apply to the 401k hardship withdrawal for primary residency?

    • ANSWER:
      No. Just keep all your docs. You will have to pay income tax on the withdrawal.

16. 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.

17. 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.

18. 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.

19. QUESTION:
    i withdrawal 401k out ,have20%penalty.how i do put back myretierment account with out penalty?
    i leave my company then took out 401k ,now i saw they took out 20% penalty ,that is my problem to mark out lumsum cash.how can i put back my moneys with out penalty.please! help.now i just want to invest
    my money back to retierment account ,if some one know please! help.

    • ANSWER:
      There is no 20% penalty. The 20% is a fixed withholding rate. The penalty is 10%. The rest goes towards your income tax. Also, the penalty is refunded on any portion that your put into a retirement account within a certain time period.

      You should deposit the 80% that you received, plus other money equal to the 20% withheld, in your retirement as a rollover contribution. When you file your tax return, you indicate the entire amount distributed, and the amount of the rollover. The actual penalty and income tax are computed on the difference. You subtract the 20% withheld from whatever tax you would otherwise owe at that time. If you would not otherwise owe tax, then it is refunded to you.

20. 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).

21. 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.

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

    • ANSWER:

23. 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.

24. 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!

25. 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%

26. QUESTION:
    Do I still owe the 10% IRS penalty if I don’t redeposit all of my 401K withdrawal in 60 days?
    In 2008 I took out ,000 from my 401K because of a family emergency. 60 days later I put ,000 back into it. I heard if you put money back into your 401k within 60 days you don’t have to pay income tax on the withdrawal or the 10% penalty. My question is since I didn’t put the 10,000 back into it do I have to pay the 10% on 10,000 or just the 6,000? Also do you pay income tax on 10,000 or 6,000? How would I claim this on my 1040? I have a feeling I have to pay income tax on the 6,000 and the 10% penalty on the entire amount, but I’m not sure.
    I do not fit under the IRS categories that allow early withdrawal because the money was for someone elses emergency, not my own. Also what would I fill out on the 1040 to show I redeposited ,000 in 60 days so I only have to pay tax and penalty on ,000 instead on ,000?

    • ANSWER:
      Ok, this is odd. First I’m nto sure how you were able to take money out of your 401k if it wasn’t a hardship. Second, how did you get it back INTO the 401k as a rollover? Technically, what you did was 100% wrong and not allowable. But, that being said…I’d go ahead and give it a shot to see if it flies. 10k distribution of which 6k is taxable amount. goes on front page of 1040. Then in back page of 1040 you put in 600 penalty for early withdrawal. You don’t pay the 10% on the other 4k. What you have to make sure to do is have your 401k company’s TPA or recordkeeper classify that 4k that you put back in as a rollover deposit. Without that you are hosed.

      good luck.

27. 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.

28. QUESTION:
    Can I take a withdrawal from my 401k for a first time home purchase penalty free?
    I know I will need to pay taxes but I am wondering about additional penalties.

    • ANSWER:
      Unfortunately, the first time homebuyer exception to the 10% penalty for early withdrawals applies only to IRAs, not 401(k)s. The whole distribution amount will be included with your other income and taxed at whatever rate your total income dictates. In addition, there is a 10% penalty for early withdrawal.

      Please see the details below…..from IRS website

      http://www.irs.gov/taxtopics/tc558.html

      Additionally, most 401(k) plans don’t allow early distributions except for certain emergency situations such as to pay medical bills that exceed 7.5% of your AGI or if you become totally and permanently disabled. Routine early distributions for any other purpose are prohibited as long as you are still employed by the plan’s sponsor. In most cases you’d have to quit your job to take an early distro for a home purchase.

      What you MIGHT be able to do with a 401(k) is take out a loan from the plan. Not all plans allow this but it is certainly worth asking. You’ll have to pay interest on the loan but the interest is paid straight back into the plan so you’re just paying yourself. The drawback to this is that if you leave the employment of the plan’s sponsor you will have to immediately repay any outstanding balance or it will be re-classified as an early distribution and will be subject to tax and the 10% penalty.
      /

29. 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.

30. QUESTION:
    If I withdraw all of my 401k, what would be the penalty fee & taxes?
    I’m a 30 year old recently unemployed NY State resident and I need the money in my 401k because I will be out of a job for a considerable amount of time. I currently have about 00 in my 401k, if I were to withdraw the full amount how much would the early withdrawal penalty be as well as the federal & state taxes?

    • ANSWER:
      You’ll have to treat the entire amount as taxable income in the year you withdraw it, so it’s taxed at whatever your marginal tax bracket is. The early withdrawal penalty is an additional 10%, or 0. If you can qualify for a loan at your local credit union or something it’s going to cost you much less.

31. QUESTION:
    What is my best option on emergency 401k withdrawal?
    I just had to quit my job after thirty years with Lockheed. I was an hourly worker. I have no insurance, but a small pension. I have 20000 in my 401k and I am 55 years old. It sinces its availble for withdrawal but what type of tax penalty , i am 55. worked since i was 14 but uneducated.
    I have decided to buy a sailboat and live on it.
    Can someone tell me how to get it and how much i can get without IRS problem?

    • ANSWER:

32. 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.

33. QUESTION:
    If you use a 401K distribution to pay off a student loan, does it off set penalty for early withdrawal?

    • ANSWER:
      Just some insight. If you use your 401k, it should be an emergency only as the cost if you are young will be outrageous. I am sure you have heard the one about k in your 401k at 25 will be about 0k when you retire.

      One other thing I have seen people do is loan themselves money out of their 401k. You can set the interest at the rate you want. The only thing is, you don’t get interest on the outstanding balance, your 401k provider does.

      ..

34. 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.

35. QUESTION:
    Do you have to pay the 10% penalty for early withdrawal on a 401k when purchasing first new house?

    • ANSWER:
      If you make a withdrawal from your 401K you will be charged a 10% penalty and the applicable marginal tax rate ( based upon your aggregate income) unless you meet the hardship requirements posted below. You may be required to provide personal info supporting your hardship claim to your employer as well as self certify to the IRS.

      A more tax advantageous option would be to take out a loan from your 401K. Terms are generally flexible and any interest paid is put back in your 401k account (principle payments as well). It is a loan from “you” to “you” – so to speak. Be aware that this type of loan has to be repaid in full when changing employers or quitting your job (ie the loan cant be rolled to a new employer) Additionally, interest paid on 401K loans, unlike traditional mortgage interest, is not tax-deductible.

      In both scenarios you will lose out on the earning potential of the money either withdrawn or loaned out – this can be significant and you should weigh the cost of this against the cost associated with obtaining higher interest rate financing for 100% financing – if this option is available to you.

      Here are the hardship requirements:

      * You become totally disabled.
      * You are in debt for medical expenses that exceed 7.5 percent of your adjusted gross income.
      * You are required by court order to give the money to your divorced spouse, a child, or a dependent.
      * You are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later.
      * 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.)

36. QUESTION:
    Pre-tax 401K vs. After-tax IRA and the Early Withdrawal Penalty?
    I was curious about something with regard to the 10% penalty for early withdrawals from an IRA. Let’s say someone had taken an early distribution from an IRA and did not qualify for any of the exceptions. That person is theoretically going to get hit with the 10% penalty on top of the 10% that was pre-emptively withheld as income tax when the distribution was paid out. However, let’s also say that some of the IRA was contributed to with after-tax income (a pre-tax 401K was rolled over into an IRA, into which ongoing contributions were made via after-tax income). Here are my questions:

    - So, even though 10% was already taken out of the distribution as income tax, the person will still have to pay another 10% on the gross distribution amount as a penalty? So, in essence, the total penalty (not even including the fact that the distribution also counts as income) is 20% in this case?

    - Why is the after-tax portion of the IRA treated as punitively as the pre-tax portion?

    Thank you for your responses.

    • ANSWER:
      Wow, where do I begin?

      There are two components to the IRA, Pre-tax and Post-tax. Chances are, all 401(k) rollover is pre-tax, although believe it or not, it is possible to contribute post-tax dollars to a 401(k) plan. For sake of arguement, we’ll assume all 401(k) contributions were pre-tax.

      Any amount contributed to a Traditional IRA that is not “deducted” on a tax return is called “after-tax” contributions or, what accountants call “Basis”. When a tax return is filed with non-deducted contributions, one should also file a form 8606 showing same. If the contributions were deducted on the tax return, then they are pre-tax contributions and they do not add to the basis.

      When money is withdrawn from an Traditional IRA, regardless if the taxpayer reached 59 1/2 and regardless if exceptions apply, one must add together the basis of all IRAs that the taxpayer owns to determine their overall basis. Then, they must add together the year-end value of all of their T-IRAs. The ratio of the two will determine what percentage of the withdrawal is post-tax.

      Example:

      IRA 1 has 0,000 as of 12/31/08 of which ,000 is basis.

      IRA 2 has ,000 as of 12/31/08 of which [FAQ-ANSWER] is basis.

      If one withdraws money from either IRA (or combination of both), then ,000 / 0,000 or 12.5% is post-tax. If they withdraw ,000 (for example), then ,750 is taxable and ,250 isn’t. They would enter ,000 on line 15a of the 1040 and ,750 on line 15b. This happens regardless of anything else. They do this no matter how old they are. Their basis will now be ,000 minus ,250 or ,750.

      As far as the 10% extra tax (not really a penalty, but a tax), if they are under 59 1/2 and no exception applies, they would pay 10% of whatever they pull out regardless if it was basis or not. So, in the aforemented example, they would owe an additional ,000 (10% of ,000).

      The 10% that was preemptively “taken out” was actually “withheld”. They aren’t taxed twice. This is a common misconception and is hard to explain except using an example.

      Let’s say someone withdrew ,000 from their T-IRA (same example as above). The fiduciary withholds 10% and gives it to the IRS on their behalf. The check the person gets only has ,000. They still made a ,000 withdrawal even though they only got ,000. When they do their tax return, they will use ,000 as their withdrawal and record an additional ,000 tax (often called a penalty). However, when they get to the line of the return that asks how much was withheld, they will add back the ,000 that the fiduciary withheld (and reported in box 4 of the 1099-R) and gave to the IRS. This is just like having federal tax withheld from your pay and reported to you in box 2 of your W-2. This ,000 will “lower” their tax obligation by ,000. It is a wash. They didn’t get it when they got their check, but they “got it” when they filed their tax return.

      Capish?

37. QUESTION:
    Can I make a penalty free hardship withdrawal from an old 401k while I’m on strike?

    • ANSWER:
      You need to check with your employer’s HR dept or the 401k administrator. Different employer plans have different requirements. Might be difficult to arrange if you’re on strike.

      Usually you have to be on the verge of actual foreclosure to get funds from the 401k. Even if the 10% early withdrawal penalty is waived, you will still have to pay the income taxes.

38. 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.

39. QUESTION:
    401k Withdrawal at 61, am I subject to penalty?
    I went to withdraw from my 401K..whereas I knew that I was subject to the 20% tax from the IRS, I thought that being over 59.5 that I would not have to pay the additional 10% penalty. My plan information states this:

    A 10% IRS penalty tax may be due on disbursements of funds prior to age 59 1/2. Certain conditions are exempt from this including the following: Disability, Death, Separation from service at or after age 55, and Annuity options.

    I am a bit confused here…as they did take the 10% penalty and I am 61. Any feedback from the experts out there would be appreciated.
    Your answers have been great so far…they took 30% out in taxes off of the entire amount…So 20% taxes, and an additional 10% as well….My thoughts are they should not have taken it now…but perhaps that is just my ignorance…So they take 30% now….and you get the 10% back with your taxes??

    • ANSWER:
      YOU are RIGHT, no penalty due to age. Birthdays count for something here! There is generally 10-20% withholding, but whether you pay any tax depends on the tax return you file. No penalty was taken. You will pay tax on this at your normal tax rate after including this in your annual income.

40. QUESTION:
    .401k withdrawal?
    I have accumlated a large amount of credit card debt and want to pay it off as well as finish paying for my son’s college. I know it’s a last resort…but I want to take money out of a 401k from a previous employer. I know about the tax penalties and all,but I can’t afford another loan and I just want to eliminate the debt once and for all. Can I do this and how? What is the amount I could take?

    • ANSWER:
      What about borrowing against your 401K instead of withdrawing the money..? You’ll be charged interest, but it goes back into your account, so you are paying yourself the interest.

      This will only work of course if you are employed since the payments need to be automatic, or you are in default.

      As others have suggested, it’s really a DUMB idea, since you will end up with less money than you already have saved, and unless you have a lot of strong will, it’s too easy to fall back into credit card debt. It’s an addiction like drugs – “Just one more..”

      I wish you good luck

41. QUESTION:
    Is there a new rule that allows withdrawal from 401k at 55 after 30 years with one company, without penalty?

    • ANSWER:

42. 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.

43. QUESTION:
    Can I take an IRA hardship withdrawal without penalty if I lost my job due to foreign competition?
    I lost my job. So I rolled over my 401k to an IRA. I took a withdrawal to pay off some debts and now have to pay taxes on it. But am I exempt from the 10% early distribution penalty if I lost my job due to foreign competition? (as defined in Trade Assistance Act)

    • ANSWER:
      no.

      However, if you were paying for health insurance then that is one of the items that is exempt. Get with your tax preparer and go down the full list of exempt expenses.

44. QUESTION:
    Is there a penalty on an early withdrawal of the amount accrued in my 401k account?

    • ANSWER:
      the above answers missed the point.
      you pay a 10% penalty fee plus!! your going rate on income tax not counting state tax fees.
      Bad deal don’t pull it out unless you like losing your money. You’ll lose up to 40% of your money.

45. QUESTION:
    What are the actions for making a 401K withdrawal?
    I am thinking about making a withdrawal from a 401K to make other investments. I was just wondering what kind of penalties are typically involved or what will happen on my taxes.

    • ANSWER:

46. 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:

47. 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.

48. QUESTION:
    Can I use 401k Hardship Withdrawal if I have money in the bank?
    I would like to buy a house, say for 100K. I want to put 20% down and I do have 20K in my checking account. But I would rather take 26K (20K minus tax and penalties) out of my 401K even if I can afford it.

    JPMorgan and IRS say I can take out (Not borrow, you don’t have to pay it back) money out of my 401K under the “Hardship Withdrawal” for the downpayment only. Will I qualify since I could afford the 20K downpayment with my checking account? In other words, must I legally pay off my downpayment with my cash at hand before dipping into my 401k?

    I can’t find any of these details online. I already know all the pitfalls of a Hardship Withdrawal versus loans etc.
    Great answer Ryan M. You mention a 10% penalty off the bat…where does that come from? I called JPMorgan and they said there is no penalty under my plan. Just taxes

    • ANSWER:
      A hardship withdraw has nothing to do with outside moneys. JPMorgan will have no way to find out if you have money inside your banking account. However, I would try not to take a hardship out of your 401K unless you ABSOLULTY need the money to put down on the house. You will lose 10% right off the top, and then have to pay standard income on the moneys. Also, when taking out 26K or 32500 (you are allowed to gross up the amount by 25% and withhold 20% to cover some of your taxes) you might be raising your tax bracket, and you might owe even more tax. I would talk to a CPA before taking out any money, but just remember this should be a last resort. You don’t want to hinder you retirement goals.

      *****More information ****

      The 10% is a penalty that is from the IRS if you are under 59 ½ years old. This is true for all qualified plans (meaning tax differed). The only way around the 10% would be “IF” the money was in a traditional IRA (Individual Retirement Account) and this would be your first home that you are buying. The IRS will allow the 10% to be waved for the fist 10,000 that is taken out for first time home buyers. If JP Morgan will allow you to roll the moneys into a traditional IRA while in-service, you might be able to get around the 10%, but most, if not all, 401K plans will not allow you to just rollover funds until you leave the company, or 59 ½ (or) 691/2 years if age while in-service. (depending on the plan rules)

      You might have just talked to someone in the call center that is either not licensed, or doesn’t know what they are doing. When it comes to the IRS, you should always listen to a tax advisor and not someone at the company where the funds are held. I hope that cleared it up a little for you. Best of luck with the new house.

49. 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.

50. QUESTION:
    Do I have to claim my 401K withdrawal as income on my 1040EZ?
    I already paid the 10% penalty as well as the tax percentage based on my income brachet.

    • ANSWER:
      You will need to still need to report it and you should have received a 1099R to show the amount of taxes withheld. Between your normal withholding and the withholding on the 401K, you could still could receive a refund if the amount you paid in were too much.