Cashing out 401(k)

bluemoonluck · #1 03/15/11, 12:03 AM

If I cash out my 401(k) before retirement, what percent of the amount goes to penalties and taxes?

For some reason I thought it was 50% but my Dad swears its only 30%.

And yes, I know I shouldn't cash it out....and I'm NOT asking if I SHOULD, I just want to know what % of the total amount I would get in cash if I do.

Reptyle · #2 03/15/11, 12:10 AM

The IRS will tax you on the gross distribution at your tax rate for the year and charge a 10% penalty on the gross amount as well.

Please keep in mind that if the distribution is for a significant amount, then it could place you in a higher tax bracket.

You have 60 days from the date you receive the monies to return them to a qualified retirement account, which could be either your 401k or an IRA.

Gary in ohio · #3 03/15/11, 06:39 AM

Keep in mind not only do you get charged a penalty but your going to be taxed on the money as well. Unless you qualify for one of the hardship exemptions I would think VERY hard about taking out your money.

luvrulz · #4 03/15/11, 07:10 AM

There are 3 'hardship' reasons and I know that buying your first home is one, a major illness and I can't remember the third..... you can sometimes also borrow money against your 401k. When I worked at GE, they would let you do that and then you'd pay yourself back. It was a lower interest, deducted right from my paycheck and was a breeze. You might check into that - the company that handles your 401k plan should be able to tell you more and if they offer that.....

DAVID In Wisconsin · #5 03/15/11, 08:15 AM

Your tax rate will depend on your individual sitaution regarding income. You or an accountant will have to figure it out.

Explorer · #6 03/15/11, 08:19 AM

Federal and State taxes at your rate and a 10% penalty on the total withdrawal.

kirkmcquest · #7 03/15/11, 08:19 AM

I think if you put it into a house/real estate you get an exemption.

Tricky Grama · #8 03/15/11, 08:35 AM

Our renters just took out some of theirs, had to have DH write a letter saying they were behind in rent. (they weren't but would've been) I figured that was one of the reasons -emergency? They have a new baby + she lost her job.

scwit · #9 03/15/11, 08:58 AM

That is about right, approx. 30% state and federal tax then a 10% penalty. We did this last year and felt it well worth it, we figured if the market and economy took a dump, we wouldn't be able to cash out and pay off the house so we opted to close it out pay the penalty and pay off the house. Now we are completely debt free!!! Wasn't like we could retire on what was in there anyway. Wall street will never see another red cent from me, can't trust them.

Txrider · #10 03/15/11, 09:38 AM

Quote:

Originally Posted by bluemoonluck

If I cash out my 401(k) before retirement, what percent of the amount goes to penalties and taxes?

For some reason I thought it was 50% but my Dad swears its only 30%.

And yes, I know I shouldn't cash it out....and I'm NOT asking if I SHOULD, I just want to know what % of the total amount I would get in cash if I do.

You get taxed on the entire amount as if it was regular income.. So whatever tax rate you pay in your income bracket..

Plus they tax another 10% as penalty.

My state has no income tax, your state may tax tax it as income too.

A lot of times if you need cash it's better to just borrow from it, and pay it back at 5% interest. At least your paying interest to yourself.

bluemoonluck · #11 03/15/11, 09:41 AM

Thanks, all. I should have done it last year, because I'm getting married this year and I know that's gonna change my tax situation. I'm kicking myself in the donkey over that, believe me!!

oregon woodsmok · #12 03/15/11, 12:49 PM

At least look into converting the holdings inside the 401K into real estate.

rancher1913 · #13 03/15/11, 08:49 PM

talk to a banker you trust. ours rolled the 401 into a moneymarket account and the penelty got lost along the way, it was all liget and passed the irs auditers, don't ask me how he did it but somebody good with money can do wonders. next we paid off the house and with the interest savings from the mortage (what we would have paid in interest had we kept the loan) we made up for the tax loss which we would have paid no mater when we withdrew the money from the 401 and came out ahead by a whole lot. yes we no longer have one of the retirement funds but we have piece of mind knowing the house is ours free and clear. for us it was a win, win, win.

Oldcountryboy · #14 03/16/11, 12:10 AM

Quote:

Originally Posted by oregon woodsmok

At least look into converting the holdings inside the 401K into real estate.

Or Gold! I read a article the other day where people are taking their money out of 401's, etc, and buying gold with it, for the just incase the SHTF. Paper money would be worthless but coins, silver, and gold may still be currency.

Riverdale · #15 03/16/11, 05:59 AM

When I cashed mine out in 2006, taxes and penalties came out to about 50%.

Of course, now our house and land are paid for.......

TnAndy · #16 03/16/11, 07:44 AM

Quote:

Originally Posted by Oldcountryboy

Or Gold! I read a article the other day where people are taking their money out of 401's, etc, and buying gold with it, for the just incase the SHTF. Paper money would be worthless but coins, silver, and gold may still be currency.

That's what I did with my IRA in 2003/04 ( split it over two tax years so it wouldn't bump us into a higher bracket ), buying silver at about 6 bucks/oz. Now silver is 34 bucks/oz, and I've not only made up the 10% penalty, but a WHOLE LOT more to boot....whereas the crappy mutual funds I had it in have returned about ZERO % in the same period.

AND I know WHERE IT IS ALL THE TIME, and not subject to theft from the "Casino on Wall St".

We had some money in a Canadian oil trust that we paid 15 bucks/sh for, it went down to 7 when price of oil tanked, but still paid a decent monthly dividend, so I wasn't about to sell it....but Lo and Behold, the "board of directors" decided to sell FOR ME....they sold out to the Korean National Oil Co for 8 bucks/sh, and I lost 7 bucks (on my buy in price)+ my source of dividend money.....just like that.....no say in the matter, screw you. So, yeah....me and "the casino" are about done with each other.

PKFan · #17 03/16/11, 12:48 PM

My understanding is that usually you can't get out of a 401(k) unless you leave the company, so you may not be able to cash out. As mentioned above, check with your company's plan to see what the options are.

Femur · #18 03/16/11, 01:28 PM

Section 72(t)(2)(A)(iv) of the IRS tax rules state that you may take money out of your IRA penalty free if they are in "substantially equal periodic payments."

You can read more about this rule here: http://www.irs.gov/retirement/article/0,,id=103045,00.html

It would be extremely prudent of you to contact a tax professional about matter before you take any action.

Jan Doling · #19 03/17/11, 12:34 PM

Our firm let us borrow 50% if the total funds and pay it back in 5 years. They subtract it from each paycheck. I think it was less than 5% interest.

lamoncha lover · #20 03/17/11, 03:21 PM

we pulled everything out of the 401 K when hubby got laid off and we needed cash. We now are jobless and have no retirement. I still don't regrett he decision to pull it as we are not homeless yet.