@chrisdg30 wrote:
Excellent. This is great to know. I have some other questions. You mentioned that I would still need to pay the income tax on it. Is that if I don't rollover to an IRA or that's even after rolling it over? And the federal income tax that I would pay is 10%? So this would be to waive the early withdrawal penalty fee which is an additional 10% otherwise it would be 20% total between the income tax fee and the early withdrawal penalty fee?
You always owe regular income tax when you withdraw money from a pre-tax account, because you did not pay tax on the contributions. The withdrawal is added to your other income to determine your total tax, it might be 10%, 12%, 22%, or higher, depending on your total income. The special exemption only excuses you from the 10% additional penalty on withdrawals before age 59-1/2.
If you do a rollover from the 401(k) to an IRA, that is a non-taxable event. When you withdraw money from the IRA, that will be taxable income.
The plan custodian might be required to withhold up to 20% for taxes, but that is not the tax you actually owe. The tax you actually owe is calculated on your tax return, after considering all your income, deductions, dependents and other credits. You get credit for any withholding, just as you get credit for withholding from wages. If your total withholding is more than your total tax, that is the amount of your refund. (You will not have mandatory withholding on the rollover if you do a direct rollover--meaning you contact both plans and have the money sent electronically directly from the 401(k) to the IRA.)
