Tax penalties for withdrawing 401k early now and at end of year

[vender]

My wife (50) needs to withdraw all the money from her 401k to pay $60,000 debt accumulated from being first unemployed and then under employed for the last 6 years. The total amount of 401k is about 70,000. They told her that there would be a 20% penalty on the withdraw lowering the amount to about $50,000. They said that amount would have an additional tax penalty of 10-20% at the end of year. Is this really true that the tax penalty could be nearly 40%? Any moves she can make to reduce either tax penalty?

[Opus 17]

 Any money that is withdrawn from the 401(k) is subject to regular income tax, because it was not taxed when it was deposited. Your regular income tax rate is probably between 15 and 28%, plus something for state taxes. 

 Then, early withdrawls are subject to an additional 10% penalty,  unless the account holder qualifies for an exception. Unfortunately, paying past debts due to under employment is not an exception that allows you to escape the 10% penalty. 

The plan trustee is required to withhold some money from the withdrawl at the time you make it.   The actual total tax and penalty dur is not calculated until you prepare your tax return.  Then, you get credit for the amount that was withheld previously, which goes into the computation of whether you owe more or get a refund. 

[VolvoGirl]

Plus don't forget the state tax.  You can lose up to 50% of it. What is the 20% penalty?  Is that just for the tax withholding or is the 401k plan charging her a plan penalty?  If it is the 20% withholding that is not a penalty but just withholding like they take out of your regular paychecks.  You will get credit for it when you file your return.

[Opus 17]

I think the 20% is the mandatory backup withholding.  The actual tax will be different and probably more.

Note that, depending on your other income and filing status, you could potentially save $4000-$6000 in tax by splitting the withdrawals over 2-3 years instead of all at once.  You'd have to balance that with the interest you would pay in the mean time.

Also, because of the taxes and penalties and lost opportunity for future growth (that $70,000 will likely triple by the time she is 67), it's almost always better to keep paying the loans, if you can afford the payments.  One interesting possibility would be to roll the entire 401(k) over into an IRA, and then take a loan from the IRA.  She would be collateralized by her own deposits, the interest rate is usually pretty low, and she would essentially be paying the interest to herself.  It might not even show up on a credit report.  Not all IRA plan administrators will allow loans so you might want to shop around.

[brollins77]

I took 6100 dollars from two previous 401ks that 6100 is after my federal tax and my early withdrawal penalties. How bad will this effect my tax return when I file taxes with my wife this year? My wife and I make about 72k combined before taxes. I was told I won't be effected to much since it's somewhat a small amount is that true? Any input be great! Thanks!

[VolvoGirl]

You get taxed on the gross amount not the net after withholding taken out.  So how much was the total?

You didn't actually pay the tax or 10% penalty (you pay a 10% early withdrawal penalty if you are under 59 ½).  You had taxes withheld like from your paycheck. You still have to enter the whole gross original amount (before taxes were withheld) with your other income to figure out the total tax (and it may put you into a higher tax bracket) and then the withholding is subtracted from the total tax to figure your refund or tax due.  The withholding will show up on 1040 line 64 or 1040A line 40.  The 10% penalty is on 1040 line 59.

It has to break out and show the 10% penalty separately on your return and then you get credit for all the withholding taken out on Line 64.

[brollins77]

The total I believe was around 10k about 4800 dollars in both accounts. Just not sure how this will effect us usually get a good amount back every year. When it comes to taxes I'm lost that's why I'm asking my question. Thanks again

[VolvoGirl]

As I said the total adds to your other income and will increase your tax.  The taxes deducted may not be enough.  You can lose like 50% of it with Tax and the 10% Early Withdrawal Penalty.

[brollins77]

Ok think that helps thank you!

[rize4god88]

Boy, glad I found this feed. Been considering a withdrawal due to $7,500 in loan debt I have to pay, but have been without a job for three months (competitive career field).

Say for example, if I did do a withdrawal of $11K, I get a federal tax of $2,200 due (since I'm in the 15% bracket right now), and $660 due for state tax (6% in OR), and then $1,100 due for the early withdrawal fee....

Now, when the withdrawal happens, are those amounts automatically withdrawn when I do the withdrawal, or do I need to pay those on my 2018 return?

And if the latter, do I need to put those amounts aside to pay off when that return happens? Meaning, could I put those amounts noted into a savings account (for example), and then have them ready to withdraw, so that they can be paid off?

[SweetieJean]

@Opus 17  IRA loans are not permitted by law.

[Opus 17]

Most of the time, if you make an early withdrawal from an IRA, there is a mandatory 20% federal withholding. It's not always taken out, and if you contact the trustee, you may be able to increase the federal withholding and add state withholding. (You have to ask them.) Alternatively you could make an estimated payment with the IRS at <a rel="nofollow" target="_blank" href="http://www.irs.gov/payments">www.irs.gov/payments</a>. Your state likely also accepts online estimated payments.
 
 Your actual tax due is calculated with your overall wages, income and deductions for the year. You get credit for the withholding along with any withholding from wages and any estimated payments. If you made more payments than you owe, you get a refund. If your tax is more than your payments and withholding, you owe a tax payment with your tax return.
 
 You may owe a penalty for late or under-payment if you owe more than $1000 with your tax return, unless the amount of your payments into the system (via withholding and other payments) are at least as much as last year's tax bill or at least 90% of the tax due this year. If you set the money into a savings account instead of making estimated payments, you will want to review your payment situation to make sure you won't owe a penalty.
 
 <a rel="nofollow" target="_blank" href="https://www.irs.gov/taxtopics/tc306">https://www.irs.gov/taxtopics/tc306</a>

[SweetieJean]

If possible, defer taking some of it out until 2019. Or, roll the entire amount into an IRA, and then withdraw only as needed.

Any 2018 withdrawals must be reported on your 2018 tax return, even if taxes were withheld,.

[Clbh4900]

I am 59 and one half. I need to have 25000 in cash how much tax will I have to pay at end of 2019 from my 401k

[xmasbaby0]

If you are 59 1/2 you will not have to pay the 10% early withdrawal penalty if you take money out of your 401k, but you will pay ordinary income tax on it at the same rate that you pay tax for your other income.  You have not told us how much that is, so we do not know what tax bracket you are in.

If you take out the money before the end of 2019, then in January you will receive a 1099R that you will enter on your 2019 tax return that you prepare in 2020.  The custodian of the fund will probably withhold 20% which you will enter when you enter the information from the 1099R.