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Old 03-20-2012, 06:29 AM
 
Location: Connecticut
2,727 posts, read 2,656,952 times
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Default 401k - Cashing Out?

I have a question, but let me say please spare me talk about how bad cashing out is, taxes, penalties, etc. I'm already aware of that.

In the event I need to cash mine out, how does it with paying taxes and penalties? Does the 401k plan company take their 10% when sending you the check? How about taxes? Can I pay them then, or do I just claim it on my following year taxes? In which case I would estimate my best and keep that money aside.

(I know I can ask my accountant, but I thought someone here might also know)
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Old 03-20-2012, 06:35 AM
 
Location: N. Raleigh
532 posts, read 577,654 times
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Quote:
Originally Posted by CTGirlNoMore View Post
I have a question, but let me say please spare me talk about how bad cashing out is, taxes, penalties, etc. I'm already aware of that.

In the event I need to cash mine out, how does it with paying taxes and penalties? Does the 401k plan company take their 10% when sending you the check? How about taxes? Can I pay them then, or do I just claim it on my following year taxes? In which case I would estimate my best and keep that money aside.

(I know I can ask my accountant, but I thought someone here might also know)
Companies estimate the taxes when doing a withdraw + 10%. My experience shows they give you < 60%. So if you withdraw $10,000 you'd receive $5,000 - $6,000.
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Old 03-20-2012, 06:48 AM
 
Location: Connecticut
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Okay, so the 401k company would send me a check minus the penalty AND taxes?

How can I be sure the taxes are actually paid/sent to the IRS? Do I get a document proving it?
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Old 03-20-2012, 08:45 AM
 
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When you fill out the paperwork to take out the money, there will be a line somewhere that says they are required to hold back 10%, you can also request that they hold back more. At tax time, if you are at or under 10% for your tax liability, you will only have to pay the additional 10% penalty for early withdrawal, unless you hit the level for Alternative Tax. I would suggest holding back 20% if you don't think you will have the cash to pay the additional tax and penalty next year.

You will get a document at tax time showing the early withdrawal. Now, you can avoid some of that penalty if you are taking the money to pay for health care costs above and beyond the 7.5% of your income, or for health insurance premiums if you have been unemployed for 6 months or more.
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Old 03-20-2012, 09:09 AM
 
Location: Connecticut
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What if you hold back too much? Do you get it refunded from the 401k company, as a tax return refund, or what?
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Old 03-20-2012, 09:12 AM
 
Location: Virginia
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I believe the mandatory withholding for 401k's starts at 20%.....not 10%.....for federal taxes. Don't forget to factor in any state taxes you might owe and set that aside also or have them also withhold for state income tax if they are able to.
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Old 03-20-2012, 09:25 AM
 
Location: Connecticut
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Yes. I had called the company to find out at one time. They said 10% penalty and 20% for federal. And I know enough to know that I will owe state also.

However, another question I have is what if i moved to a state that has no state tax? Do I get taxed (or not) depending where I lived when cashing it out, filing the return, or am I taxed by what state it was set up in (their rates)?
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Old 03-20-2012, 10:23 AM
 
5,089 posts, read 5,635,531 times
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Quote:
Originally Posted by CTGirlNoMore View Post
Yes. I had called the company to find out at one time. They said 10% penalty and 20% for federal. And I know enough to know that I will owe state also.
First of all, keep in mind that the 20% is just the withholding amount. You may owe more or less at tax time depending upon whatever your overall income/tax situation is. Secondly, be aware that the federal tax you will owe will be based on the gross amount of your withdrawal notwithstanding the 10% penalty. For example, if you have $100,000 in your 401(k) when you close it, you will pay a $10,000 penalty. You will also have to declare the entire $100,000 as income and pay taxes on the full $100,000, not just the remaining $90,000.


Quote:
Originally Posted by CTGirlNoMore View Post
However, another question I have is what if i moved to a state that has no state tax? Do I get taxed (or not) depending where I lived when cashing it out, filing the return, or am I taxed by what state it was set up in (their rates)?
You get taxed depending on where you live when you receive the money, not based on what state you were living in when you put money into it.
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Old 03-20-2012, 10:29 AM
 
Location: Connecticut
2,727 posts, read 2,656,952 times
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Thanks MadMan (about the state I live in thing).

And yes, sadly I am aware of tax on the full amount.
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Old 03-20-2012, 02:05 PM
 
20,802 posts, read 30,296,490 times
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Not to pry but what do you need this money for? Have you examined all other options? It's an expensive way to get access to cash. Maybe some people here will be able to give you some other ideas that won't end up hurting your pocketbook so much?
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