401K withdrawl


A

aj

I just started a new job, and initiated a rollover of my
previous 401K plan. Coincidentally, both plans are managed
by the same company, but I digress.

I am in the process of finishing my basement, so I figured
this might be a good oppurtunity to take out a little cash,
so I took deducted a small percentage of my 401k to go to me
instead of the new 401k. This small amount totals $2800. I
know that it will come to me after 20% and 10% taken out, so
I should end up with something a little more than 2000. My
question is, what are the ramifications come tax time? Will
I just have to make up the difference between 20% and my
real tax rate?

Thanks.
 
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P

Phil Marti

I just started a new job, and initiated a rollover of my
previous 401K plan. Coincidentally, both plans are managed
by the same company, but I digress.

I am in the process of finishing my basement, so I figured
this might be a good oppurtunity to take out a little cash,
so I took deducted a small percentage of my 401k to go to me
instead of the new 401k. This small amount totals $2800. I
know that it will come to me after 20% and 10% taken out, so
I should end up with something a little more than 2000.
Not quite right. They will just withhold 20% unless you ask
them to withhold more. (I wouldn't.)
My
question is, what are the ramifications come tax time? Will
I just have to make up the difference between 20% and my
real tax rate?
That plus the 10% penalty on the gross (pre-withholding)
amount not rolled over.
 
Last edited by a moderator:
H

Herb Smith

I just started a new job, and initiated a rollover of my
previous 401K plan. Coincidentally, both plans are managed
by the same company, but I digress.

I am in the process of finishing my basement, so I figured
this might be a good oppurtunity to take out a little cash,
so I took deducted a small percentage of my 401k to go to me
instead of the new 401k. This small amount totals $2800. I
know that it will come to me after 20% and 10% taken out, so
I should end up with something a little more than 2000. My
question is, what are the ramifications come tax time? Will
I just have to make up the difference between 20% and my
real tax rate?
The plan trustee will WITHHOLD 20% of the distribution
before sending you the check. The 10% early withdrawal
penalty is NOT withheld, so you will have to pay that when
you file your taxes for 2006.

The $2800 will be added to your income for 2007 (line
16a/16b) and will be taxed at whatever marginal rate you are
at at that time. The 20% withholding may or may not be
enough to cover the increased tax. If not, you will pay
whatever is due in April. If it does, you may get a refund.

BTW, this is an extremely expensive way to obtain the funds
for your basement improvement, especially because of the
early withdrawal penalty. I'm sure you could do a lot better
by taking out a home improvement or FHA loan from your bank.
 
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A

aj

Herb said:
(e-mail address removed) wrote:
The plan trustee will WITHHOLD 20% of the distribution
before sending you the check. The 10% early withdrawal
penalty is NOT withheld, so you will have to pay that when
you file your taxes for 2006.

The $2800 will be added to your income for 2007 (line
16a/16b) and will be taxed at whatever marginal rate you are
at at that time. The 20% withholding may or may not be
enough to cover the increased tax. If not, you will pay
whatever is due in April. If it does, you may get a refund.

BTW, this is an extremely expensive way to obtain the funds
for your basement improvement, especially because of the
early withdrawal penalty. I'm sure you could do a lot better
by taking out a home improvement or FHA loan from your bank.
The fund guy told me explicitly that the 10% would be
withheld.

At any rate, I understand it is not a great idea to do what
I did, but I kept the amount at a minimum, and it is for
good reason (home improvement). I really don't want another
loan over my head, especially since I just paid off all
CC's.
 
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