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| *Loan,banking and credit>>>income tax |
If I have no income and withdraw a tiny amount from 401k, how is it taxed? |
I am contemplating quitting my job to start a business. I have plenty of cash, but just in case, I am considering withdrawing a small amount from my 401k each year -- if I have to. My question is, if I have ZERO income next year, and I withdraw a tiny amount (say, $5k or $10k).. I understand there is a 10% penalty for early withdrawal, but wouldn't I be taxed at the lowest tax bracket, and also, if I withdrew a small enough amount isn't is possible that I could withdraw the money for (nearly) no interest? If you leave your job, you can open a Rollover IRA to manage your 401k funds. Depending on the institution who manages the account, you can take as little as you like or the whole thing, but you will owe income tax on it at the $5 and $10k marks, plus the penalty. But you're right that it will be at the lowest percentage if you have no other income to report at the end of the year. I have mine at Fidelity and have taken small amounts out and allowed them to withhold for me so I didn't have to worry about it. I just got a form at the end of the year. They also allowed me to return the funds within 60 days without tax or penalty. Your mileage may vary. But I think you should find another way to fund your business. If it doesn't work out you won't have the business, the investment, or the retirement money. you can only withdrawal from your 401k if you show hardship or you are buying a house or if you quit your job.. then you take the entire amount minus the penalty The previous answer is incorrect. Most 401k plans allow you to take "loans" out. But I'm not sure how the taxation works if you have no income. Maybe you just get lucky in that case? You can take a loan from your 401k (typically 50% of the face value at the time of the loan). This is NOT reported as income since you will have to make monthly payments. But the interest you pay goes right back to your own 401k. Of course, each investment company is different so you will need to confirm with whoever administers your 401k. If you withdraw, you will pay 10% plus income tax (taken off immediately) on whatever you take out. If your income is low enough, you may not pay anything over the initial 10%. To do this, you would need to incorporate your business and then pay yourself a very small salary thereby, keeping all assets within the company. You can then give yourself a raise after you've taken out all you want from your 401k. Keep in mind though, you are spending your future income so make sure you have other income planned for your retirement. More information is needed for a precise answer, however, here are some assumptions. If you file single with zero dependants (other than yourself), you will begin paying tax on income from all sources above $8200. You will be required to file a return if you make a 401K withdrawal of any amount and you will be required to file if you have self-employed earnings above $400. You will pay the 10% federal penalty and applicable state penalty for your early 401K withdrawal. If you have or when you do leave your job any 401K loans must be repaid or they are considered a withdrawal so do not rely on taking a loan. There are some exclusions to the early withdrawal penalty and those should be looked at when filing your returns. There is no automatic free amount you can withdrawal, however, other than for a first time home purchase. - Steve Steve Larson - Steve Larson Direct, Inc www.SLarson.com If you were to withdraw $5k from your IRA. You would have to pay the 10% penalty for Federal purposes and how ever much penalty your home State charges. But you would owe no income taxes because your standard deduction and personal exemption would be more than the $5k thus your taxable income would be zero. If you took $10k out, you would pay the penalty and your taxable income should be roughly $1,000 if you have no other source of income and it would taxed at the lowest bracket. |
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