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Tax Question: What happens if I want to take my money out of my 401 (k) account? |
I have had a 401k for a couple of years it has about $4000 in it. I only make about $12,000 a year and need this money. I am thinking of cashing it in. Currenlty it is invested in a CD. I am single, and have some deductions (Teacher expenses, school expenses, and student loan interest) how much money will I lose by cashing this in? In your most likely scenario, you will pay a 10% tax penalty PLUS income tax on the $4,000 as if it was earned income. You didn't pay tax on the money when you put it into the 401(k) so the IRS is going to tax it coming out. Based on the limited information of your deductions disclosed, you'll be paying either 10 or 15% of the withdrawal as income tax so plan on forfeiting about $800 - 1,000 of that withdrawal to the IRS as tax and penalty. If you can qualify under their definition that this is a hardship withdrawal, it is possible that the penalty portion may be waived. Here's what would need to be approved by the IRS to get out of that penalty from their regulations: "A distribution is deemed to be on account of an immediate and heavy financial need of the employee if the distribution is for: Expenses for medical care previously incurred by the employee, the employee鈥檚 spouse, or any dependents of the employee or necessary for these persons to obtain medical care; Costs directly related to the purchase of a principal residence for the employee (excluding mortgage payments); Payment of tuition, related educational fees, and room and board expenses, for the next 12 months of postsecondary education for the employee, or the employee鈥檚 spouse, children, or dependents; or Payments necessary to prevent the eviction of the employee from the employee鈥檚 principal residence or foreclosure on the mortgage on that residence." You may also note from their regulations: "Hardship distributions - A 401(k) plan may allow employees to receive a hardship distribution because of an immediate and heavy financial need. Hardship distributions from a 401(k) plan are limited to the amount of the employee鈥檚 elective deferrals and generally do not include any income earned on the deferred amounts. If the plan permits, certain employer matching contributions and employer discretionary contributions may also be included in hardship distributions. Hardship distributions cannot be rolled over to another plan or IRA". All that to say the amount you can take out as a hardship distribution is limited to the amount of money you put into the 401(k) and not the earnings you may have made on that money. Those earnings would be kept in your 401(k) account and taxed when you (or your estate) qualify for a normal distribution which is: The participant dies, becomes disabled, or otherwise has a severance from employment. The plan terminates and no successor defined contribution plan is established or maintained by the employer. The participant reaches age 59陆. Clear as mud so far? There's more to it. All 401(k) plans are different. In some, the employer matches some or all of your contributions up to a maximum of 3% or your income in the year you made the contribution, some plans do not. Depending how your plan was written by your employer you may or may not be able to withdraw their matching portion. I've seen other answers to your question suggesting that you borrow the money from your 401(k). It's not a bad idea at all BUT not all plans allow for it to happen. Find out who is the trustee or administror of your 401(k) is. They should be able to guide you right through the process and tell you how much is able to be withdrawn. You will lose the amount you will take out from the 401K.. another place you can look for the answer is http://www.TaxForum.us - it is a forum about United States taxes You only are allowed to receive about half of it if taken out early plus you are penalized big time for taking it out. Leave it there. With only 4,000.00 it wouldn't be worth it. ask the bank...thnx 4 the 2 pts You are assessed an early withdrawl fee of 10% (if I remember this correctly--- it may be more but I know there is a penalty) plus you need to pay taxes on it. If you end up with $3000 of that $4000 you will be very lucky. It's not really worth it in my opinion. If you take it all out, you won't get it all; there's a 10% tax penalty for early withdrawal, with a couple of exceptions, plus you'll pay the taxes that were deferred. Go to the IRS website http://www.irs.gov for more info. You can borrow from your 401(k), up to 50% of the money in it, and the interest you pay on the money you borrow is paid to yourself. The only time you can liquidate your 401(k) and withdraw all of the money out of it is when you stop working at that employer. If the 401(k) plan allowed you to take money out, it would essentially disqualify the entire 401(k) plan, and this would affect every other employee that are also contributing to the 401(k). |
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