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Thread: 401k 20% taxes

  1. #1
    callie212 is offline Member
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    401k 20% taxes

    What is the name of your state (only U.S. law)? NY

    I have a 401k at an old job that I am thinking about closing and withdrawing the balance.

    Does the 20% of taxes get taken out as an estimate, and does the 401k tax amount end up being based on your total income that year, or is it a flat amount of 20% regardless of your income?

    I know it gets withheld when an early withdraw is made, but does that get added into the taxes you paid at the end of the year to be recalculated based on AGI, kinda how a traditional paycheck does?
  2. #2
    Zigner is offline Senior Member
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    Quote Originally Posted by callie212 View Post
    What is the name of your state (only U.S. law)? NY

    I have a 401k at an old job that I am thinking about closing and withdrawing the balance.

    Does the 20% of taxes get taken out as an estimate, and does the 401k tax amount end up being based on your total income that year, or is it a flat amount of 20% regardless of your income?

    I know it gets withheld when an early withdraw is made, but does that get added into the taxes you paid at the end of the year to be recalculated based on AGI, kinda how a traditional paycheck does?
    It's not a tax...it's a penalty
  3. #3
    Antigone* is offline Senior Member
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    Quote Originally Posted by callie212 View Post
    What is the name of your state (only U.S. law)? NY

    I have a 401k at an old job that I am thinking about closing and withdrawing the balance.

    Does the 20% of taxes get taken out as an estimate, and does the 401k tax amount end up being based on your total income that year, or is it a flat amount of 20% regardless of your income?

    I know it gets withheld when an early withdraw is made, but does that get added into the taxes you paid at the end of the year to be recalculated based on AGI, kinda how a traditional paycheck does?
    If I remember my facts correctly, (and I'm sure LdiJ will correct me if I am wrong) the withholding amount is a mandatory 20% and the penalty is an additional 10% on the taxable amount.
  4. #4
    Zigner is offline Senior Member
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    Quote Originally Posted by Wirelessany1 View Post
    If I remember my facts correctly, (and I'm sure LdiJ will correct me if I am wrong) the withholding amount is a mandatory 20% and the penalty is an additional 10% on the taxable amount.
    I will stand corrected, as required
  5. #5
    Andy0192 is offline Member
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    "cashing in" a 401(k) that was funded with pre-tax dollars will result in an immediate penalty if you're withdrawing the amount before age 59 1/2.

    You will also owe taxes on the full amount of the withdrawal, and the amount will be added to the tax year's AGI, likely moving you into a higher bracket if the amount is substantial.

    Generally, taking money out of a 401(k) is a really bad idea. There's cheaper ways to borrow money, and if you can't get anyone else to loan you the money, consider that money in a 401(k) is normally safe from any bankruptcy or other judgement claims.

    Here's the rules:

    [url=http://www.irs.gov/retirement/participant/article/0,,id=151787,00.html]401(k) Resource Guide - Plan Participants - General Distribution Rules[/url]
  6. #6
    Antigone* is offline Senior Member
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    Quote Originally Posted by Zigner View Post
    I will stand corrected, as required
    Don't worry Zig...I may have to jump on the correction train with you. My tax accounting class was not one of my favorites.
  7. #7
    callie212 is offline Member
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    Quote Originally Posted by Andy0192 View Post
    You will also owe taxes on the full amount of the withdrawal, and the amount will be added to the tax year's AGI, likely moving you into a higher bracket if the amount is substantial.
    Ok, so thats pretty much what I thought but I wasnt sure. Its not a lot, $2,000. I will make about $30,000 by the end of the year as HOH with dependents, so it shouldn't up me too much if it does.

    And if I wasn't desperate for the money, I wouldn't do this. Its been sitting for a year trying to recover from the banking disaster, as 60% of it was in BOA stock. Now, I am financially strapped, and this ($1,600 after the withholding) would fix our second vehicle and allow us both to work, where right now, only I can.

    I know the penalty of 10% regardless ($200) and I pay that when I do my tax return, which is helpful to me now. Fidelity said they would send me $1,600 because they withhold 20% ($400). I just wasn't sure if the $2,000 would be added to my income and the $400 added to my taxes paid to be recalculated based on my total AGI or if It was a flat 20% taxes, like the flat 10% penalty.
  8. #8
    pattytx is offline Senior Member
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    Yep. The gross amount is the distribution (ordinary income) and the taxes withheld (20%) will show on the 1099-R as taxes.
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