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401k early withdrawal taxes

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SoonerSublime

Junior Member
What is the name of your state? Oklahoma

I have $40,000 in my 401k and am starting a business. I am curious if it is possible to withdrawal all of this money from my 401k without any money withheld or at least a bare minimum withheld for taxes. Then just pay the tax bill at the end of the year.
 


LdiJ

Senior Member
What is the name of your state? Oklahoma

I have $40,000 in my 401k and am starting a business. I am curious if it is possible to withdrawal all of this money from my 401k without any money withheld or at least a bare minimum withheld for taxes. Then just pay the tax bill at the end of the year.
You can do that....but it may be an incredibly foolish thing to do. Very few businesses make any kind of significant profit in their first year, and many of them lose money in their first year. You could end up owing signficant tax without any resources to pay the tax.

It would be far wiser to have enough withheld to cover not only the regular income tax due on the money, but the 10% penalty for early withdrawal as well.
 

irsos

Member
You asked the same question in a different way yersterday. If you cannot get a loan to start a business, you need to really think about whether this is something you should do. It is a recipe for disaster. This is a really bad idea.
 

SoonerSublime

Junior Member
Ok so I want to open up a new business with debt...that sounds great.

How bout I open up my business with no debt and not have to worry about paying anyone back for something when I already have the income available.

Then after I get my business going and I decide I would like to expand I incur debt to increase my cashflow and now we have a business that not only has a proven trackrecord but also assets.

Loans are great, but I just don't need to go that way right now. That way if my business does not succeed then I will just have to live off of Social Security(Plan Z) when I retire.
 

LdiJ

Senior Member
Some other food for though:

A 40k withdrawal from your 401k, including state taxes equals a MINIMUM of a 10k tax bite. If you have losses the first year a maximum of 6k of that could be offset by losses (assuming that your losses are high enough) but 4k cannot.

A loan equals interest, but no tax bite.

If your business is successful, a loan is not a problem. If your business is not, the 401k money is still there, to be withdrawn later to pay off the business debt...and also might have a lower tax bite that particular year.

If your business fails so badly that even if you withdrew the 401k money you would still have to file bankruptcy, you can leave the 401k money alone, because its protected in a bankruptcy..

And all of this food for thought, should indicate to you that you really ought to get some professional advice before you decide how to finance your new business. You may still decide to withdraw your 401k money to do it, but at least you will be fully informed of the ramifications in doing so.
 

tranquility

Senior Member
Retirement money, before you retire, is the most expensive money to get. I think LdiJ's estimate is low, but won't disagree beyond saying you are going to get a huge tax bite on the cash.

Are you still working? Can you *borrow* from the 401K?
 

TinkerBelleLuvr

Senior Member
If you borrow from your 401K AND leave employment, it must be completely repaid, otherwise, you have a withdrawl and the tax implication.
 

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