How bad is it if you cashout your 401k when you leave a company?
Answers:
Cashing out your 401k will increase your "ordinary income tax". For example, if you make $40,000 in 2007 and you take out $30,000 from your 401k, you will be taxed on $70,000 of income for the year, plus a 10% federal tax penalty on the $30,000, considering all of this money was in a traditional 401k and not a Roth 401k. I would advise rolling your money into an IRA. If you roll your money into an IRA you will likely be in a better situation than if you keep it in your 401k or withdraw the funds. Rolling the funds into an IRA will keep all of your money tax deferred. You will also be able to do just about anything you want with your investments within an IRA, whereas you were limited to your investments within the 401k. Find out if your entire employer match is vested and will you keep 100% of what they put in. Feel free to email me specifically if you have any more questions.
You shouldn't ever view retirement money as liquid in this way. You may want to roll it over into another fund, but this is retirement money, not saved money to now pay off bills.
The company will withhold 28% federal tax plus whatever your state tax calls for. When you file your taxes next year, you will have to figure out the tax owed on the amount cashed out plus a ten percent penalty. Of course, the 28% goes toward the tax you owe, just like withholding in your paycheck.
It's tough...
TAXES to Uncle SAM $$$
About 50% of the balance goes to him since its pre-tax dollars?
Try to avoid this if possible since this is a great way to supplement your income for retirement.
Of course it depends on the balance in your 401K? And your tax bracket?
Go to your local Bank and speak with an IRA Specialist or Personal Banker and get their advice and they can calculate your tax possibly?
www.wellsfargo.com (IRAs)
www.irs.gov (TAXES on IRAs)
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GOOD LUCK! :-)
well lets see. You did without that money already. So you really don't need it.
You got a tax brake when you were putting money in, so it actually increased your income, by reducing the amount money paid out in taxes.
if you do pay all the penalties, like higher tax bracket,
and after you pay taxes at the higher tax bracket you will also pay a 10% penalty off the top of whatever amount you took out
Or you could just leave it there, and maybe have a little bit of retirement outside of SSI, which might not even be there later in life.
By the way, if your just taking it out to get a something "New", whatever that may be, will just be old a few years down the line.
I think you answered your own question. When withdrawing from a qualified account, you can expect to pay out about
40%-45% in taxes & penalties. In addition, there is a hidden cost to making an early withdrawal and that is opportunity cost. When an early withdrawal is made, the earning potential for that amount of money is gone forever.
Do not do it. Bankers should/will not give you tax advice.
It's flat out *horrible*. Don't do it, or I will drive to your house and throw eggs at you.
For every dollar you cash out of your 401k now, you lose 10 cents to the penalty and another 30 or so to taxes. You'll get to take home 60 cents.
But the point of a 401k is to let it grow -- that $1 will be about $8 by the time you go to cash it out in 30 years. Furthermore, you'll be retired and your tax burden will be much lower then, so you'll take home about $7 of that $8, instead of just 60% of it.
If you can see further into the future than the end of your nose, you'll leave the 401k where it is or roll it over to an IRA. And as young as you are, make sure you have it in stocks or REITs or high yield bonds (or a nice combination thereof).
Good luck,
Doug
Very bad. Assuming you'll go from a 28% to 33% tax rate if you withdraw everything, and I'm assuming it's over $75K in your account, then this is how it will play out.
First, the company will withhold 28% the year you take it out.
Second, when you do your taxes next year, you will have to pay a 10% penalty.
Third, you'll have to pay the extra 5% (33-28) federal tax.
Fourth, (and this is the big one), you will have to pay the Alternative Minimum Tax (AMT) on not just your 401K money but on ALL your income. If you own a home, you cannot deduct property taxes. You can't deduct the sales tax or state income tax either.
So, you will be lucky if you get to keep 50% of your money.
The best bet is if you don't want to keep the money in the 401K, then do a rollover IRA with a brokerage company, so you can purchase stocks, ETFs, or mutual funds to build your retirement.
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