Tax on Early Withdrawal on 401K

**emanon1501** · 08-20-2013, 12:09 PM

Originally posted by kltravis12 View Post

I know I shouldn't do an early withdraw and I know how much I will be losing out in the end, I have heard it all but I am 25 and my husband is 26, not only does he contribute to his 401k generously, and has been for 6 years, we are young and committed to being able to retire so as soon as I finish school in a few years I will start to build my 401k back up. I just want to make sure that come April we don't owe a large sum of money because we went up a tax bracket and did not put enough away.

Thanks for any help!!

It�s not about your husband�s retirement plan. It�s about YOUR retirement plan. What if you divorce or your husband dies. FYI. About 50% of marriage ends in divorce.

**KTP** · 08-20-2013, 12:23 PM

Do almost anything else other than take out money from your 401K...especially paying a penalty.

What type of graduate degree are you seeking? Will it give you a guaranteed better job? Why can't you get a student loan?

**MonkeyMama** · 08-20-2013, 12:29 PM

I am not personally a fan of borrowing money. But, if spouse has good income and you will retire early anyway and yadda yadda... The thing about taking the retirement money out is that you lose so much to penalties and taxes. You'd be better off paying 10% interest every year, for 3 years, rather than paying 30% up front, today. & reality is you should be able to borrow for much cheaper than 10%. I share just to illustrate why it is such a bad idea.

What is the interest rate on the debt you want to pay off??

**lorraineb** · 08-20-2013, 12:35 PM

Originally posted by MonkeyMama View Post

What is the interest rate on the debt you want to pay off??

This -- it sounds like you are going to be penny wise, but pound foolish just to clean up the debt. If you are going to retire so soon, take the money the extra money from the salary that won't come close to earning 30% to pay down the debt.

**riverwed070707** · 08-20-2013, 01:56 PM

To add to what the others have said, if you're still making $110k combined, you shoudl be able to cover your bills without pulling from retirement. I'd look at ways to cut spending and payoff debt while going to school not so you can go to school. If the latter is necessary, perhaps grad school should have waited.

**KTP** · 08-20-2013, 02:12 PM

A graduate degree worth having is worth getting a student loan or part time job to support.

If you are getting a graduate degree in Egyptology, keep the 401K, get a part time job, and use that to pay for the tuition.

If you are getting a graduate degree in Aerospace Engineering, keep the 401K and take out a student loan.

Bottom line, keep the 401K and examine the future income from your advanced degree to determine how much if any debt you want to incur getting it.

**MonkeyMama** · 08-20-2013, 03:06 PM

P.S. It's impossible to tell your taxes without more information. I'd probably estimate 25% Fed (with $130k income) plus something for state (I don't know your state tax rates). 25% Fed + 5% (state estimate) + 10% penalty = 40%. Plus, your state might also have a penalty.

It would also make more sense to stop retirement contributions for one year or longer, versus losing 40%+ on cash-out.

**JustBill** · 08-20-2013, 06:24 PM

OP, I suggest you use a tax prep software (use yours from 2012 if you have, or download a free version) and go through the motions to prepare a "faux" return that reflects the action you're considering. Otherwise, you can do the same exercise by hand utilizing online forms and instructions available at irs.gov. HTH

**tulog** · 08-20-2013, 07:45 PM

I'll join the others telling you this is a bad idea and very dangerous.

When I withdrew $10,000 from a 401k it ended up costing $76,000, and four years - hosts of accountants and lawyers trying to straighten it out.

**moneysma** · 08-21-2013, 03:45 AM

I'll agree with the others saying this is a bad idea. It's great that you plan on saving a good amount in your 401(k) once you graduate, but sometimes (many times) plans don't materialize the way we think.

For instance, what if the economy still stinks and you can't find a job? What if you decide to have kids soon and plan on staying home to raise them? You won't be putting much, if anything into your 401(k).

To me, taking the money out and paying that huge penalty (yes, 10% is big when you look at how much that 10% can grow into in the future) is wasteful. Can you find any ways to cut out some expenses so that you can get rid of debt that way?

I have a friend that is planning to leave his job to try to run his own business. He knows money is going to be tight at first, so he is cutting all unneeded expenses out of his budget now and using that money to pay off any remaining debts and save what's left so he has a less worries to make ends meet when he makes the jump and has a savings cushion. I would recommend you do the same. Prepare for the worst case scenario and if it doesn't happen, you'll be in great shape. If it does happen, you'll be in OK shape too.

**bjl584** · 08-21-2013, 03:47 AM

An early withdraw of 401K funds is almost always a terrible idea.

What sort of degree are you pursuing? Can you work while obtaining your degree? (I worked full time while taking night classes for my MBA)

You would be better off with student loan debt than you would with draining your retirement savings.

**Gailete** · 08-21-2013, 04:40 PM

I'm still at the starting gate trying to figure out why a couple (with no kids?) making $110,000 a year needs to be borrowing from a 401K to make ends meet? Even if you aren't working at all, your hubby is pulling in a good salary. Much higher than the average salary these days.

My advice is leave that 401K where it is and for more reasons than those that have been offered. To borrow from your account means that if you quit your job or get fired, you have to immediately replace the loan within a couple of months. At least that is how it worked last I knew. Do you have that amount in savings to cover the loan if it is needed to be paid back? This is why it is called a loan. You might also want to check to see just how much your company will allow you to take out and you will immediately have to start making payments to pay it back (not like a school loan which give you some grace time). Someone is welcome to correct me if I got this info wrong, but this is what happened when my ex Mr. BigBucks borrowed from his 401k and several years later tried to tell me I owed him money from what he had borrowed. LOL!

**MonkeyMama** · 08-22-2013, 05:18 AM

Originally posted by Gailete View Post

My advice is leave that 401K where it is and for more reasons than those that have been offered. To borrow from your account means that if you quit your job or get fired, you have to immediately replace the loan within a couple of months.

I didn't see anyone suggesting to borrow specifically against the 401k (as a 401k loan)? To me, that is the same difference as taking a distribution. If you can't pay it back, then it is a distribution, and you are back to square one. You are correct in how it works.

**Gailete** · 08-22-2013, 06:24 AM

I didn't see anyone suggesting to borrow specifically against the 401k (as a 401k loan)? To me, that is the same difference as taking a distribution.

I believe when one takes money out of a 401K prior to their reaching retirement/distribution age, it is considered a loan and has to be paid back. Taking it after the correct age it is considered a distribution and doesn't need paid back. I get a small pension via my ex-husband and when doing taxes it is called a distribution. The difference is whether it will need to be paid back or not. But like I said it has been awhile since I went through that with someone, but he had to pay it back, with interest I might add that is paid into his account! The government does what it can to keep people from killing their retirement dreams with all the rules.

Tax on Early Withdrawal on 401K