401 K Cash Out. Please help!

[James17]

I left my job to move to another state recently. I have decided to cash out my 401K. Now, I know it's not advisable, but I have to do it. My questions are these: 1. when I view my portfolio, it automatically takes out the normal amount due to early withdrawal. It also gives me the option to select what percentage of Federal taxes I want to withhold--I understand the normal amount is 10%. So, if I choose the 10% along with the normal deduction, do I still need to pay taxes on my cash out, or are these the only taxes that are taken out, and I'll have no surprises at tax time? 2. Should I wait until January 1st to cash out instead of now, in December? 3. If I DO wait until next year, is the cash out counted for the tax year of 2014? 4. In relation to question 1, regardless of what YEAR I cash out, are the tax rules still the same? Are the taxes that are taken out & the percentage I elect standard regardless of when I choose to cash out?

Thanks!

[disneysteve]

I know it's not advisable, but I have to do it.

Why do you feel you have to cash out your 401k. It is a HORRENDOUS thing to do. You will surrender 35% of your savings to the government.

To answer your questions:
1. There is a 10% penalty for early withdrawal. You then have to pay normal income taxes on the money as well. If you are in the 25% bracket, you have to pay 25% (hence the 35% I mentioned above).
2. If you do it in January, it goes on your 2014 taxes. If you do it now, it goes on your 2013 taxes.
4. The rules are the same whether you do it now or in January unless you are in a different tax bracket for 2014 than you are for 2013.

[James17]

Thank you. I appreciate the information. My reasons are personal.

[Petunia 100]

Thank you. I appreciate the information. My reasons are personal.

I'd try a loan first, James. Even a credit card will give you much better terms.

Don't forget that your state may take a bite too. My state would assess income tax and a 2.5% penalty.

[disneysteve]

I'd try a loan first, James. Even a credit card will give you much better terms.

Good point. Better to even pay 20% interest on a credit card than to pay 35% or more (if state taxes too) on the 401k cash out.

[humandraydel]

1. There is a 10% penalty for early withdrawal. You then have to pay normal income taxes on the money as well. If you are in the 25% bracket, you have to pay 25% (hence the 35% I mentioned above).

Don't forget state taxes. And depending on the amount, cashing out could push you into the 28% or even 33% bracket.

[disneysteve]

Don't forget state taxes. And depending on the amount, cashing out could push you into the 28% or even 33% bracket.

Like I said, it is a horrendous thing to do. Unless it was to save a life or possibly to save my home, I would never even consider it. There are lots of better ways to get money. I can't imagine anything worth paying 35-45% interest on.