View Full Version : 401K question



Roadhawg
09-06-2012, 12:58 PM
One of my co-workers asked me this and I didn't have the answer. We're going to be ending our 401K, don't get a match anyway, and I was going to switch mine over to an IRA. A coworker thought of cashing his in and paying off some bills and wondered how much they would take out in Federal and State taxes. I said other than an arm and a leg I didn't know. Anybody out there know?

Bill Robertson
09-06-2012, 01:07 PM
I cashed a 401K mine out a few years ago when I was in a big bind. Feds get 25% as a penalty plus whatever taxes in your bracket would be on the total amount. Hit mine for about 40% all together. I don't remember the state being too big a deal.

Bellaboo
09-06-2012, 01:12 PM
One of my co-workers asked me this and I didn't have the answer. We're going to be ending our 401K, don't get a match anyway, and I was going to switch mine over to an IRA. A coworker thought of cashing his in and paying off some bills and wondered how much they would take out in Federal and State taxes. I said other than an arm and a leg I didn't know. Anybody out there know?

Never cashed mine out, but if you are under 59 and 6 months, you will pay a penalty along with the fed tax rate if you do. So it would be best not to cash out until at least 59 years 6 months and a day.

Roadhawg
09-06-2012, 01:19 PM
Would you still get a penalty if your company ends the 401K and it wasn't voluntary on your part?

BBatesokc
09-06-2012, 01:31 PM
I don't believe the gov't cares why you're cashing it in, they just want their cut. Its better to transfer it and protect it. I have a SEP IRA and they'd take 10% plus applicable income taxes if I cashed it in (last time I checked - 2011).

Depending on the amount, your friend might be better to use a secured loan to pay his debt (as the interest of a secured loan vs the penalty to cash in could make it a better deal). Not only will you pay a penalty for cashing in, but you also lose the financial benefit on the money that was in the 401K.

Roadhawg
09-06-2012, 01:37 PM
Good points... I'll pass that along

Questor
09-06-2012, 08:35 PM
It'll be 30% or more of his money. 10% penalty plus all applicable taxes. The 10% penalty can be avoided, but only if you can prove a hardship (there's a list of them out there somewhere). I don't believe your company ending the 401k is considered a hardship... it's more like severe medical issues, etc.

I know you can roll a 401k into another 401k, so I would assume that you can do that with an IRA as well (I am not sure though). Rolling something over isn't taxed and there are no penalties. Your friend might consider that too.

knightrider
09-07-2012, 06:56 AM
You can rollever your 401(k) into whats called a rollever IRA. These can be found at most brokerage firms or financial institutions (Fideltiy, Charles Schwab, etc). Its not usually a good idea to cash out a 401(k) unless you do fall under one of the hardship exemptions. Questor is correct that you will have to pay a 10% penalty (if you don't fall under one of the hardships) plus taxes at your normal federal and state tax rates.