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How much is the penalty for taking money from 401k plan ?

Jul 30, 2013 by Barbara from Glendale, CA in  |  Flag
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3 votes
Rich Winer Level 20

Barbara, Rod is correct. If you are under age 59 1/2, I would explore all viable options for coming up with the money you need before you take it from your 401K plan and likely get hit with the 10% penalty. The money in your 401K is for retirement and you should make every effort to use if for retirement. From my experience, most people who take money from their IRAs and 401Ks prematurely rarely put it back and often take more. The same applies to loans from 401Ks, it's often a struggle to repay the loan and rarely happens. You might want to consult with a local financial advisor.

Comment   |  Flag   |  Jul 31, 2013 from Woodland Hills, CA

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Peter C. Karp Level 20

Barbara,

First of all it is never a good idea to take money from your 401(k) as it is designed to be a benefit to you upon retirement. Explore other options first. If you do need to withdraw funds from your 401(k) you should see if there is a loan provision in your plan to avoid taxes & penalties unless you default on the loan. If you are still employed at the company you will also need to find out if they allow for any type of in-service withdrawals. If distributions are available under your plan document the penalty depends on your age (under 59 1/2 yrs. old = 10% penalty) and the proceeds are taxed as ordinary income. You should consult with a tax advisor or financial consultant before moving forward.

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Comment   |  Flag   |  Aug 21, 2013 from San Francisco, CA

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2 votes

Barbara,

There are many answers to this question, depending on your situation. First, we need to know your age, whether you're still employed, and, whether you're looking to borrow money from your plan or remove it.

In general, any funds removed from the 401k will be taxed as ordinary income, as all funds in the plan went into it "before tax". In addition, if you're under age 59 1/2 there will be an additional 10% penalty. All together, depending on your income and age, I've seen the tax bill approach 50%.

One way to avoid the taxes would be to take a loan from your plan if you're still employed there. If it's a short term need, this would allow you to pay back your loan over time, and avoid taxation on the funds borrowed.

If you'd like, post additional information so that we might better guide you. In addition, I'd advise seeking out a Certified Financial Planner to help you with this decision. Making the wrong decision here could get rather costly.

Best Regards, Rod

Comment   |  Flag   |  Jul 30, 2013 from Springfield, MO

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2 votes

What they said -- If you're under age 59.5, you'll pay a 10% penalty and taxes. Note: 20% will be withheld for taxes automatically by most 401k providers for you, but that may or may not be enough at the end of the year. You might owe more or less.

Comment   |  Flag   |  Aug 02, 2013 from Alexandria, VA

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1 vote

Barbara, there are 2 basic ways to take money out of a 401(k). one is by distribution. If you take a distribution, you have to pay income tax. If you are not age 59 1/2, or 55 if you left company, you pay an additional 10% penalty.

If your plan allows, you may be able to take a loan. The pratfalls of taking a loan are that it must be repaid in 5 years. If you default or lose your job, you are subject to income tax plus 10% penalty. Additionally, you are re-paying pre-tax money with after-tax dollars. I'll argue that it is double taxation.

I'll continue to argue that 401(k) money is not liquid; that it is earmarked for retirement, and except for a dire emergency, should only be used for that purpose.

Comment   |  Flag   |  Jul 31, 2013 from Delray Beach, FL

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