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How much tax is paid when pulling from 401k?

weirdichi

weirdichi

Diamond Member
I know I can call my institution, but I just wanted a quick response so I get a general idea. I was thinking of paying off a bill, even with being taxed. I'd save more in the long run instead of just making monthly payments.

Any thoughts? Pay off now or continue to bend over every month for interest?
 
If I remember correctly it is taxed along with the rest of your income at whatever effective tax rate you are at, the killer is the penalty you pay on top of that.
 
You can make it a loan to yourself, and then pay it back afterwards.

I think.

I've never done it, and it may only be for things like home purchases, but I don't really know.
 
Linflas said:
If I remember correctly it is taxed along with the rest of your income at whatever effective tax rate you are at, the killer is the penalty you pay on top of that.
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Hmm.. so I get taxed AND penalized for pulling from it? Double whammy. But still may save me $$ than monthly payments.
 
weirdichi said:
Hmm.. so I get taxed AND penalized for pulling from it? Double whammy. But still may save me $$ than monthly payments.
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Take it as a loan if possible. No penalty or additional taxes.

You pay it back out if your paycheck with interest. The interest actually goes back to you.

Only down side is that you can not contribute to the 401K until loan is paid back.

If you leave employment, then the balance gets reported as income but no penalty assessed.

/edit
additions/corrections

The no penalty is if the withdrawal was done under the IRS hardship guidelines.
The contribution seems to be based on the plan. I have seen three plans where contributions were suspended, but another poster say he has seen otherwise.
 
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counts as income for you, so you pay income tax on it. +10% early distribution penalty. on top of that, thats money you will never be able to get back into your account.
 
EagleKeeper said:
Take it as a loan if possible. No penalty or additional taxes.

You pay it back out if your paycheck with interest. The interest actually goes back to you.

Only down side is that you can not contribute to the 401K until loan is paid back.

If you leave employment, then the balance gets reported as income but no penalty assessed.
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This. (Fixed 491k to 401k too 😛)
 
EagleKeeper said:
Take it as a loan if possible. No penalty or additional taxes.

You pay it back out if your paycheck with interest. The interest actually goes back to you.

Only down side is that you can not contribute to the 491K until loan is paid back.

If you leave employment, then the balance gets reported as income but no penalty assessed.
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Are you sure about the last part? I don't see why the distribution wouldn't be subject to the penalty.
 
weirdichi said:
I know I can call my institution, but I just wanted a quick response so I get a general idea. I was thinking of paying off a bill, even with being taxed. I'd save more in the long run instead of just making monthly payments.

Any thoughts? Pay off now or continue to bend over every month for interest?
Click to expand...

Take a loan against it, that way you don't pay any taxes or penalty. You then repay the loan with after-tax money + interest to yourself. I did this once to pay off my student loans and once to help with a down payment.
 
nickbits said:
If you take a loan then lose your job then you have to pay it back immediately.
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Only if he wants to avoid the penalty. You can keep it, but pay the taxes + penalty on it, in which case he wouldn't be any worse off than he would have been originally.
 
EagleKeeper said:
Take it as a loan if possible. No penalty or additional taxes.

You pay it back out if your paycheck with interest. The interest actually goes back to you.

Only down side is that you can not contribute to the 491K until loan is paid back.

If you leave employment, then the balance gets reported as income but no penalty assessed.
Click to expand...

Not true. It is going to vary with your particular plan. In my plan we can contribute while paying back a loan, I'm doing it now.
 
Can you cut spending instead, like dropping a $100/month cable bill?

If you do a withdrawal instead of a loan, you lose a chunk of retirement savings that can grow without paying taxes until you retire. First as a 401k and later as an IRA rollover.

You'll never get that tax-deferred part back. I have to pay taxes every year on the part of my savings that is in a regular brokerage account -- I'd love to have that in an IRA instead.
 
All these answers and everyone forgot about the mandatory withholding requirement. The plan administrator must withhold 20%. You will then have to reconcile on your tax return based on your effective tax rate and 10% penalty.
 
CPA said:
All these answers and everyone forgot about the mandatory withholding requirement. The plan administrator must withhold 20%. You will then have to reconcile on your tax return based on your effective tax rate and 10% penalty.
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You're suppose to use effective tax rate and not marginal tax rate?
 
I've done a loan before- there was a loan fee but it wasn't much- interest goes back to me and I'm still able to contribute the regular amount to my 401k
 
brianmanahan said:
this is probably a bad idea
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not always - one of my friends drew against his 401k to help fund a downpayment for a house (to put 20% down). There was no penalty, and he pays himself back with interest. Not sure about contributing at the same time, but overall he got his house and money back. This was back in 2008 when the market was in the toilet anyway, so not like he was losing 20% gains by not having the money invested.
 
stlc8tr said:
Are you sure about the last part? I don't see why the distribution wouldn't be subject to the penalty.
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It would depend on how you classified the original distribution.
If it was based on the hardship rules (usually medical or house); no penalty.
 
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