Tax question on 401k withdrawal

[jkjsooner]

I'm trying to talk my wife out of liquidating a small 401k plan that she needs to roll over into an IRA. I want to make sure I get my math correct. Are you taxed on the full amount of the withdrawal or only on the amount left after the 10% penalty.

Say you're in the 28% tax bracket and you withdraw x, which of the following do you get after penalty/taxes:


x*.9*.72 (only pay taxes on the 90% after the penalty)
x*.62 (pay taxes on the 10% penalty amount as well)


I've tried to look this up but none of the website are clear. They do say there's a 10% penalty on the "taxable amount" which would imply you pay taxes onthe whole thing but I'm not really sure...

[jkjsooner]

I think I found my answer. I think it's the second one. More ammunition to convince my wife it's a bad idea.

[OutlandTrophy]

I thought the penalty was just an additional 10% in taxes paid, total.

I think you're right with the second one.

[Mjcpr]

I thought the penalty was just an additional 10% in taxes paid, total.

I think you're right with the second one.

Did he ask for opinions on hole digging?

[2121Sooner]

I'm trying to talk my wife out of liquidating a small 401k plan that she needs to roll over into an IRA. I want to make sure I get my math correct. Are you taxed on the full amount of the withdrawal or only on the amount left after the 10% penalty.

Say you're in the 28% tax bracket and you withdraw x, which of the following do you get after penalty/taxes:


x*.9*.72 (only pay taxes on the 90% after the penalty)
x*.62 (pay taxes on the 10% penalty amount as well)


I've tried to look this up but none of the website are clear. They do say there's a 10% penalty on the "taxable amount" which would imply you pay taxes onthe whole thing but I'm not really sure...


I believe you are taxed on the whole thing. 28% plus 10% penalty=38% and all that money counts as ordinary income, so could bump up all the taxes.

[pphilfran]

If memory serves me correctly you pay 10% penalty on the amount withdrawn and then pay the proper tax rate for the total amount...

So...

You withdraw 10k...1k in penalty...2800 in taxes (if a 28% tax rate)..total 3800 taxes due...

[2121Sooner]

Call your financial planner, that is what they get paid for.

[rekamrettuB]

If memory serves me correctly you pay 10% penalty on the amount withdrawn and then pay the proper tax rate for the total amount...

So...

You withdraw 10k...1k in penalty...2800 in taxes (if a 28% tax rate)..total 3800 taxes due...

Correct.

It's not 1K penalty and then 9K is taxed at 28% (for example purposes only). The entire 10K is added to your income and taxed appropriately. Then they add another 1K to that total.

[jkjsooner]

Call your financial planner, that is what they get paid for.

I don't need a financial planner to tell me not to do it.

[2121Sooner]

I don't need a financial planner to tell me not to do it.

Yeah, but think of all the fees you could pay. Wouldnt that be awesome?

[dwarthog]

I don't need a financial planner to tell me not to do it.

You knew that from the start, so it isn't to convince you! :D

[NormanPride]

Highway robbery.

[pphilfran]

Highway robbery.

The 10% penalty?

[tator]

I don't need a financial planner to tell me not to do it.
What you need is a man to get that woman of yours in line.


:D (totally kidding)

[NormanPride]

The 10% penalty?

Taxes in general. :)

[pphilfran]

Taxes in general. :)

FAir enough....you will probably not like what will happen to tax rates in the next 10 years....

[NormanPride]

That's why I always vote for smaller government. :D

[OUEngr1990]

Just don't pay it. Then when (if) the IRS comes knocken, just say oops, forgot..

It may not work, but it will buy you plenty of time...been there done that..:D

[OUEngr1990]

You can also try to figure out a way to take it as a hardship withdrawal, then you might not have to pay the 10% penealty. You might talk to your financial advisor about this. If you happen to be buying a house, you can use it as a down payment (and call it hardship withdrawal), and not have to pay the 10%.