Early withdrawal penalty on 401K
 

I asked my broker (JP Morgan) who said it's assessed by the IRS. Googled it and got this and this:
Tax Topics - Topic 558 Additional Tax on Early Distributions from Retirement Plans, Other Than IRAs
Publication 575 (2013), Pension and Annuity Income

and still unsure. Pub 575 was to me as clear as mud.

The hardship exceptions described are about death and having medical bills. So is this all?

If my general tax rate is going to be nil in a particular year, would I still have to pay a 10% penalty on an early 401K withdrawal?

Re: Early withdrawal penalty on 401K
 

Change jobs, then you can take it all aka "cash it out" (you still have the tax to pay). Lots of Americans do that each time they switch jobs, which is why they arrive at retirement with next to no savings. :rolleyes:

Re: Early withdrawal penalty on 401K
 

Thanks.

What's the definition of changing jobs? I started a new job September 2nd this year?

And I just called JP Morgan again about this. Was told it depends on my plan and I am now on hold waiting to speak with a "consultant".

Re: Early withdrawal penalty on 401K
 

When you leave one employer and start with another. If you have a balance on your 401k from your previous employer, you can leave it there, roll it into your new 401k (if your new employer allows that), roll it into a free standing IRA, among several other options, or just request it as a cash-out lump sum. IIRC there will be an amount withheld for taxes, which I think is 35%, and when you file your taxes you might get some of that back. As you already discovered the cash out is taxed at basic tax plus 10%.

Re: Early withdrawal penalty on 401K
 

Yes, you have to pay the 10% penalty in addition to any tax that is due on the withdrawal. Remember that the amount of the withdrawal will likely be income that is taxable.

Re: Early withdrawal penalty on 401K
 

Would rolling it into a Roth help?
I know you'd still need to pay the tax though.

Re: Early withdrawal penalty on 401K
 

Well that is an option, but it isn't going to help if she needs the cash, which seems to be the thrust of the original question. :unsure:

Re: Early withdrawal penalty on 401K
 

Got my answers from JPMorgan:

New employer: Can NOT take out money penalty free. Can roll over to new plan penalty free.

Withdrawal: Penalty applies except for use in death, medical, education, first home purchase or first home within 3 years etc.

Withholding of tax: They withhold 20% tax on any money taken out

What can I take out: Either everything at once or distribute it over 10 years

And the other option I was give: Roll it into an IRA. Everything above still applies except that distribution is more flexible and 20% tax is not withheld.

Thanks all.

Re: Early withdrawal penalty on 401K
 

So apparently they pay 10% penalty if they do that. Plus whatever tax is owed.

Re: Early withdrawal penalty on 401K
 

And the 10% penalty doesn't apply.

Which is why it's almost always a dumb option unless one of the "hardship" situations allows you to avoid the penalty.

Re: Early withdrawal penalty on 401K
 

Right. But it's categorically an entirely different option. i.e. you don't any money

Re: Early withdrawal penalty on 401K
 

Why do you need / want to take money out of a 401K early?

Doing that isn't usually a good idea unless you have no other options.

If this is a case where you need some extra cash for a short period of time many 401k plans allow you to borrow from the plan and repay it later (although many people feel that even that is often not a good idea).

Re: Early withdrawal penalty on 401K
 

No, it was for what you'd classify as an entirely frivolous reason. I still want to "do" that thing I was thinking of. I'll just not touch the 401K though. I hate the idea of a penalty.

Re: Early withdrawal penalty on 401K
 

With the Roth I was aware you could take your money, your contribution out. But you need to wait 10 years or be 59.5 without penalty...

Re: Early withdrawal penalty on 401K
 

Yep, I've done exactly this, twice. Since I know my job is stable and I know I'll be there long enough to pay the loan back through paycheck deductions, I did it. Both times worked out really well for me. I got the cash I needed, got a super low interest rate in paying it back, deducted out of my paycheck so I didn't really "miss" the money, and the payments plus interest went right back into my 401K. So it was like taking a very low-interest loan from myself and paying myself back with interest. LOL

jmood, depending on how much money you want, this might be a good option.

I don't recommend it for someone with an unstable job, who thinks they'll be leaving their job, etc...because I think if you leave the job, you need to pay that all back immediately...the loan can't be rolled over to a new employer (I think).

Rene