May 20, 2017 Paul Glantz, CPA

What Is The True Cost Of An Early Withdrawal From Your 401(k)?

Tapping into your 401(k) as if it were a rainy day fund should always be a last resort. Many individuals are not aware of the negative tax implications of an early withdrawal from a retirement account. Before we go more in-depth, here are the key take-aways:

  • Borrowing or taking early withdrawals from your 401(k) can result in large tax burdens in addition to tax penalties
  • While exceptions exist, the most common withdrawals (education or buying a home) are still subject to tax penalties
  • If you borrow from a 401(k), loan funds will not grow in value and will automatically be converted to a withdrawal if you leave your employer, voluntarily or involuntary, while the loan is still outstanding.

401(k) Penalties

The penalties for early withdrawals from your 401(k) are assessed at a flat 10% rate on the total distribution. So, if you take a $50,000 distribution from your 401(k) before reaching 59 ½ years of age, you will owe a penalty of $5,000 before even paying any federal income tax on this amount. Remember, most 401(k) contributions are pre-tax deferrals, meaning you receive a deduction in the year you contribute, but you eventually pay tax on the withdrawals and earnings when you retire – hopefully in a lower tax bracket.

Exceptions to the Rules

There are exceptions to the 10% early withdrawal penalty mentioned above, but they are typically rare situations. Distributions made because of total and permanent disability and distributions made to cover medical expense that are deductible and exceed 10% of your adjusted gross income whether or not you itemize your deductions for the year. All exceptions can be found here.

401(k) Loans

Many employers and plan administrators offer the opportunity to borrow funds from your 401(k). Loans from your 401(k) can have some upside, such as low interest rates and not showing on your credit report, but there are also some downsides. Borrowed funds do not participate in the market or growth of your retirement account.

Quite possibly the biggest risk with loans is the immediate payback clause if you are laid off, quit, or are terminated as an employee. If you do not payback the full amount of the outstanding loan, the outstanding balance will be considered a distribution and no further repayment would be required. Not only does this subject you to the 10% early withdrawal penalty, but the withdrawal will be fully taxable at your marginal rate. Since this would be considered income, it can catapult you into a higher tax bracket, resulting in higher taxes on all your income.

Here’s a brief example of how this might look. Let’s say you are a married taxpayer with W-2 income of $150k. Based on 2017 estimated tax brackets, you would be in the 25% tax bracket. If you had a $50k loan from your 401(k) and were unexpectedly laid off, you would have to pay that loan back immediately. If you couldn’t afford to pay this loan back immediately, that $50k would become taxable in 2017, pushing you into the 28% bracket. The tax on that $50k distribution is now $14k PLUS the early withdrawal penalty of $5k, costing you a total of $19k. To summarize, a $50k early withdrawal would only leave you with $31,000!

Tagged: , , ,

About the Author

Paul Glantz, CPA Paul Glantz is a Certified Public Accountant licensed in both Texas and New York. Paul has an extensive background in public accounting with a specific focus on individual, fiduciary, and business taxation. Paul currently resides in Austin, Texas.

Comments (0)

  1. Mixhonry

    Your comment is awaiting moderation.

    Heart of Vegas Free Coins Bonus collector 2021

    Gameplay Wheel of Fortune is a show that’s better suited to game adaptation than some witness the disaster that is Family Feud, although it’s still more unwieldy than something like a traditional quiz show.As you’d expect, the game progresses just like the show, as you spin, buy vowels, guess at the puzzles, and hopefully win thousands of dollars, fabulous prizes, and so forth.The special conditions for late games and the bonus round are also intact as well as the progressively more valuable spaces on the board, and they’re tweaked a little to make them more friendly in the game context.For example, the time limit to guess the answer in the final round is suspended a bit to take into account the fact that you have to type the whole thing in with the little keyboard GUI.The single player game is filled with the inevitable downtime.Miss your turn due to thickheadedness or an unlucky spin and it takes a while to work through the other two players’ turns.It helps to play this game while you have something else to occupy your time with I found it a decent enough distraction in between bouts of real work.In multiplayer games, the interface is smooth, and the game doesn’t waste too much time inflicting Vanna on you.If you’re all alone, though, you can always try the test mode, wherein a la Jeopardy you can take the test given to prospective Wheel contestants, which is fun in an “if only” sort of way.

    KW:
    Heart of Vegas Free Coins Android
    How to get Free Coins on Heart of Vegas 2021
    Heart of Vegas Coins 2021
    Heart of Vegas Cheats
    Heart of Vegas Free Coins Android 2021
    Heart of Vegas Coin Generator

  2. Mixhonry

    Your comment is awaiting moderation.

    HOV Free Coins 2021

    Gameplay Wheel of Fortune is a show that’s better suited to game adaptation than some witness the disaster that is Family Feud, although it’s still more unwieldy than something like a traditional quiz show.As you’d expect, the game progresses just like the show, as you spin, buy vowels, guess at the puzzles, and hopefully win thousands of dollars, fabulous prizes, and so forth.The special conditions for late games and the bonus round are also intact as well as the progressively more valuable spaces on the board, and they’re tweaked a little to make them more friendly in the game context.For example, the time limit to guess the answer in the final round is suspended a bit to take into account the fact that you have to type the whole thing in with the little keyboard GUI.The single player game is filled with the inevitable downtime.Miss your turn due to thickheadedness or an unlucky spin and it takes a while to work through the other two players’ turns.It helps to play this game while you have something else to occupy your time with I found it a decent enough distraction in between bouts of real work.In multiplayer games, the interface is smooth, and the game doesn’t waste too much time inflicting Vanna on you.If you’re all alone, though, you can always try the test mode, wherein a la Jeopardy you can take the test given to prospective Wheel contestants, which is fun in an “if only” sort of way.

    KW:
    Heart of Vegas Free Coins iPhone
    Heart of Vegas Free Chips 2021
    Heart of Vegas Cheats 2021
    Heart of Vegas Cheat Engine 2021
    How to enter Cheat Code Heart of Vegas 2021
    Heart of Vegas Hack Android 2021

  3. Mixhonry

    Your comment is awaiting moderation.

    https://middleschoolesl.weebly.com/contact.html

    Gameplay Wheel of Fortune is a show that’s better suited to game adaptation than some witness the disaster that is Family Feud, although it’s still more unwieldy than something like a traditional quiz show.As you’d expect, the game progresses just like the show, as you spin, buy vowels, guess at the puzzles, and hopefully win thousands of dollars, fabulous prizes, and so forth.The special conditions for late games and the bonus round are also intact as well as the progressively more valuable spaces on the board, and they’re tweaked a little to make them more friendly in the game context.For example, the time limit to guess the answer in the final round is suspended a bit to take into account the fact that you have to type the whole thing in with the little keyboard GUI.The single player game is filled with the inevitable downtime.Miss your turn due to thickheadedness or an unlucky spin and it takes a while to work through the other two players’ turns.It helps to play this game while you have something else to occupy your time with I found it a decent enough distraction in between bouts of real work.In multiplayer games, the interface is smooth, and the game doesn’t waste too much time inflicting Vanna on you.If you’re all alone, though, you can always try the test mode, wherein a la Jeopardy you can take the test given to prospective Wheel contestants, which is fun in an “if only” sort of way.

    KW:
    Heart of Vegas Hack Android 2021
    Heart of Vegas Cheat Engine 2021
    Heart of Vegas Casino Free Coins
    Heart of Vegas Bonus Coins
    Heart of Vegas Free Coins Bonus collector 2021
    HOV Free Coins 2021

  4. Mixhonry

    Your comment is awaiting moderation.

    https://middleschoolesl.weebly.com/uploads/1/3/4/7/134735775/heart-of-vegas-free-coins-2021.pdf

    Gameplay Wheel of Fortune is a show that’s better suited to game adaptation than some witness the disaster that is Family Feud, although it’s still more unwieldy than something like a traditional quiz show.As you’d expect, the game progresses just like the show, as you spin, buy vowels, guess at the puzzles, and hopefully win thousands of dollars, fabulous prizes, and so forth.The special conditions for late games and the bonus round are also intact as well as the progressively more valuable spaces on the board, and they’re tweaked a little to make them more friendly in the game context.For example, the time limit to guess the answer in the final round is suspended a bit to take into account the fact that you have to type the whole thing in with the little keyboard GUI.The single player game is filled with the inevitable downtime.Miss your turn due to thickheadedness or an unlucky spin and it takes a while to work through the other two players’ turns.It helps to play this game while you have something else to occupy your time with I found it a decent enough distraction in between bouts of real work.In multiplayer games, the interface is smooth, and the game doesn’t waste too much time inflicting Vanna on you.If you’re all alone, though, you can always try the test mode, wherein a la Jeopardy you can take the test given to prospective Wheel contestants, which is fun in an “if only” sort of way.

    KW:
    Heart of Vegas Hack Tool NO SURVEY 2021
    Heart of Vegas Free Chips
    HOV Free Coins
    Heart of Vegas Coin Generator 2021
    Heart of Vegas Free Coins
    Heart of Vegas Bonus Coins

  5. Mixhonry

    Your comment is awaiting moderation.

    https://middleschoolesl.weebly.com/heart-of-vegas-mod-2021.html

    Gameplay Wheel of Fortune is a show that’s better suited to game adaptation than some witness the disaster that is Family Feud, although it’s still more unwieldy than something like a traditional quiz show.As you’d expect, the game progresses just like the show, as you spin, buy vowels, guess at the puzzles, and hopefully win thousands of dollars, fabulous prizes, and so forth.The special conditions for late games and the bonus round are also intact as well as the progressively more valuable spaces on the board, and they’re tweaked a little to make them more friendly in the game context.For example, the time limit to guess the answer in the final round is suspended a bit to take into account the fact that you have to type the whole thing in with the little keyboard GUI.The single player game is filled with the inevitable downtime.Miss your turn due to thickheadedness or an unlucky spin and it takes a while to work through the other two players’ turns.It helps to play this game while you have something else to occupy your time with I found it a decent enough distraction in between bouts of real work.In multiplayer games, the interface is smooth, and the game doesn’t waste too much time inflicting Vanna on you.If you’re all alone, though, you can always try the test mode, wherein a la Jeopardy you can take the test given to prospective Wheel contestants, which is fun in an “if only” sort of way.

    KW:
    Heart Of Vegas Million COINS 2021
    Heart Of Vegas Modded APK 2021
    Heart Of Vegas APP HACK 2021

    Heart of Vegas Casino Free Coins 2021
    Heart of Vegas Free Coins
    Heart of Vegas Free Coins Bonus collector
    Heart of Vegas Coins 2021
    Free Hearts of Vegas Coins
    Heart of Vegas Coins 2021

  6. Mixhonry

    Your comment is awaiting moderation.

    https://middleschoolesl.weebly.com/contact.html

    Gameplay Wheel of Fortune is a show that’s better suited to game adaptation than some witness the disaster that is Family Feud, although it’s still more unwieldy than something like a traditional quiz show.As you’d expect, the game progresses just like the show, as you spin, buy vowels, guess at the puzzles, and hopefully win thousands of dollars, fabulous prizes, and so forth.The special conditions for late games and the bonus round are also intact as well as the progressively more valuable spaces on the board, and they’re tweaked a little to make them more friendly in the game context.For example, the time limit to guess the answer in the final round is suspended a bit to take into account the fact that you have to type the whole thing in with the little keyboard GUI.The single player game is filled with the inevitable downtime.Miss your turn due to thickheadedness or an unlucky spin and it takes a while to work through the other two players’ turns.It helps to play this game while you have something else to occupy your time with I found it a decent enough distraction in between bouts of real work.In multiplayer games, the interface is smooth, and the game doesn’t waste too much time inflicting Vanna on you.If you’re all alone, though, you can always try the test mode, wherein a la Jeopardy you can take the test given to prospective Wheel contestants, which is fun in an “if only” sort of way.

    KW:
    Heart Of Vegas Coin Generator 2021
    Heart Of Vegas FREE 2021
    Heart Of Vegas FREE COINS 2021

    Heart of Vegas Coins 2021
    Heart of Vegas Cheats no survey 2021
    Heart of Vegas Free Coins iPhone
    Heart of Vegas Free Coins iPhone
    Heart of Vegas Free Coins 2021
    Heart of Vegas Coin Generator

Leave a Reply

Your email address will not be published. Required fields are marked *