How is my 401K Early Withdrawl Tax Rate calculated if I am now unemployed?

Question

I quit my job in the middle January of this year (2008). I have had 1 year to rollover my 401K to another 401K or IRA (I still have until Jan. 09). I have started my own business and was interested to find out how my tax rate for an early withdrawl would be. I already know about the 10% penalty. If my business posts a loss (or breaks even) what tax rate do I fall under? Do I just pay the 10% penalty or do I have to pay according to my 2007 tax return tax rate?

Answer 1

It will count as current period income.  The tax rate will depend on what you have earned already.

By the way, I don't believe you have a full year for the rollover, but only 90 days.

Answer 2

You'll incure a 10% penalty tax + 10% income tax so in essence you end up paying up to 20% of your 401K total.  When you do your 1040A you'll have to report it on line 16 I believe and then again on line one of the last lines.  10% for each line.  get it into a high dividen IRA - I found a good one with Bank Of America.  

Best of luck!

Answer 3

The withdrawal is fully taxable.  If you have enough in losses to get your total income below the $0 tax point ($8,950 for a single taxpayer in 2008) then you'd owe no tax on the distribution.  That won't get you out of the 10% penalty tax though.

Bear in mind that 20% will be withheld for taxes from any distributions that you take.  Keep that in mind when figuring how much (if anything) you need to pay in estimated tax payments.

If you do do a rollover by the 401(k) deadline (be absolutely SURE how long you have -- each plan can make their own rules -- so that you don't get any surprises) make SURE that you do a DIRECT rollover from the 401(k) to the IRA without taking custody of the funds.  Open the IRA and give them the details on the 401(k) and let the custodians handle the rollover for you.  If you don't, you'll have to make up the 20% withholding from other funds and you'll only have 60 days to complete the rollover.  Miss that by 1 day and $1 and you'll have to pay the 10% penalty on the amount not rolled over.

Answer 4

If you actually received the money, you didn't have one year to roll it over, you had 60 days and that has long since expired.  If it's still in the fund and you have a year by plan rules to decide what to do with it, then you're OK for now.

If you actually did the withdrawal in 2008, then it's your 2008 rate that applies to the tax on the withdrawal.  The withdrawal is of course included with your other income when calculating the rate.  The 10% penalty is additional.

If it's still in the fund but you don't roll it over and get the money in 2009, then it's your 2009 rate that determines your tax on it.