You generally should avoid cashing 401k fund if you are below 59 1/2.
Funds in 401k are protected from creditors and should not be considered for bankruptcy.
You may take a distribution from 401k plan if you are in hardship situation - these are your funds and generally you may use them.
Usually the distribution is a subject of 20% mandatory withholding, however your tax liability will be determined at the tax time - the amount of distribution will be added to your other income and your tax liability will be calculated based on your total income - that is why you need to plan distribution wisely - to avoid higher tax bracket.
In additional if you are below 59 1/2 - the distribution might be a subject of 10% early distribution penalty.
Also depending on the state where you live - the distribution might be a subject of a state income tax.
Let me know if you need any help.
I'm not sure you got to see the orig. question with all the facts?
I do not see if you had any other question...
Please either post your original question or a link to the page with your question.
I will help you as much as I could.
MY HUSBAND & I WILL SOON BE UNEMPLOYED & WILL HAVE MADE APPROX. $55,000 YTD JOINT GROSS INCOME. WE ARE IN THE FIRST MONTHS OF A CHPT.13 BANKRUPTCY (NOT SIGNED OFF ON YET) BUT ARE MAKING TRUSTEE PAYMENTS. WE HAVE APPROX. $107,000 IN OUR COMBINED 401K PLANS & THE BANKRUPTCY IS ON $100,000 IN DEBT.WE WERE THINKING OF WORKING OUT SETTLEMENTS WITH CREDITORS THRU OUR LAWYER & PAYING OFF OUR DEBT WITH THE 401K AND SKIPPING THE BANKRUPTCY. OTHERWISE IT LOOKS LIKE $1000 A MONTH PAYMENTS FOR THE NEXT 5 YRS. WE ARE IN OUR EARLY 40'S & WILL BE UNEMPLOYED FOR A FEW MONTHS. WE HAD PLANNED ON SETTING THE 10% ASIDE AND OUR COMPANY WILL WITHHOLD 20% UP FRONT. WHAT ADDITIONAL TAX PROBLEMS WILL WE NEED TO LOOK FOR AND DOES THIS SEEM LIKE A GOOD PLAN. WITH OUR DEBT TAKEN CARE OF WE WILL ONLY HAVE A HOUSE PAYMENT AND OTHER HOUSEHOLD EXPENSES & CAN AGGRESSIVELY RESTART SAVING FOR RETIREMENT.
Assuming you are using standard deduction - your taxable income for 2009 will be $55,000 - $11,400 - $7300(personal exemption) = $36,300
Your tax liability is estimated as $4,610
Additional $107,000 distribution will result your taxable income to be $133,300
as a result - you will be pushed into 25% tax bracket (instead of 15% that you currently are) and your tax liability would be estimated as $25,700 plus $10,700 penalty - total $36,400 - or approximately 1/3 of your savings.
If the administator will withhold 20% or $21,400 - you would need to put aside an additional $15,000
In your situation to keep yourself in 15% tax bracket - your taxable income should be below $67,900. So if your distribution in 2009 will be not more than $67,900 - $36,300 = $31,600.
You may plan another distribution in 2010. That will save you 10% on taxes (15% instead of 25%)
If there is a risk that you will file chapter 7 - funds in 401k plan are protected - and it is not advisable to use them now.
If there is no risk of chapter 7 - you may use funds from 401k, but try to avoid large distributions in any single year.
Tax Preparer
Personal Investment, Tax Preparation