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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28084
Experience:  Taxes, Immigration, Labor Relations
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I am thinking of leaving my company. I have a 401k retirement

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I am thinking of leaving my company. I have a 401k retirement plan with them. My 401k consists of a ~29k pretax loan amount owed back (original loan was $35k taken in 2012), ~9k ROTH amount, and a ~$19k pretax amount. I am in a 25% tax bracket. If I have this right, cashing out my 401k in full would result in a taxable event consisting of the ~29k pretax loan amount, the ~$19k pretax amount and whatever interest was gained on the ~$9k ROTH amount being added to my 2013 adjusted gross income at a tax rate of 25% plus a 10% penalty for early withdrawal. To put numbers to this: Let's say there was no interest gained on the ROTH amount so then I would owe (~$29k pretax loan + ~$19k pretax amount) * 35% = ~$17k in tax on the combined pretax amount plus the loan distribution. Therefore, if the company were to cash me out and send me a check it would be ~19k pretax + ~$9k ROTH = ~$28k total but to make sure I withhold enough in federal taxes, the amount to withhold should be (~$29k pretax loan + ~$19k pretax amount) * 35% = ~$17k. Finally, I'd have (~$29k pretax loan + ~$19k pretax amount) added to my 2013 adjusted gross income and corresponding ~$17k withheld for 2013 taxes and a final cash out check to me of ~$11k. Does all that sound correct?

Lev :

Hi and welcome to Just Answer!
If you leave your employer - you will be offered to pay the loan back in full. Normally - you would be given three months. If not paid - the outstanding loan amount - in your case $29k - will be treated as a nonperiodic distribution - subject of income tax and 10% penalty if you are below 59 1/2 and none of exemptions may be used in your situation. So your assumptions are correct.
If you will cash out the 401k in full - the total amount of pre-tax contributions, employer's contributions and earnings will be taxable.
Also - additional taxable income might push you into higher tax brackets - so you might want to estimate your total income.

Lev :

In additional - there will be state income taxes.

Lev :

The distribution from the designated Roth account might be subject of the additional 10% tax on early distributions - if such distribution is taken within the 5-year period.

JACUSTOMER-dz4zzgx3- :

I already paid state taxes. Why would I have to pay them twice?

JACUSTOMER-dz4zzgx3- :

or do you mean just on the employer contributions?

Lev :

You paid state taxes on your wages. You will not pay state taxes again on that.

Lev :

However - you did not pay state taxes on employer's contributions and earnings in 401k. Upon distribution - that amount will be taxable for state tax purposes.

JACUSTOMER-dz4zzgx3- :

OK. I think I've got it. Thanks.

Lev :

That will not be large amount - but you might want to keep that in mind - so you will be aware at the tax time.

JACUSTOMER-dz4zzgx3- :

OK

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