Hello! I am a CPA here to assist you with your tax questions. My goal is to provide you with excellent service today.
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If you are under 59.5, you will have a 10% across the board tax on your 401(k) distribution.
It's actually a penalty, but you pay it on your tax return
Hi Megan, I am well, thank you!
I'll need to know how much you're taking out, and what your other income is
and your tax filing status and any dependents you have
Outside of the 10% across the board penalty, would there be a Federal tax and a state tax on the cashout as well?
Yes, from the traditional most definitely and from the Roth you would have tax on the earnings portion
no dependents, I am single so I only claim myself
And how much are you looking to cash out? And what is your other income?
Currently I am at $51,000 income level at my new job. Total balance from my 401k (traditional and roth included as well as the employer match is $17,938.66)
For simplicity sake, let's calculate tax on the entire withdrawal. Keep in mind that your Roth contributions will not be taxed as income, only the earnings from that and you won't know the breakdown until you get your 1099-R
I feel because I am still young and on the Federal government retirement system, this would not be a huge hit over my lifetime. My thoughts at least, I do not know what the math would be behind any cash out of my old policy
I personally wouldn't cash it out because it is very expensive.
ok, I am listening
You lose a lot of money to taxes and penalties
ok. what would the math look like for a total withdrawal?
You are in the 25% tax bracket, so you would owe 10% plus an additional 25%
And that's just federal.
That's $4,500 plus $1,800
another 5.75% based on VA taxes then I am guessing as well on top of that
Yes, that is correct.
That's another 1,035
so that's $7,335 of taxes and penalties
or roughly 40%
If I rolled over to my federal govt, TSP, is there any way to know potential total lost for future earnings?
If you roll it over, you won't lose anything.
Or is that too difficult to determine because of fluctuating percentage changes?
Yes, that would be too difficult to determine
Ok. If it is cashed out are the taxes applied immediately, or does that get completed during tax season in the spring?
The plan administrator typically does a withholding.
I'm not 100% sure on state, but I know they do federal
ok. Well, I think that pretty much answers all of my questions.
Thank you for the help and the tax lesson!
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