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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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I have a 401K account from an old employer containing approximately

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I have a 401K account from an old employer containing approximately $50,000. I was working in the State of Texas (no State Tax) when I worked for this company but I now live in the state of Colorado (4.63% State Tax). Since I no longer work for this company I was given the option of withdrawing my funds without a penalty. I am considering withdrawing these funds to pay off some personal debt and I am interested in the Tax penalty for doing so (I am younger than 59 1/2). I believe there is a 29% Federal Income Tax, however I am not sure if I will have to pay the Colorado State Income Tax. I also believe there is an additional 10% Federal Tax for early withdrawing from a 401K. Are there any other Tax penalties that I would have to pay? What is the Total amount I would pay in Taxes.

LEV :

Hi and welcome to Just Answer!
If at the time of distribution - you are a resident of Colorado - the distribution will be subject of both - federal and state income taxes.
Because you are below 59 1/2 - the distribution is subject of early distribution penalty - that is on the federal level. There is no early distribution penalty on the state level in Colorado.
Please be aware - there are some exemptions from penalty - and you might want to verify if any may be used in your situation.

LEV :

The following five exceptions apply to distributions from any qualified retirement plan:



  1. Distributions made to your beneficiary or estate on or after your death.

  2. Distributions made because you are totally and permanently disabled.

  3. Distributions made as part of a series of substantially equal periodic payments over the life expectancy of the owner or life expectancies of the owner and the beneficiary. If these distributions are from a qualified plan other than an IRA, you must separate from service with this employer before the payments begin for this exception to apply.

  4. Distributions that are equal to or less than your deductible medical expenses, that is, the amount of your medical expenses that is more than 7.5% of your adjusted gross income. You do not have to itemize to meet this exception.

  5. Distributions made due to an IRS levy of the plan.


The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:



  1. Distributions made to you after you separated from service with your employer, if the separation occurred in or after the year you reached age 55,

  2. Distributions made to an alternate payee under a qualified domestic relations order, and

  3. Distributions of dividends from employee stock ownership plans.

LEV :

In additional - you will continue to defer the tax liability if funds are rolled over to another qualified tax deferred account.

LEV :

Your income tax liability will be based on your total income, filing status, deductions, etc - you may find tax rate schedule on the last page in this publication - www.irs.gov/pub/irs-pdf/i1040tt.pdf‎

Customer:

What sort of exemptions are there? I will be using the funds for and Auto Loan, Personal Loans, Credit Card Debt, and a Education Loan.

Customer:

So I will Pay a total of 43.63% on my withdrawal.


What sort of exemptions are there? I will be using the funds for and Auto Loan, Personal Loans, Credit Card Debt, and a Education Loan.

LEV :

None of listed may be used as an exemption... sorry.
I listed all possible exemptions above. Are you able to review?

Customer:

So I will Pay a total of 44.63% on the withdrawal. What sort of exemptions are there? I will be using the funds for and Auto Loan, Personal Loans, Credit Card Debt, and an Education Loan.

LEV :

What sort of exemptions are there?
I will post a list of exemptions again - please verify if any may be used.
The following five exceptions apply to distributions from any qualified retirement plan:
Distributions made to your beneficiary or estate on or after your death.
Distributions made because you are totally and permanently disabled.
Distributions made as part of a series of substantially equal periodic payments over the life expectancy of the owner or life expectancies of the owner and the beneficiary. If these distributions are from a qualified plan other than an IRA, you must separate from service with this employer before the payments begin for this exception to apply.
Distributions that are equal to or less than your deductible medical expenses, that is, the amount of your medical expenses that is more than 7.5% of your adjusted gross income. You do not have to itemize to meet this exception.
Distributions made due to an IRS levy of the plan.
The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:
Distributions made to you after you separated from service with your employer, if the separation occurred in or after the year you reached age 55,
Distributions made to an alternate payee under a qualified domestic relations order, and
Distributions of dividends from employee stock ownership plans.

LEV :

I will be using the funds for and Auto Loan, Personal Loans, Credit Card Debt, and an Education Loan.
None of these may be used as an exemption from penalty... sorry.

LEV :

The Colorado income tax rate is a flat 4.63%.
Federal income tax liability will be based on your total income - tax rates are between 10% and 35%
Early distribution penalty (if you would not be able to use any exemption) is an additional 10%

Just in case you were not able to use the chat - I am switching to Q&A mode and porting the answer below.
Please feel free to communicate if you need any clarification or have other tax related issues.

What sort of exemptions are there?
I will post a list of exemptions again - please verify if any may be used.
The following five exceptions apply to distributions from any qualified retirement plan:
Distributions made to your beneficiary or estate on or after your death.
Distributions made because you are totally and permanently disabled.
Distributions made as part of a series of substantially equal periodic payments over the life expectancy of the owner or life expectancies of the owner and the beneficiary. If these distributions are from a qualified plan other than an IRA, you must separate from service with this employer before the payments begin for this exception to apply.
Distributions that are equal to or less than your deductible medical expenses, that is, the amount of your medical expenses that is more than 7.5% of your adjusted gross income. You do not have to itemize to meet this exception.
Distributions made due to an IRS levy of the plan.
The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:
Distributions made to you after you separated from service with your employer, if the separation occurred in or after the year you reached age 55,
Distributions made to an alternate payee under a qualified domestic relations order, and
Distributions of dividends from employee stock ownership plans.

I will be using the funds for and Auto Loan, Personal Loans, Credit Card Debt, and an Education Loan.
None of these may be used as an exemption from penalty... sorry.

The Colorado income tax rate is a flat 4.63%.
Federal income tax liability will be based on your total income - tax rates are between 10% and 35%
Early distribution penalty (if you would not be able to use any exemption) is an additional 10%

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