Calculating 401k Early Withdrawal Penalties
An early withdraw from your 401k plan is any withdraw that you make before the age of 59½ years of age. The penalties you will have to pay often depend on the specifications of your company’s 401k plan, but there are some common penalties that apply in most cases.
Calculating 401K early withdrawal penalties involves looking at several different costs that you may incur for taking your money out before it is time.
If you plan to withdraw money early, here are the penalties you will need to take into consideration:
- Federal Taxes
- State Taxes
- Additional Tax Penalties
Federal Taxes
The first penalty you will be assessed is federal tax.
- When you withdraw money early from your 401k, you will have to pay the federal taxes due on this money as if it were a part of your regular income.
- The amount of federal tax that you will be assessed varies depending on the amount of money you are withdrawing from your account.
- The federal tax rate you will be assessed on the amount you withdraw varies from person to person based on income.
To calculate the federal taxes you will owe for taking money out of your 401K early, you first need to determine your personal federal income tax rate. You will then need to apply this rate to the amount that you are withdrawing. For instance, if your federal income tax rate is 28 percent and you plan to withdraw $10,000 from your 401k plan early, you will have to pay $2,800 in taxes.
You may argue that when you take your money out of your 401K at retirement that you'd have to pay taxes too. However, in many cases, people's income (and thus, their tax bracket) falls when they enter retirement, so there is a chance the taxes on the 401k withdrawal would have been less if you'd waited to withdraw the money until you were at least 59½.
State Taxes
The second penalty you will have to consider is the state tax due on this early withdrawal.
- The money you withdraw will be considered a part of your income and is thus taxable as such.
- Like your federal tax rate, your state tax rate will vary on an individual basis. Therefore, if you withdraw $10,000 from your 401k early and have an individual tax rate of 8 percent, you will be required to pay a penalty of $800 for this withdraw.
Additional Tax Penalties
In addition to the taxes on your early withdrawal, you will also be required to pay a general tax penalty on the monies that you withdraw early from your 401k account. This is above and beyond the taxes you will be required to pay at the state and federal levels.
- The penalty is an amount that the IRS requires the company providing your 401k to assess you if you decide to withdraw funds early from your account.
- This is normally assessed at a rate of 10 percent of the taxable amount you took out. Therefore, if we continue to use the $10,000 as an example, you will owe a penalty of $1,000 in early withdrawal fees.
So, now you know the penalties to include when calculating 401K early withdrawal penalties. This will help you make a more informed decision about whether or not you want to make an early withdrawal.