Question

Cashing out on 401K & Pension Plan in CA state. Would like to know what the penalty is total & tax owe.?

I have a total of 67K combined in 401K and pension plan. (going to pay off visa debt) and im cashing it out. I live in CA and would like to know the exact cash I would get after all the state/ federal/ penalty taxes.
I'd rather pay all my debt and start over again. I have a total of 55K in visa debt and want to pay as much as i can off . Im only 25 so i can start retirement savings all over again.
so how much would i know what income ta bracket im in? if its going to increase from 15% or 25% or 33%. I make 70K in gross this year, if i take 67K out that would make 137K. should i only take half out in 2007 and the other half in 2008. If i take 27K from 401K that would mean I made only 97K this year. what bracket would that be and what is the total tax i would have to pay?

6 years ago - 5 answers

Best Answer

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One would be better off filing for Chapter 13 bankruptcy rather than liquidating retirement assets for paying credit card debt.

{EDIT} If one makes $70K in regular income plus another $67K in the 401k distribution and is single, one'll wind up in the 33% tax bracket rather than 28%. A bankruptcy would be better in the long run if one works in sensitive field like defense where blackmailers and extorters will not hold the debt over one's head.

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6 years ago

Other Answers

DON'T DO IT! Unless you are of retirement age.

Just federal would result in an instant 10% penalty, plus paying normal income tax on that money on top of what you've earned this year, so it will be taxed much higher than your normal income tax. I don't know if the State of California has a penalty, but it too will tax it like normal income.

As a guess, I'd say you'll be paying about 40% of that money in taxes and penalties. That is a heck of a lot worse than any credit card interest rate you may be paying.

If you need help figuring out how to handle your credit card debt, please go to a reputable credit counselor. I've linked below to a reputable organization that can give you a referral.

UPDATE - Bostonian gave you a great answer! I defer to him. Contribute only enough to the 401k to get any matching funds offered. Use the extra money every month to pay down credit card debt.

UPDATE AGAIN - ARGH! Why are you so insistent on flushing away tens of thousands of dollars on unnecessary taxes? At $70k per year, you are going to be in the upper brackets unless you have a lot of deductions and dependents. Even splitting it into two years, you might very easily be paying 28% federal tax on most of that money, plus the 10% penalty, plus CA state tax. I've linked to the IRS tax bracket info below. No matter how you slice and dice it, you'll be paying at least $28k in needless taxes, whether in one year or two, and still owe $16k in Credit card debt after all is said and done.

You say you can start fresh and being saving for retirement again. That's true, but it would be far more advantageous to use that money you'd be starting your retirement savings again with to just pay down the debt.

Bostonian gave you a great idea! Stop contributing to the retirement plan and use that extra money to pay down debt. So what if it takes you like 5 years. You'll save a lot of dough over the long run.

Source(s)

by Laissez-Faire Guy - 6 years ago

It's not possible to say what the exact tax bill will be without knowing your complete financial and tax situation. And there are many issues you need to think through first BEFORE you go this route.

First off, if you are still working for the sponsoring employer you'll have to quit your job to get the funds. You cannot take an in-service distribution from a 401(k) to pay off credit card debt.

Next, if you do quit your job (or this is from a former job) the fund administrator will withhold 20% for Federal income tax and 8% for CA income tax. There is no way around that. That's $18,760 which leaves you with a net distribution of $48,240 or about $6,760 shy of your CC debt. Maybe that seems OK, but it gets worse.

For sake of argument let's assume your tax bracket is 25% and you're under age 59 1/2. You'll also be hit with a 10% penalty tax. That brings your total tax liability for the payout to 43% (25% FIT, 10% penalty & 8% CA IT) or $28,810. But wait! Only $18,760 was withheld from the distribution. This will leave you about $10,000 short when you file your tax returns next year. What are you going to do, put that on your credit cards?

In the end you will have thrown away $67,000 of your retirement money to pay off about $39,000 of your debt and you'll STILL be at least $16,000 in debt.

Since you have that much in retirement funds at your age, you're obviously making significant contributions to your plan. I'd suggest that you leave the retirement money alone and temporarily stop contributing to the plan. Use those funds to pay down the CC debt. Cut other expenses to the bone if needed and slash and burn on the debt until it's cleared. Go through one of the debt conselling services and see if you can get the interest rates cut or dropped entirely. You probably have enough cash flow to clear this mess in 2 or 3 years and in the meantime your retirement funds will have continued to grow.

Dumping the retirement fund now -- especially as it's not large enough to clear all of your debt and pay all of the taxes -- will leave you wishing you hadn't in 40 years when you retire. The future value of that $67,000 could easily exceed $1,000,000 or more depending upon how your investments perform over 40 years.

At least now you're armed with the basic information that you'll need to make a (hopefully) intelligent decision.

by bostonianinmo - 6 years ago

You would owe income tax at your highest marginal rate plus an extra 10% of the withdrawal to IRS and 2.5% to Franchise Tax Board

by wartz - 6 years ago

Withdrawals before the age of 59½ is "Early withdrawal." “Early Withdrawal is subject to 10% penalty. Also the withdrawal will be taxed at your normal income tax rate.

It may not be good decision to withdraw (if you are allowed) all the 401K money in one go. It will be taxed at your top income bracket. It may jump from 15% bracket to 25% bracket or from 25% to 33%. Withdraw some amount in 2007 and some in 2008.

Appears like you are investing too much in your pension plan. Reduce or stop this investment till the situation improves.

by MukatA - 6 years ago