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401K Early Withdrawal Tax for 2009, 2010

A 401k is a plan sponsored by employers that is subject to the regulations of the IRS. It basically allows the employee to put away a certain portion of his or her earnings and to defer taxation on this income and its earnings until the time comes to withdraw this money for retirement. You as the employee are going to be responsible for the management of this arrangement.

So when you plan to an early 401K withdrawal, if you are under 59 and a half, then you will have to follow these rules:

• You could take a lump sum distribution which will be distributed by your employer minus a 20% withholding tax mandated by the IRS, and then the 10% early withdrawal penalty.
• If youre over 59 and a half but younger than 70 and a half:
• Take a lump sum distribution which will be written into a check by your employer minus a 20% withholding tax mandated by the IRS.
• The 20% that is withheld will be counted against your income tax payable or will be counted against any refund due for the tax year when you file your tax return.

If youre older than 70 and a half and plan to take a 401K Withdrawal early:

• Take a lump sum distribution which will be written into a check by your employer minus a 20% withholding tax mandated by the IRS.
• The 20% that is withheld will be counted against your income tax payable or will be counted against any refund due for the tax year when you file your tax return.
• You can do nothing as long as the amount is still over $5,000, but in this case youll be taxed 50% of the minimum distribution.
• If you do a 401k rollover into an IRA youll still be hit with the minimum distribution tax.

Thats basically it, but there are online tax services such as TurboTax Online that will help you with each step through the process of paying the taxes on your 401K withdrawal. They also have an assortment of tax calculators that will pinpoint whats possible for you in whatever unique tax situation you may be in.

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This entry was posted on Thursday, September 2nd, 2010 at 1:39 pm and is filed under General. The entry is tagged under You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.