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Financial Planning / Tax Strategies


Subject:  Re: 401k early withdrawl Date:  11/6/1999  2:39 AM
Author:  ptheland Number:  20590 of 127542

Withholding rate on distributions (even early ones subject to the 10% penalty) is 20% unless you designate another higher rate.

Correct - but this is only what is withheld when you take the distribution, not the total taxes owed.

In California (where I live) I advise clients that taxes on an early withdrawl will eat up half of what you take out. 31% to Federal Tax, 10% to Federal penalty, 2.5% to the state penaly, and 8% to state income taxes. (There is a small reduction in the effective Federal rate for the increased state tax itemized deduction).

Another possibility for you might be to borrow against your 401k plan. There is a BIG WARNING here though. This will only be viable if you meet all of the following:
1) Are happy with your job and won't go looking for another before the loan is repaid.
2) Are secure in the job and won't be fired/laid-off/downsized/right-sized before the loan is repaid.
3) Have a budget and the discipline to follow it so you don't run the credit cards up again. (Side note -- if you haven't been there already, check out the Credit Card and Living Below Your Means boards for help with this.)

The interest rate on a 401k loan will probably be around 10% right now, so it could be better than your credit cards. Payments will be withheld from your paychecks, so you don't have to worry about spending the money on something else. The big downside is that if you leave your job, for whatever reason, you must repay the outstanding balance on the loan. If you don't, it will be treated as an early distribution with all the taxes noted above.

Good luck with your plans to get out of debt.

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