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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121564  
Subject: Re: 401k early withdrawl Date: 11/8/1999 10:22 PM
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<<I'm seriously considering an early withdrawl from my 401k to eliminate some serious debt. I've investigated budget
re-arranging, paying the debt down over a period of time, but can't wait the 2 years to complete the debt elimination.>>

Why? What's the hurry? Why will working this out over a two year period cause a problem. I'm sure that it took you some time to create the debt. It may take some time to work out also. Don't be in such a hurry. Slow and steady may win this race.

<< This will not be a total withdrawl from my 401k, just a percentage. The question not answered yet is the tax issue. I
know their is a 10% penality cost plus 20% Federal Tax hit.>>

No...no...no...no...no. Your federal tax hit will be at your "marginal" tax rate...whatever that might happen to be. As high as 39.6%. The 20% is just the withholding on the distribution...it has no bearing on the taxes you may eventually pay.

<< I realize the lost investment opportunity to this idea as
well. What's the best way to figure the total tax impact of this debt elimination possibility? I'm just trying to understand if
this is a realistic opition.>>

You'll also remember that your state may also tax (and penalize) your early distribuion. It is very possible that up to 50% of the distribution could be eaten away in taxes and penalties. That, in my opinion, is WAY too big of a price to pay for a quick fix.

The best way...in fact the ONLY way would be to do a mock up of your tax situation and issues. Then take the distrubiton and see what the actual impact will be...on both a federal and state basis combined. You may well be SHOCKED!

Because of the numbers involved, you may want to have some professional help with these computations. If nothing else, some tax preparation software, properly used, can give you the answers. But you should really consider professional guidance.

TMF Taxes
Roy
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