401K question...

[markvg]

Originally Posted by pinkdaisy226

I think it barely puts me in the next tax bracket... but that being said, next year I plan on getting a teaching job that pays more (plenty of schools do) so in that case, I'd end up in the next bracket anyway. So then it doesn't matter, right?

Next year won't matter since you are doing the 401k thing this year.

To figure out what bracket you are in this year: add the $7000 to what you think your total income for this year is. That will tell you what bracket you will be in for this year's taxes (this will be for the forms you fill out next year).

 

[crazyforinfo]

Originally Posted by markvg

You can take a loan from your 401k (up to 50% of your vested amount) and pay it back without a tax penalty. The thing with this is you don't get the interest on the money because it is not there.

You can close the 401k and take a lump sum. You then have up to sixty days to get it back into another account like an IRA.

If you don't put the money into another retirement account you will have to pay taxes on the entire amount based on your tax bracket. You will also pay another 10% on top of that because of the early withdrawal.

I think the 20% that people are talking about is what the 401k plan will withhold in anticipation of your having to pay taxes. It is not like you will be taxed 20% but you are taxed on your tax bracket.

I went through this about 14 years ago and didn't have to 20% withheld, so I think that is something that you can waive.

Why wouldn't the 20% apply? You can ask them not to take it now but you still owe the IRS the 20% by next tax year. It can be waived but if you don't specify they automatically take it out.

*edit*
I found this from MSN Money

Do I have to pay taxes and penalty on a hardship withdrawal from my 401(k)?

Qualifying for a hardship withdrawal from your 401(k), doesn’t automatically exempt you from an early withdrawal penalty on the withdrawal. And you still have to pay income taxes on the money. By the time you pay federal and state income taxes, plus a 10% penalty, you may only get to keep 50% or so of the money you withdraw.

Make early withdrawals from your 401(k) only as a last resort. And be careful of the timing of the withdrawal. If, say, you will be in a lower tax bracket the following year, waiting a month or more can make a big difference in your tax bill.

 

[markvg]

Originally Posted by crazyforinfo

Why wouldn't the 20% apply? You can ask them not to take it now but you still owe the IRS the 20% by next tax year. It can be waived but if you don't specify they automatically take it out.

[/i]

What I believe is the penalty is 10%. The 20% is to help you pay the tax. When I did it, I didn't have the 20% taken out. I got the lump sum but planned on moving the money into a qualified account within the 60 days. At that point, it was my money. If I didn't move it to a qualified account, I would have been responsible for all the taxes, plus the 10% penalty. If I had the 20% withheld and kept the money, I think you take the 20% off as taxes already paid. I didn't do it, so I'm not sure.

 

[pinkdaisy226]

Originally Posted by markvg

Next year won't matter since you are doing the 401k thing this year.

To figure out what bracket you are in this year: add the $7000 to what you think your total income for this year is. That will tell you what bracket you will be in for this year's taxes (this will be for the forms you fill out next year).

I meant next school year. As in, August of this year.

And I'm not going to really add $7000 because that's not how much is in my 401k. Right now there's $2000 in my 401k, minus all the deductions, of course. So yes, that money would push me in the next bracket - but so would my next teaching job which would start in August.

 

[markvg]

Originally Posted by pinkdaisy226

I meant next school year. As in, August of this year.

And I'm not going to really add $7000 because that's not how much is in my 401k. Right now there's $2000 in my 401k, minus all the deductions, of course. So yes, that money would push me in the next bracket - but so would my next teaching job which would start in August.

Ok. Just remember, whatever money you take out of the 401k (and keep) this year is added income (like your new teaching job) for this year. When you do your taxes next year (for this year), it needs to be accounted for on the tax return, plus the 10% penalty.

The best thing to do, like others have said, is just move the money to an IRA and not worry about the tax stuff. If you need the money now, you will end up paying a ton of it back next year in taxes and the penalty. With the 401k, the taxes have not been taken out over how long you have had it. Those taxes will now be due.

 

[pinkdaisy226]

I guess I won't worry about it then. Thanks.

 

[markvg]

Originally Posted by pinkdaisy226

I guess I won't worry about it then. Thanks.

Good luck!