401K Early Withdrawal Tax for 2011, 2012

You probably already know what a 401k plan is, but if not, here is a quick summary. Then I will explain the 401k early withdrawal tax.

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.

Here is the deal if you plan to take an early 401k tax withdrawal. If you are under 59 ½, 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 you’re over 59 ½ but younger than 70 ½:
• 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 you’re older than 70 ½:

• 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 you’ll be taxed 50% of the minimum distribution.
• If you do a 401k rollover into an IRA you’ll still be hit with the minimum distribution tax.

That’s 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 early tax withdraw. They also have an assortment of tax calculators that will pinpoint what’s possible for you in whatever unique tax situation you may be in.