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Taxes On 401k Withdrawals When You Cash Out Early
Taxes on 401k withdrawals when you cash out early can be a little confusing
, but once you understand how things work it can be easier to manage. Of course, the ideal situation is not to cash out early at all, as this will cost you a great amount of money (but now and in the future) but if you've already decided to do it knowing how to do it properly is key to not ending up in a sticky situation.When you cash out before you reach fifty nine years and six months old you have to pay a ten percent early penalty as well as state and federal taxes. The percentage the state will take varies from state to state, and the amount the federal government will take depends on your income level. The more money you make the higher percentage of your income you owe every year.
Typically to figure out the percentage you would owe you could check your records from the previous year, assuming you still make about the same amount of money you could assume that percentage would be how much you owe this year. The problem, however, is that the money you take from your retirement account will count as income for this year. This will most likely put you into a higher income bracket, and mean you owe a higher percentage to taxes.
When you make the withdrawal your employer will automatically hold twenty percent of what you cash out to help cover what you will owe. However, with the ten percent early withdrawal penalty, state, and federal, taxes you will likely owe more than twenty percent, easily somewhere from thirty to forty percent. At the end of the tax year you will responsible for paying this when you file your taxes, so you will want to put aside some money for this when you make the withdrawal.
Taxes on 401k withdrawals when you cash out early can be a devastating blow financially, which is why it's so important to know about it ahead of time.
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