azmike74

When money is withdrawn early from a 401K, are the taxes paid at the time of withdrawal, or can they be deferred?
And if they are taken at the time of withdrawal, is there a chance not enough was withheld and more taxes would have to be paid later?

Thank you all for any info you can give, my father is losing his memory, getting a divorce, and his soon to be ex is trying to take $14K to use to "pay taxes" on his 401K withdrawal and I don't know if this is a legit claim or not.

Linderbee

My experience with withdrawing money from my 401k is that almost a full 1/3 of what I took out went to taxes right off the bat--there was no option offered to defer paying that. THEN I had to also claim it on my taxes that year, and it was entered separately from my regular income & was taxed again. Really pissed me off.

I'm sorry you're going through this...best of luck to you & your dad. I hope you are able to get it all worked out.

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Russ Smith

AS I understand it the immediate hit is 10% penalty for early withdrawal. Then at the end of the year you get taxed on the full amount as if it was regular income.

So you wind up losing close to 40%.

If someone HAS to do it the better way to do it is borrow against the 401k but it doesn't sound like that's an option here?

Apparently in some states the 401K administrator will withold 20% upfront, 10% for the penalty, and another 10% in anticipated year end taxes. In that scenario you will almost always end up paying more again at the end in taxes since your tax rate will be higher than 10%.

Edit, I googled it the 20% is separate from the 10%. 10% is penalty, 20 is anticipated taxes so it's roughly 30% as Linderbee said. The problem is most of us are in a higher than 20% tax bracket
so even after all that end of year you will be underwitheld and owe more.

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MigratingOsprey

go talk to a lawyer - would be a wise investment to help your dad through this time - will cost a bit more, but you'll get rock solid advice and strategy that could save you in the long run

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azmike74

Thanks for the advice, everyone. I do appreciate it. I helped him open a new bank account without his estranged wife on the account, and got power of attorney papers for finance and health.

I think the lawyer advice is right on, I really don't want to get in the middle of their divorce, but someone has to look out for my dad.