I am in a situation where I need to withdraw from my 401K plan to cover a payment owed back to my former employer. Basically, I left the company after I finished my MBA which they paid for. I now owe them 14k for it. Its too late to get a student loan for it. MY tax question is, if I take out 18k which would come out to 14k after the 20% for early withdraw. Come tax season next year do I pay the 10% fee and taxable income based on the 18k or the amount I actually received? If have them take the additional 10% when I withdraw it would it cover that cost? I have also seen that the 10% can be waived for educational cost purposes. The only problem is my former company paid for it. Any advise would be appreciated.
Wed Feb 18, 2015 4:57 pm
oldguy Senior Member
Cash: $ 714.80
Joined: 21 May 2006
quote: if I take out 18k which would come out to 14k after the 20% for early withdraw. Come tax season next year do I pay the 10% fee
doz, the 20% is just a withholding rate that most companies use, it doesn't represent your income tax bill. If you have other income, and add the 401k withdrawal to it, you'll probably pay about 38% (28% fed tax and 10% penalty). And if your state has income tax, that will be added - in my state it's about 5%. At any rate the cut is likely to be in the 42% range (you net only about 58%). So you need to take about $24,000.
But I would avoid doing that - instead, borrow the $14k elsewhere and pay the loan interest, it's sure to be less than the $10,000 hit on $24,000.
Wed Feb 18, 2015 6:01 pm
Wino Senior Member
Cash: $ 113.80
Joined: 03 Aug 2012
You will pay the taxes and penalties on the entire $18K. That's $1.8K for the withdrawal, plus opportunity costs.
Why not get a $14K loan from a bank or credit union instead? Even at 10% per year, you'd end up paying less than $1600 in interest over a 2 year repayment period. That's still less than the $1800 penalty, and it doesn't affect your income. You should be able to afford the $650 monthly payments with an MBA.
And assuming you're in the 25% tax bracket, you'd also be paying $4500 in taxes on the $18K. Your total expenses are well over $6K for the $14K you need. That's about a 40% hit, and you'd have to come up with at least $2K from out of your pocket come tax time.
Retirement funds are for retirement. Don't touch them unless you have absolutely no choice.