Tax Information: Cashing out a small 401(k) account.

[Principled Man]

My 27-year old niece switched jobs recently. She has a small 401(k) from her former employer - $10,000.00

 

Her bank and her former employer are telling her that if she cashes out the account, she will have to pay it back, as it will be deemed a loan (because of the COVID situation). I am skeptical about this advice, as the account is now closed. She has even received the paperwork for all her options - cash out, direct rollover into an IRA, the Roth IRA option, etc.

 

She's quite confused. She's considering cashing out because she has several debts to pay off, but she doesn't want to pay anything back. Every website I see says that the payback of withdrawals only apply to active accounts with current employers.

 

Does she have to pay it back? I don't think that she does.

[The Cat 3]

She does not have to pay the money back if she cashed out.

 

With the CARES Act, she should be able to liquidate the entire amount with incurring any penalties.

 

She would, of course, have to pay taxes on the entire amount.

 

The taxes can be taken out at point of liquidation.

Edited October 8, 2020 by The Cat 3

[HemiBeers]

I don't think she is required to pay it back if she's separated from the employer. But the penalty is pretty steep with 10% plus having the funds become federal and state taxable income. It would be a required payback if she was still employed and it was a loan.

 

Here's a calculator to figure out what the penalties would be.

 

https://www.wellsfargo.com/investing/retirement/tools/401k-early-withdrawal-calculator/#:~:text=Taking%20cash%20out%20of%20your%20401%28k%29%20plan%20before,of%20the%20cash%20withdrawal%20from%20your%20retirement%20plan.

Edited October 8, 2020 by HemiBeers

[Principled Man]

She does not have to pay the money back if she cashed out.

 

With the CARES Act, she should be able to liquidate the entire amount with incurring any penalties.

 

She would, of course, have to pay taxes on the entire amount.

 

The taxes can be taken out at point of liquidation.

 

I don't think she is required to pay it back if she's separated from the employer. But the penalty is pretty steep with 10% plus having the funds become federal and state taxable income. It would be a required payback if she was still employed and it was a loan.

 

Here's a calculator to figure out what the penalties would be.

 

https://www.wellsfar...etirement plan.

 

I told her that she should expect to lose about 40% to taxes and the penalty. No penalty will make her smile!

And the money won't push her to a higher tax bracket, so that's another win!

[tangy]

At one point there was a financial sub forum here.

 

A short lived experiment.

 

That's enough money to ask an accountant imo

 

Remember. the big print giveth, the small print taketh away.

 

Too pay taxes to reduce debt is a surprisingly complex time value of money calculation. Imo

[goose]

At one point there was a financial sub forum here.

 

A short lived experiment.

 

That's enough money to ask an accountant imo

 

Remember. the big print giveth, the small print taketh away.

 

Too pay taxes to reduce debt is a surprisingly complex time value of money calculation. Imo

Yeah, losing 40% to avoid paying interest on other debt may not be financially sound. I'm wondering what the interest rate is on the debt the girl has. Is it low-rate student loans or high-interest revolving debt (credit cards).

 

Here's info on the CARES Act and avoiding the 10% penalty...

 

https://www.consumerfinance.gov/about-us/blog/cares-act-early-retirement-withdrawal/

Edited October 9, 2020 by goose

[Krystal]

At one point there was a financial sub forum here.

 

A short lived experiment.

 

Bring it back!!!!!!!!!!