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401K Payout Tax Brackets

21st July 2010
By Jennifer Quilter in Taxes
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There's a lot you're going to need to know about taking a 401k payout and tax brackets.

When you make an early withdrawal there is a large penalty. A withdrawal is categorized as early when you take any money from your retirement account before you reach the age of fifty nine years and six months. However much you withdraw from the account is subject to a ten percent penalty and state and federal taxes.

This greatly diminishes your savings, and possibly the amount you can withdraw at all.

What may make a 401k payout even worse is your tax bracket.

Every time you get paid the percentage taken out of your checks from taxes is decided based on what tier you fall into. The more money you make, the higher that percentage gets.

When you make a withdrawal from your retirement savings account the amount you withdraw is considered income for the year, raising your income, and thus, the percentage you have to pay in taxes that year. This means you will owe even more money on the amount you withdraw, making taking an early withdrawal an even worse financial decision.

Most financial experts agree that doing pretty much anything to avoid taking an early withdrawal is a better option. This is because you not only lose all of this money now, but you will have less when you go to retire--both because you are withdrawing all this money and because you will lose the money you would have made between now and retirement in interest on your investments.

There are a lot of other options. You can take a traditional loan (paying interest is awful, but you'll pay less in interest than you will lose taking a payout) or a 401k loan--though these do have a set of downfalls on their own, mainly that if things go through the loan may be treated as though you cashed out in the first place and then you would lose money as explained above.

If you decide to take a 401k payout despite the issues with tax brackets and penalties make sure budget for the taxes you'll need to pay at the end of the tax year.

Retirement accounts don't have to be so confusing. Learn more about what happens when you cashing in a 401k accounts and how to avoid the 401k early withdrawal penalty.

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