What is the penalty for liquidating 401k
Assuming that you have a 15% federal income tax rate and a 10% state income tax rate, here’s a breakdown of what would happen to your ,000: You would pay a total of ,250 and end up with only 65% from your initial ,000!The government wants you to keep your money in these accounts for a long time, so they use these tax penalties to strongly discourage you from withdrawing prematurely before your actual retirement.The main advantage of a 401(k) is the potential of deferring taxation until retirement when you have the higher potential of being in a lower tax bracket.By taking an early withdrawal, you’re foregoing that tax advantage and any future growth for your retirement contributions.
Imagine not only getting hit with a pink slip, but also with an unexpected large tax bill two months later. Sometimes it throws the whole financial kitchen at you and you may have to tap into funds that you firmly vowed to keep untouched.However, this isn’t even the whole story for that early ,000 withdrawal.You must also take into consideration your missed gains if you were to rollover that ,000 into an eligible retirement account.Americans work hard to sock away money for retirement.
Whether it’s through an IRA or an employer-sponsored 401(k), saving up takes hard work and discipline: they need to diligently contribute from every paycheck, take advantage of employer matches, minimize applicable fees and charges, and select funds that meet their retirement strategies.A study from the National Bureau of Economic Research (NBER) estimated the total outflow from defaulting 401(k) loans in the U. Second, the average amount for new loans was about ,800 and the average amount of all loans was about ,000.