A 401(k) employee retirement plan lets you take a tax deduction on your contributions and postpone taxes until you withdraw money from your plan. All withdrawals from a traditional 401(k) are taxable unless they are properly rolled over into another tax-qualified retirement account. Additional 401(k) penalties may be due if you withdraw from your 401(k) before age 59 ½.
To calculate the tax on a 401(k) early withdrawal, estimate your annual taxable income, including the withdrawal amount, and multiply by the sum of your federal, state and local tax rates. Add a 10 percent penalty on the withdrawn amount if you don’t qualify for an early-withdrawal exception.
Using a 401(k) Early Withdrawal Calculator
You can figure your taxes on a 401(k) early withdrawal calculator available from various internet sites. Typically, you’ll be asked to enter your estimated annual taxable income, your federal tax rate and your state/local income tax rate, if applicable. The calculator might be able to tell you your federal tax rate based on your income and tax year, or you can look up the tax rate in the instructions for IRS Form 1040. The calculator might be configured to add a 10 percent penalty if you indicate the withdrawal is early and not subject to an exception.
Qualifying for a Penalty Exception
If you withdraw from your 401(k) before age 59 ½, you’ll pay a 10 percent 401(k) early withdrawal penalty on the withdrawn amount unless you qualify for an exception. Withdrawals that are properly rolled over to another qualified retirement account escape income tax and the penalty. You can avoid the penalty for 401(k) withdrawals after age 55 if you are separated from your job. Other exceptions include hardship withdrawals as well as ones due to death, disability, a qualified domestic relations order, an IRS levy and large, unreimbursed medical expenses. Also note that some states do not charge income tax on 401(k) withdrawals. You can check with your secretary of state for detailed information.
Figuring Tax for 2018
The tax tables for tax year 2018 changed due to the Tax Cuts and Jobs Act of 2017. For example, suppose you are an unmarried 45-year-old and want to withdraw $20,000 from your 401(k) to buy a new car. The withdrawal will bring your annual taxable income to approximately $75,000, which puts you in the 22 percent tax bracket. Your state charges 5 percent on all income, bringing your total tax rate to 27 percent. Your taxes are therefore $20,000 x 0.27, or $5,400. In addition, you’ll have to pay a 10 percent early-withdrawal penalty, or $2,000, bringing the total cost of the early withdrawal to $7,400.
Figuring Tax for 2017
For tax year 2017, the tax bracket for a single filer with $75,000 of taxable income is 25 percent. If the state charges 5 percent on all income, a $20,000 early withdrawal from a 401(k) will cost $20,000 x 0.30, or $6,000. Adding the $2,000 penalty on the early withdrawal brings the total cost to $8,000.