401k Withdrawal taxable?

Question

We are planning to buy a house and wants to withdraw money from my husbands 401K. He was informed that a 20% mandatory withholding for Federal tax will be deducted. He is already 66 years old but still working. Does he need to be taxed?

Answer 1

This is not tax free money. Yes, it will be taxed as ordinary income.

Helen, EA in PA

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Answer 2

if he is still working, he might not be allowed to withdraw any money from the 401k plan

withdrawals from a 401k plan are always taxable income and you may still owe more tax than the 20% withheld - the withholding amount has nothing to do with your actual tax rate

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Answer 3

If it went in as pre-taxed money it will still be taxable as ordinary income. The company is required by law to withhold the 20% for tax purposes.

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Answer 4

401K is a non-taxed savings fund supplied by most employers, by law the income is not taxed until the time it is withdrawn. You must pay the tax on it or face penalties and in some instances the taxes are taken directly out of the check the financial institution cuts you before they mail you the check. Otherwise you would have to pay the 20% at year end when you file your taxes. Again if you fail to pay taxes by now you know the penalty for that, either a hefty fine, fraud charges or light jail time.

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Answer 5

The company is withholding 20% because they are required by law to withhold it.

Your 401(k) is most likely taxable (the only rare exception is if it were taken out of your paycheck POST tax. It's in the books, but I haven't heard of anyone doing it). The tax rate would depend on your marginal tax rate. It could be as much as 35%, so the 20% withholding might not actually cover the tax you'll owe. Unless it is a minimal amount and you don't make much.

The good news is you won't get an early withdrawal penalty.

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