So what is the tax bite for cashing in your 401K? My son says it will wash out to be 40%, I thought it was more like 15.
It depends on several factors. The most significant is your marginal tax rate since the 401k withdrawal is treated as income. In addition, most would be hit with a 10% early withdrawal penalty.
So, if you’re currently in the 25% marginal tax bracket, 35% of a 401k withdrawal would go to the tax goons. Unless you are in a situation that’s exempt from the the 10% penalty, then it would be 25%.
If it was a sizeable withdrawal or you’re close to the break point for the next tax bracket, you could end up paying a more since the withdrawal might push you into the next bracket.
Waiting patiently for smarter Freepers to tell me what I got wrong. :)
Unless you are over 59 (or 59 1/2), there is a 10% penalty IN ADDITION to income tax liability, federal, and state, if you have a state income tax. The amount of the income tax liability will depend on where you fall in the marginal tax rates.