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 in a situation thats exempt from the the 10% penalty,
Note that paying owed income taxes is a legitimate reason to pull money penalty-free from your 401K plan. So underpay your taxes throughout the year, and when you need to write that big check just use your 401K plan.
It's a legal means of cashing out your 401K without paying a penalty.
Disclaimers - I am NOT a lawyer, or CPA, or even a bookkeeper. And you do need to pay attention to things like penalties for under-paying your taxes throughout the year. But most self-employed folks can jigger the numbers every other year to make it so one year you have a very low tax bill, and the next it's really high, meaning you can play the underpayment game without penalty.
So, if youre currently in the 25% marginal tax bracket, 35% of a 401k withdrawal would go to the tax goons. Unless you are in a situation thats exempt from the the 10% penalty, then it would be 25%.
When I called a financial adviser about this yesterday, this is exactly what he told me. He also mentioned something about 20% of the 401K could be withheld in certain funds until the end of the year. I didn't really understand that part.
He hadn't heard about any of these proposals, which kind of concerns me. (He's a financial planner...doesn't he pay attention to stuff like this?) But in the end, he told me "That's kind of a big hit to take on a rumor." I still haven't decided what to do. If you cash out the 401K, you should do it before the end of THIS year - otherwise, you'll be subjected to Barry's new tax brackets. So you could end up paying 65% to cash in that 401K.