I urge you to think twice before taking distribution from your 401(k). As you mentioned, the distribution amount will be subject to the 10% penalty tax, which will be withheld by the administrator before you receive the distribution. Second, you will need to show the distribution on your 1040 for the tax you receive the distribution, and will need to pay income taxes on the amount received. The amount will be shown on a 1099-R that you will received from the 401(k) administrator. Alternatively, you can tell the administrator to withhold your tax rate from the distribution so that the tax is pre-paid.
In either event -- your 401(k) administrator withholding the proper amount or not -- you will not be subject to the double-taxation that you described.
Rollover
Instead of taking a distribution, I urge you to consider rolling your 401(k) into an IRA. If you roll the balance of the 401(k) into an IRA, you will pay zero dollars now in penalties or taxes. You can move these funds into an account type of your choice, such as CDs, money market, an fund at a brokerage that either you or a stock broker control -- really you are only limited by your imagination. See the IRS document IRA Online Resource Guide - Information About Rollovers to learn more about the rollover rules.
I hope this information helps you Find. Learn & Save.
Best,
Bill
www.bills.com/
B/o Rutherford, NJ | June 15, 2011
June 15, 2011
Even if you can avoid the 10% early withdrawal penalty, which may or may not be the case, you will have to pay taxes on the disbursement and need to be mindful of the taxes you will have to pay as well as the fact that such a large disbursement could bump up your tax bracket.
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