Wednesday, March 9, 2011

California state 401k distribution tax rate

Early withdrawal of 401k in California?
Hi guys, I quitted my job lately and I decided to early withdraw my 401k account to pay part of my credit card debt. I worked for my prior employer for about 1 year and the % they matched was really low. I got the check from JohnHancock today, after I requested the withdrawal. The check amount is $3,071.74 and there's a $767.94 federal tax withheld and $45.00 withdrawal fee. My question is, when I filling the withdrawal request form, I checked the 'OPT OUT' option since it is available in California. However, I have no idea what is that 'opt out' for and I can't really remember the full description of it. Since they deducted only 20% of the entire amount from my 401k account, as I seen on the check, I just wondering if I need to pay additional penalty and the tax for CA? If yes

The federal tax of $767 withheld from your distribution has nothing to do with the amount you may owe on this early withdrawal; your company is required to withhold 20% of the gross distribution (your total distribution, then, was about $3800) by law. The total distribution will be added to your other income, taxed at ordinary income rates, and a 10% IRS early-withdrawal penalty will apply. State taxes will apply, as well, to the extent you got a deduction when you made the contributions.

A taxpayer in the 15% federal tax bracket, and the 5% state tax bracket would owe the following on an early withdrawal of $3,800.

Federal tax = $570 (3800 x 15%)
State tax = $190 (3800 x 5%)
IRS penalty = $380 (3800 x 10%)

The total tax due would be $1,140 in this scenario.

Hope that helps.

On behalf of all of your responders, who take the time and effort to help questioners in this free Yahoo! community, THANK YOU in advance for taking the time to choose your "Best" Answer. We really appreciate it.

DISCLAIMER: While the information in this response was obtained from sources believed to be reliable, its accuracy and completeness cannot be guaranteed. The opinion voiced in this answer is for general information only and it shall not be construed as tax, legal, or investment advice for any individual. Questioners are urged to consult with their professional advisers before making any decisions regarding their finances.

Bradley Mann, CFP, EA
Source(s):
Enrolled Agent, CFP, in practice over 25 years

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