How much is your 401k taxed when you liquidate it?

Question: How much is your 401k taxed when you liquidate it?

I am leaving a company and I have $5,000 in my 401(k). I would simply like to cash it out. What kind of taxes will I have to pay?

Answer:

The 401k withdrawal would be taxed at your ordinary income rate, which will vary depending on your income, plus there’s an additional 10% penalty. Assuming you are 25% tax bracket, you’ll receive a net of $3,250. 20% is required to be withheld by the broker, which amounts to $1,000, a $500 penalty would be imposed, and an additional $250 in taxes would be owed.

You can avoid taxes and penalties by rolling your 401k into an IRA.¬†Wells Fargo offers a 401k Early Withdrawal Calculator. What I like about this calculator is that it helps you learn the impact of cashing out your 401k early. Let’s assume that you are 30-years-old and you plan to retire at 65-year-old. At just a modest 3% annual growth rate, that $5,000 would grow to $14,069 by the time you retire.

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