I am relocating to another country and will not live in the U.S. for the rest of this year; what is the penalty for withdrawing from my 401(k)?
I am 39 years old. I want to withdraw the total amount from my 401(k) account next year because I am moving to another country in 2 months for another job. I will be not employed in United States for this full year. What will the penalty for withdrawing be? I have $22,000 in my account.
At a minimum, you will pay the 10% early withdrawal tax penalty because you are taking a distribution before age 59 1/2. You may also owe ordinary income tax, depending on your US income in 2018 and your filing status. The fact that you are relocating is unlikely to have an effect on the taxability of the US income.
In general, if you withdraw your money from your traditional 401k account before age 59 1/2, you need to pay ordinary income taxes on the money you take out plus 10% early withdrawal penalty. And you may also give up some of the unvested employer's contributions if any. I find another article on Investopedia maybe helpful to you regarding "How do you calculate penalties on a 401(k) early withdrawal".
There are certain exceptions to the 10% tax penalty. Most of them may not apply to your situation, but you could check it out directly from IRS's website here.
Wells Fargo also has a 401(k) Early Withdrawal Costs Calculator. It may help you get some estimated numbers based on your specific situation.
Having said all these, I wouldn't recommend you taking an early withdrawal from your 401k account unless you are really out of options. Just throw out a couple of ideas here：
1. If you are still with the same employer, you could consider taking out loans instead of taking a withdrawal if the plan allows. A loan from your 401k plan is not taxable if it meets certain criteria which you could learn it directly from IRS's website here.
2. If you are no longer with the same employer, you could consider rolling over your 401k to an IRA account. An IRA account has more exceptions to the 10% tax penalty including qualified first-time homebuyer distributions. You could learn more about the exceptions specifically to IRAs directly from IRS's website here.
3. If you don't need all the money right away, you could also consider using Substantially Equal Periodic Payment (SEPP) with your 401k if you no longer employed by the employer that sponsors the plan or with an IRA right away. It not only could help you avoid the 10% tax penalty but also may lower your total income taxes on this by stretching a one-time lump-sum distribution into multiple years. Another article from Investopedia here may give you a basic understanding of how this works.
It really depends on why you need the money, when you need it, and how much you need. Unfortunately, I cannot give you any specific recommendation without knowing all the details. As always, I recommend you to consult a qualified professional based on your specific situation. Hope it helps.
For starters I am never a big proponent for withdrawling money from your retirement plans prematurely. Especially, if just doing one year abroad. Now naturally if you need the funds desperately and it is your only option that is another story. So the way this would work if you did indeed still withdrawl is you would pay income tax on the entire amount PLUS a 10% penalty. Simple math on your 22k is if you were in the 22% tax bracket you would receive $22,000-32%= $14,960.
Due to your age (under 59 1/2) you will be required to pay a 10% penalty plus ordinary income on the distribution. You being in another country has not effect on the taxes and penalty due. Taking money from you retirement account is not a good idea.
Kimberly J Howard, CFP
If the reason for the withdrawal is not in the list of exceptions the IRS allows (See link below) then you will pay a 10% penalty in addition to your ordinary income taxes. The ordinary income tax depends on your total income (including your 401K withdrawal) and deductions etc
Here is the the link to the IRS website with the list of exceptions to the 10% early withdrawal penalty: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions