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What is the penalty /taxes for withdrawing money from 401K ? Is a loan from 401k account better?

I am trying to figure out how to come up with the money to retain a lawyer for divorce. Then I thought about 401K ( I only have about $3000 there because my husband always told me no need for me to do it as he was investing enough for both of us, a couple years ago when things started to get back I started doing the minimum amount I could thru work. So I am not sure if with the penalty and taxes it would be worth it or not since I have such a small amount in there as it is.

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Asked by MommaB0334 at 1:01 PM on Jul. 7, 2010 in Money & Work

Level 6 (121 Credits)
Answers (4)
  • There will be a penalty for taking money out of your 401k regardless of how it is taken. You must pay it back within one year, I believe, in order to dodge the charges. But again I am not completely sure, that rule might just be for Roths.

    Answer by DomoniqueWS at 1:06 PM on Jul. 7, 2010

  • The taxes are about 30 percent in addition to income taxes.

    Answer by lovinangels at 1:07 PM on Jul. 7, 2010

  • The penalty for early is 10% plus your tax bracket. So if you're in the 25th tax bracket, you'll end up paying about 35% in order to pull your money out plus your state income taxes (if applicable). I would guess that you'd be able to get a loan with a lower interest rate than 35%.

    As far as borrowing from your 401K , it will depend on whether or not your employer allows you too. If you can, the interest that you pay back is "paid" into your 401k. So you’re borrowing your own money, and paying interest to yourself.

    Most companies will allow you to borrow up to half of the money in your 401k. There are special circumstances where you can borrow more and for a longer period of time- but I don’t think divorce is one of them. Check though, since I could be wrong.

    I’m sorry you are going through this.

    Answer by Erica_Smerica at 3:49 PM on Jul. 7, 2010

  • A loan from your 401k is definitely the way to go. Speak with the benefits person where you work.

    Answer by rkoloms at 5:17 AM on Jul. 8, 2010

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