If I take money from my Roth 401k and pay the 10% penalty, will I still have to pay taxes next year when I file?
If you take an early withdrawal from a Roth 401k, part of it is taxed, and part isn’t. Your original contributions aren’t taxed or penalized, but any earnings are taxed, plus there’s a 10% penalty. How much tax depends on your total income for the year.
If you take Roth IRA earnings out before age 59½ and before five years, taxes and a 10% penalty apply. There are some cases where you avoid the penalty (not always the taxes), such as:
- Up to $10,000 for a first home
- Qualified education costs
- Certain emergency expenses
- Adoption or birth expenses
- Medical expenses if unemployed
- Survivor benefits if you’re a victim of abuse
- IRS levy or disaster relief
Check if any of these apply to your situation.
@Jaden
This is for a Roth 401k… my balance shows 1,808 vested and 1,229 available for early withdrawal.
Kemper said:
@Jaden
This is for a Roth 401k… my balance shows 1,808 vested and 1,229 available for early withdrawal.
Yes, you’ll owe taxes on top of the penalty. Maybe think of other options if you can.
You’ll pay taxes on the income, and the 10% penalty is just extra. If you already had money withheld, you might be covered. How much did you actually withdraw? For example, if you took out $10,000 but only got $7,500 after taxes, you may not owe more. But if you got the full $10,000, you likely will owe.
Kemper said:
@Vince
My total vested is 1,808, and it says 1,229 is available for withdrawal.
So, they probably withheld some for you, which might mean you don’t owe more. If it’s 10% for penalties, then around $181 is gone as a penalty. That would leave the rest possibly taxed at 25%.
If it’s saying 1,229 is what you get, maybe it’s already considering taxes and penalty. You could check with HR just to be sure. Also, if you’re needing money fast, have you thought about other options? Some people borrow against their 401k instead of withdrawing and getting penalties.
@Vince
I’m in Florida, so no state tax here. Need to cover a hospital bill to avoid collections. Also, my 401k balance is too low to borrow against it.
Kemper said:
@Vince
I’m in Florida, so no state tax here. Need to cover a hospital bill to avoid collections. Also, my 401k balance is too low to borrow against it.
In that case, you can actually use 401k money for medical bills without the 10% penalty. You’d still owe taxes, but the penalty doesn’t apply. You might want to check if there’s an option to avoid that penalty when you request the withdrawal.
@Vince
Just like with the medical expense deduction, you can only avoid the penalty if your unreimbursed expenses are over 7.5% of your adjusted gross income. Check section 72(t)(2)(B) in the Form 5329 instructions.
@Milo
Actually, with the new Secure 2.0 Act (passed in 2022), from 2024 onward, you can take up to $1,000 yearly for emergency expenses without penalties. Check Division T of the Act if you’re unsure. It might make things easier if it applies to your situation.
@Vince
Given your low balance, the amount you can withdraw may be below $1,000, and you might still have to fill out Form 5329 to show the exception. Look at the Secure 2.0 Act for details.
Keep in mind that taxes and penalties are two separate things. The penalty isn’t a tax payment; it’s extra on top of your actual taxes.
For 2024, there’s a new ‘Emergency personal expense’ exception to the 10% early withdrawal tax. The IRS hasn’t updated their form yet, but expect to see it soon. You can use it for emergencies if the amount doesn’t go over $1,000 or your vested balance over that. Only earnings, not contributions, are taxed and penalized.
What did they already withhold? It’s hard to say without that info.