Hello!

I’m having a hard time wrapping my head around this so maybe someone here can explain this to me better.

Say I have $30,000 in a 401k from a former employer. I’m going to rollover some of it into a IRA, but some I’m going to take as a cash distribution. Let’s say that I’m going to tell the former 401k company to send me $15,000.

To my understanding, this is how it works.

Remainder of the 401k is put into my Rollover IRA. No taxes, no fuss, no muss.

For the $15,000 cash distribution, the 401k company keeps 20% for federal income taxes, which will go towards the taxes that I’ll have to pay on that $15,000 (which will vary on my tax bracket). So if I’m in the 25% tax bracket, I’ll need to plan to pay on that 5% when tax time comes around.

So in the mail, I receive a check for $12,000 ($15,000 – 20%).

Now, I have my early withdrawal penalty of 10%. I’ll have to plan to pay this penalty at tax time (which will be $1,500). So in the end, minus the 20% that the 401k company already took out, I’ll need to plan to pay on the 15%.

Are there any other taxes that I should know about or be aware come tax time?

Yes, I expect the “that isn’t very smart” comments. I’m looking at all the pros and cons before committing this this kind of decision.

Thank you!