This retirement calculator compares the consequences of taking a lump-sum distribution from your 401(k) or IRA versus rolling it over to a tax-deferred account. It analyzes early withdrawal penalties and tax consequences for the distribution so you can decide if cashing out a lump sum is worth it.
Assumptions: Contributions to plans are made before taxes, federal and state income tax rates are the same at retirement age, and the plan withdrawals are qualified withdrawals under the IRS rules.
Should You Withdraw Early From Your 401k?
Ask yourself honestly . . . are you tempted to cash out your 401k early?
You probably have a long list of all the great things you can do with those funds right now. But is an early withdrawal from your 401k really a good idea?
This 401k Early Withdrawal Calculator will help you compare the consequences of taking a lump-sum distribution from your 401(k) – or even your IRA – versus rolling it over to a tax-deferred account.
Make the smart choice. Use the calculator and see for yourself what is the best choice.
Is Your 401k A Security Blanket?
Most of us look at our 401k as a security blanket — something that we intend to pull out when we are suffering in the cold. There are a number of financial hardships that might tempt you to consider taking an early withdrawal:
- Urgent medical emergencies
- Extended family financial difficulties
- Unexpected tax bills
- Rising college tuition costs
- Pressing home improvement needs
This 401k withdrawal calculator will help you decide whether to take a lump-sum distribution or to rollover to a tax-deferred account. Its side-by-side comparison of data gives you the information you need to make a decision that is right for you.
Consider The Pros And Cons
Early withdrawals of your hard-fought savings should be considered carefully. There are many factors to consider with long-term implications. Study the alternatives available and make decisions according to your ultimate goal.
Whether you decide to keep your 401k contributions intact with your old employer, move it to your new employer, roll it over to an IRA, or simply cash it out, the question of taxes and penalties loom.
There are pros and cons to taking a lump-sum distribution. Four important factors to consider include:
- Penalties – By withdrawing early from your 401k, you’ll incur penalties. But if you rollover your funds to a tax-deferred account, you can avoid penalties.
- Taxes – Would you rather pay taxes now, or later? Taking a distribution now will be considered a taxable event. On the other hand, you could wait until retirement to withdraw, and pay future tax rates. Either way is a gamble – do you think tax rates will be higher or lower in the future? This calculator assumes consistent tax rates because future rates cannot be predicted.
- Future Savings – If you consume your savings now for current lifestyle then those small amounts won’t be able to compound and grow into significant savings later.
- Lifestyle Needs Today – The future savings issue must be balanced against lifestyle needs today. Early 401k withdrawals are often precipitated by job changes and temporary loss of income where that nest egg provides a convenient and relatively painless solution – at least, it is painless today. The long term savings loss will cause pain later.
In summary, there are many conflicting issues you must balance. Lifestyle needs, taxes, and penalties today versus future savings tomorrow. It is a difficult decision.
Using The Calculator And Comparing The Results
Using this 401k early withdrawal calculator is easy. Enter the current balance of your plan, your current age, the age you expect to retire, your federal income tax bracket, state income tax rate, and your expected annual rate of return.
With a click of a button, you can easily spot the difference presented in two scenarios. A lump-sum distribution may save you on future taxes but it definitely cuts into your asset at the time of distribution. If you roll over your 401k, on the other hand, you may have to shell out a lot of money in future taxes but the growth in the account will make paying those taxes a good problem to have.
Easy, simple, and straightforward — that is what the 401k early withdrawal calculator offers. Unlike other calculators in the market, this calculator puts forward a detailed analysis of what you are getting into. It presents the taxes and penalties that you may incur as well as the opportunities each option brings.
Knowledge brings with it profound power. Spending a few minutes contemplating the results of this calculator can lead you to make an educated decision resulting in thousands more saved at retirement.
Early Withdrawal Calculator Terms & Definitions:
- 401k – A tax-qualified, defined-contribution pension account as defined in subsection 401(k) of the Internal Revenue Taxation Code.
- Federal Income Tax Bracket – The division at which tax rates change in the federal income tax system (also: the amount paid by a taxpayer in accordance with their earned income).
- State Income Tax Rate – The percentage of taxes an individual has to pay on their income according to the laws of their state.
- Lump-sum Distribution – The withdrawal of funds from a 401k.
- Rollover – Moving the 401k contribution to another retirement fund option, often an IRA.
- Penalties – The payment demanded for not adhering to set rules.
- Future Value Before Taxes – The value of one’s asset at the end of the term before taxes are paid.
- Future Taxes to be Paid – The taxes that are required to be paid at the end of the term.
- Future Net Available – The amount left after taxes and penalties are deducted.
- Annual Rate of Return – The percentage earned every year by having funds in an account.
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