Some money followed me home

[Garnet]

Can I keep it?

I had a small 401K with one of my previous employers that I completely forgot about. They tracked me down, four years, two states and four addresses later. The upshot of it is that since the amount is under $5000 (way under) and since I didn't respond to a notice they supposedly sent me when I left employment there, they are issuing me a check. I plan on cashing the check and using it to pay the deductible for MT's eye surgeries.

Here's where I'm falling off the 'tater wagon. The penalty for early withdrawal is 10% and the "taxable" portion gets added to my taxable income.

What is the taxable portion? The whole thing? Or the amount that is left after the 10% penalty?

Either way, the total amount is small enough that it's not a big deal but I would like to understand it.

[Dingfod]

The taxable portion is that pre-tax income you may have invested in the account, any company matching funds contributed, and any earnings thereon. The non-taxable portion is that after-tax money you've invested, either not a non-401K account or that which was above the limits on 401K contributions, more than something like 19 or 20 percent of your income. It is very likely it will all taxable as income in the year of the distribution.

[Dingfod]

Sorry about all the edits in my previous post. The 10% penalty has no bearing on what is taxable as regular income, it is extra, over, and above any normal income taxes owed on it. Your state may also charge an early withdrawal penalty as well. Consult your tax professional.

[Garnet]

That works, Dingfod. You've given me enough to figure out that, in this case, the whole amount will be taxable as regular income.

The way I read it, the amount will just be added to my taxable income. It's not big enough to really cause a problem for me there.

I do need to find out if Michigan has an additional withdrawal penalty though. Thanks for the tips.

[Dingfod]

You're welcome. The amount you got was about what I got when I left my former employer. I cashed that check, paid the taxes and spent it on buying a car and catching up on bills when I should've rolled it over. Despite plummeting stock prices, it would be worth about $15K right now if I had.

[Garnet]

I've got another 401K that I'm leaving alone. Since that one is over $5000, they can't force me to do anything with it. I'm just leaving that one alone.

I scared to death to look at since the economic downturn. :(

[Dingfod]

I've been working good jobs for over 30 years, contributing to one 401K or another for 25 years of that and have dismally little to show for it. I'm 53 years old, two years from early retirement age, something I may have dreamed about 25 years ago. Now, retirement at 67 (full SS age) is only a dream attached to the continued existence of the Social Security system unless I'm willing to live in a van down by the river.

[Garnet]

Ding, the way things have gone for me, mostly because of bad decisions on my part, I'll be working until I die. My one 401K is just enough to get me by for some months...a few months...not years.