Expert: David M Iannopollo - 6/22/2009

Question
I was thinking about taking money out of one of my 403k plans.  I was wondering about the penalties/tax charges if they would be the same since I have lost so much of the value I may just have what I put in or even less.

Answer
Hi Lori,
Since all contributions to a 403b account are made with pre-tax money, anything that you withdraw from this account will be taxed as ordinary income regardless of the investment performance. If this were an account where the contributions had already been taxed, then you would only be taxed on the gains.

The company holding your funds will most likely withhold 20% for federal taxes. Depending on your tax bracket, you may owe more or less when you file for taxes. If you are under age 59 1/2, you will also be charged a 10% early withdrawal penalty. Depending on the state you live in, you may also owe state tax as well.

So for example, if your tax bracket were 25%, you would owe 35% (25% plus 10% penalty) plus any applicable state tax. As you can see, it's really not a good idea to take early withdrawals from this type of account. I hope this helps. Good luck!

Dave