A fixed deposit is one of the investment vehicles used for investing money for a fixed time period. For this reason, if you want to cash out your fixed deposit before the time of its maturity, you should be prepared to pay the penalty for early withdrawal. This may not be the best option because of the taxes and penalties associated with cashing out this deposit early. For some taxpayers who are in higher tax brackets, this could mean losing up to 50% of their investment. There are several other options that you may want to consider instead of cashing out your fixed deposit. First, it may be helpful to know what tax bracket you are in.
Your tax arrangement service provider can help you decide whether the tax consequences and penalties will worth the benefit of cashing out your fixed deposit. A tax veteran can help you determine what your income taxes will look like with and without the cash out so you can make an informed decision.
It is important to point out that money in your 401(k) grows without taxes negatively impacting the growth. In other words, it grows tax deferred! These accounts permit for pretax contributions and the accounts can flourish without you worrying about taxes until you withdraw them from the plan. Younger investors are particularly prone to cashing out their 401(k) early, while the average cash out amount for those under 40 is $14,300. This money is often hard to save again and can set someone back years in their retirement planning.
Taxes on Your Total Income
Even if you do not cash out your 401(k) early, you will still have to pay taxes on the money that you withdraw. It doesn’t matter if this comes from your own contributions, dividends, or even capital gains. They are all taxed at the same rate, and that is based on your total income. There is no capital gains tax rate on your 401(k) withdraws. That means that you could be taxed on your withdrawals up to 39.6% (as of 2016).
Tax Rate on 401(k)
A Roth 401(k) is slightly different because contributions to this account are made with after-tax dollars, so you will not have to pay taxes on withdrawals in retirement.
For most people however, the deduction made when contributing to a 401(k) account is worth paying later in retirement when they have more funds.
Early Withdrawal of Fixed Deposit and the Associated Cost
Your taxes for an early withdrawal are usually about 20% of your balance. That can be a huge amount of money for some taxpayers. For those who cash out before age 59 ½, they also have to pay a 10% withdrawal penalty—that is almost 1/3 of their investment gone right away!
You may also have other tax implications that alter your annual tax refund amount as well. Find a tax preparer who works with retirement accounts on a regular basis, and he or she can help you determine what other come tax consequences you may face when cashing out your 401(k).
Instead of withdrawing your 401(k) early, you may want to consider other options that have significant tax advantages.
You can transfer a debt or other financial arrangement of your 401(k) to a traditional IRA. In an IRA, your contributions will grow tax free. You are only taxed when you withdraw from a traditional IRA. The rollover process is easy, and you are not taxed on anything when you roll it over. It is treated as if the account has not moved!
Rollover to a Roth IRA. You can also roll over your 401(k) into a Roth IRA account. Roth accounts have slightly different tax implications, so you may end up triggering a tax bill with this type of rollover. If you made only pretax contributions to your 401(k), those contributions will be taxed if you roll over to a Roth IRA. This is because Roth accounts are created with after-tax dollars, and are not taxed when you withdraw them in retirement.