Early Withdrawal

Archive for July, 2006

Question: What are the rules for a hardship withdrawal from someones’s IRA that exempts someone from paying the 10%…?

withdrawal ffee?
How about unemployment as a hardship?

Answer: It depends on your definition of hardship. Most people don’t qualify.

Disability.
Medical expenses in excess of 7.5% of AGI.
Premuims to pay health insurance if unemployed.
Education expenses, purchase new home.
Paying an IRS levy.
Qualified distributions due to Midwest disaster.

401k Early Withdrawal: Do This First

Question: Taxes, IRA’s & Home Buyer Credit?

I am strongly considering taking advantage of the $8K 1st time Home Buyer Credit this year. But, I want to understand the tax implications on this. First question: As I understand, the $8K does not need to be paid back and it is refundable. Is this correct? Second question: Lets say I wanted to borrow $5K from my IRA to help with the down payment, what are the tax concerns? I know I’d be responsible for the taxes on whatever I withdraw, but would there also be an Early Withdrawal Penalty? Third question: When combining the taxes incurred from the early IRA distribution, the $8K tax credit, and other home costs that can be written off on the taxes (points, etc), is it possible that I could get a refund equal or close to the amount of the IRA distribution? So, essentially I could put the money back into my IRA? Can someone do the math and explain this to me? Thx.

Answer: The $8K is refundable and doesn’t have to be paid back.

For the Ira Withdrawal, you’ll pay income tax at whatever your rate is but can probably avoid penalties for Early Withdrawal.

The $8K will more than cover any taxes on the $5K withdrawal, but the timing won’t work for putting the money back into your IRA – that has to be done within 60 days and the credit would be part of your refund next year (2010)

Invest and Earn 8%-15% on your Money

Question: Can I deduct from my 401K to pay taxes due to the IRS without a penalty?

I owe the IRS 7K for taxes this year. The money I owe is for taking an Early Withdrawal from our 401K to fix the bathroom. I’m not sure it counts as a hardship, but the bathroom was mold infested and needed to be gutted everything replaced. Can i take more money out of my 401K to pay the taxes due and not have to incurr another penalty?

Answer: Taking money from your 401k means double tax. You get taxed everytime you borrow. Remember when you pay it back and take it during retirement, you get taxed again!

Personal Finance: 401(k) : Avoiding 401(k) Hardship Withdraw Penalties