Early Withdrawal

Archive for August, 2008

Question: Roth IRA Early Withdrawal – The 10% penalty applies only on the earnings or the principal as well?

For example – Let’s say I deposit $5000 in Roth in 2005 and by 2010 I earn $1000 on it as interest or whatever. Now, if I withdraw (no exemptions) now, will I be paying the 10% penalty on $1000 or the whole $6000? Will I be paying $100 or $600 in penalty?

Answer: You will pay the10% penalty on your earnings and you will pay taxes on your earnings at your marginal rate. Since you have paid taxes on the contributions, there are no further taxes or penalties to pay there.

Part 4 of Solo 401k vs. Self Directed IRA – UBIT exempt, Participant Loan, and Roth account

Question: Can I rollover my 401(k) during a Leave of Absence?

Okay, my 401(k) plan investment options suck. I want to roll the money into an IRA so I can choose better (lower fee) options.

Answer: You pretty much answered your own question. The plan does not offer in-service withdrawals.

ERISA seems to get pretty upset with selective treatment. If they would do this ’scheme’ for you, then they need to offer it to all Plan participants.

You could see if your Plan allows for a hardship distribution (and if you qualify); however, there are also monetary and other restrictions involved in that. You could also see if you Plan allows loans, but in my experience the interest rates have been approximately Prime. (Let alone it probably isn’t a good strategy.)

My advice would be to complain to whomever is in charge of your Plan’s investments. It costs you nothing and you might get different fund options out of it. Almost all other options are shady or will cost you more than they are worth.

In response to “quit” in doing paperwork. A termination is a termination. Once the Plan Sponsor (usually your employer) notifies the TPA or custodian, things get rolling fairly quickly. However, inquiry and preparation by a participant helps. Expect 30 – 60 days before funds are transferred.

Are IRA withdrawals considered earnings?

Question: How do calculate 10% excise tax on IRA withdrawl?

I think i have failed to pay the early withdrawl 10% tax on my 72T for some past years.

Answer: From my understanding and experience of this issue the IRS may attempt to assess 10% on all of the entire withdrawal since the additional withdrawal has violated the 72(t) exception. There is some question if they (the IRS) have the ability to catch the problem absent any other reason for them to have looked at the return. Therefore the best approach to this question may come from an understanding of how the problem came to your attention.

For the returns to have been filed correctly in the first place the preparer would have included a IRS Form 5329 and excluded the 72(t) portion on line 2 of that form and assess a 10% penalty on the remainder. If you wish to be correct you should file an amendment (1040X) to include the corrected IRS form 5329. But again the means by which you became aware of this oversight may dictate another answer.