Early Withdrawal

Archive for May, 2009

Lysis of Adhesions Procedure / Neuroplasty Ira Fox, MD Channel 10

Question: Recently I was laid off from my job and held a 401k with my employer’s retirement fund.?

I converted the 401k to an IRA, with the advice of our investment firm, so I am able to make monthly withdrawals to pay my bills. However, I think I am subject to a 20 percent tax penalty and a 10 percent Early Withdrawal Penalty. I am 55, does the government have any kind of hardship law to keep me from paying such high penalties for withdrawals? I am wondering if I should I convert it back to a 401k and borrow against it to avoid the steep penalties and taxes. Could you advise me how I can avoid the high penalties and interest to help get me through until I can get another job?

Answer: Yes. If you’re above 55 years old and your job is terminated you’re entitled to waive the 10% penalty.

Ask your plan administrator for a reimbursement immediately.

Cash Out 401K, Early Cashing Out 401K

Question: Tax question– I withdrew funds from a Roth IRA (before the 5 yr mark) to make a down payment as a first time?

home buyer, in 2005. I am many years less than 59. My “advisors” had not informed me that this sort of Early Withdrawal is only tax exempt if it is made at least 5 yrs after the creation of the Roth (the Roth started in 2002); I thought it was tax exempt just because it was used as a first time homebuyer cost. I made this unfortunate finding just now, as I research my reply to the CP2000 the IRS sent me a few months ago, stating that I owe them $900 in taxes. My question: is this true? Am I screwed? I have also read that your contributions to the Roth can be withdrawn “anytime” without tax or penalty. Can this be true? If so, and if contributions are the first to be withdrawn, then didn’t part or all of my $3000 distribution in 2005 actually consist of contributions, so that part or all of it should be exempt from tax? Anyone?

Answer: I assume the contributions to your Roth did not come from another retirement plan.

If you had previously contributed $3,000 to your Roth, the full $3,000 distribution should be tax-free. However, when you have a distribution from a Roth, you are required to attach Form 8606 to your tax return. Since you did not do this, the IRS is assuming the the entire distribution is taxable, hence the $900 tax and penalties.

To fix this, you can amend your return and attach a properly filled out 8606, or it may be possible to send in the 8606 separately. Take the letter you received to a tax preparer who will figure out which course of action is appropriate.

Although you used your distribution for a home purchase, I recommend you not put this on your 8606, since the entire distribution is tax-free as long as you made that amount of contributions. You have one life-time $10,000 exclusion from penalties for the first-time homebuyer, you may as well keep that entire exclusion should you need it in the future.

See Form 8606 for 2005, Part III.

http://www.irs.gov/pub/irs-prior/f8606–2005.pdf

line 19: $3,000
line 20: 0
line 21: $3,000
line 22: enter the amount of all your contributions
line 23, 24, 25a: 0

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