Early Withdrawal

Archive for August, 2009

Question: individual stock account vs IRA and Roth IRA (tax rates).?

I have a stock account and am looking for the best way to make the most of my return (after tax). If I make 10% return this year (let’s say $100) . How much would I have to pay in taxes (what is the rate)? If I converted that account into an IRA or Roth IRA or some other account (can I do that?)…how much would I have to contribute monthly and how much tax would I have to pay at the end of the year (on that return)? If I cashed in early on those IRAs (sold some of the stock and took the cash and bought, let’s say, an apartment), what penalty rate would be applied to that withdrawal?

This basically boils down into: Is it better to hold stock in a regular (i.e non IRA etc) account (so I can withdraw $ whenever I need to) and pay tax on that, or hold it in an IRA (or other type) account and then pay the penalty, if I need to withdraw?. Any advice is appreciated. Thanks!

Answer: You don’t get the privilege of paying taxes on a stock gain until you sell the stock, and when you do, your tax will depend on your tax bracket.

Technically speaking, capital gains are the final dollars in your income, meaning they enjoy the highest tax, while your ordinary income is taxed at the lower brackets.

On the other hand, your IRA benefits will depend on how much you make, too, because of the extra “saver’s credit”. You can take up to a certain amount out of your taxable income, but you get the bonus of 0%, 10%, 20% or 50% credit in addition depending on your income and marital status.

So you’ll have to give us a little more information to be more specific.

How to: Leave your job/ retire? what are your 401k options

Question: Company’s matching 100% 401K contrib. If I withdraw money immediately with penalty, that’s still good deal?

What kind of penalty for early 401K withdrawal ?
Please keep in mind that I consider using company’s matching to cover the penalty. For example, I contribute $100 to 401K. With company’s matching, it is $200. If I withraw this $200 immediately, I pay 30% penalty and I pay 30% income tax. That leaves me $98. That is still better than paying 30% income tax on the original $100 income. That would leave me $70. Thanks for your help in advance.

Answer: In most company, 401k matching is not 100% vested immediately and thus the plan wouldn’t work.

To do a more accurate calculation you need to gather more data. There are a couple of things you need to find out from your plan administrator
1. What is the maximum amount that the company would match?
2. What is the vesting schedule?

As far as tax issues:
Early withdraw from 401k is taxed as ordinary income (i.e. your marginal tax rate), plus 10% early withdraw penalty.

Best wishes.

395 Dealing With 401k Early Withdraw. Part 1

IRA Early Withdrawal FAQs

Can I take 72t Distributions from a Roth IRA, making Roth IRA Early Withdrawal?

72t Distributions can be taken from Roth IRAs in essentially the same manner as Traditional IRAs. 

However, since Roth IRA contributions can be withdrawn without incurring any taxes or penalties and Roth IRA distributions are always treated as consisting first of contributions, this strategy need only be used for a Roth IRA if you are under 59�/2. and want to withdraw earnings after exhausting contributions. 

May I aggregate the value of two or more IRAs for IRA Early Withdrawal purposes or 72t Distributions?

Yes. 

The IRS allows taxpayers to aggregate two or more IRAs to calculate 72t Distributions while taking the entire distribution from just one IRA. 

If I have several IRAs, do I have to apply the 72t Calculations to all of them?

No. 

You can choose to take 72t Distributions from one IRA account and leave the funds in your other IRAs untouched. 

Moreover, once you have embarked on a 72t distribution schedule from one IRA, you can elect to start another distribution schedule from another IRA at any time. 

Can I stop receiving IRA distributions before the required period?

You may stop your 72t Distributions at any time. 

However, if 72t Distributions are modified before the end of the required payment period, you will owe a 10% penalty tax, plus interest, on all distributions received before the age of 59�. 

If you don’t need all of the money being distributed to you, you cannot put the distributions back into your IRA. 

You can, however, continue to make contributions, based on earned income, to an IRA, other than the IRA from which you are receiving 72t Distributions.