Early Withdrawal

Archive for the ‘Penalties’ Category

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?

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: Is there a tax free retirement fund with no penalty for early withdrwal?

I heard there is a fund which is not a Roth IRA that allows you to invest tax free with no penalty’s for withdrawal prior to 59 1/2?

Answer: Yes. I can name a few. For instance, you can invest your money in your life insurance via VUL or VAL.

http://www.irs.gov/publications/p525/ar02.html#d0e4676

If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. In general, your cost (or investment in the contract) is the total of premiums that you paid for the life insurance policy, less any refunded premiums, rebates, dividends, or unrepaid loans that were not included in your income.

Thereby, you can invest and withdraw up to the cost. And the proceeds (after your death) will be income tax free.

Maybe you should ask how to avoid Early Withdrawal Penalty from retirment account:

http://www.irs.gov/taxtopics/tc558.html

To discourage the use of pension funds for purposes other than normal retirement, the law imposes an additional 10% tax on certain early distributions of these funds. Early distributions are those you receive from a qualified retirement plan or deferred annuity contract before reaching age 59 1/2. The term “qualified retirement plan” means:

* A qualified employee plan such as a 401(k) plan,
* A qualified employee annuity plan,
* A tax–sheltered annuity plan for employees of public schools or tax–exempt organizations,
* An IRA other than an education IRA, or
* If you have an early distribution from a SIMPLE IRA plan within the first 2 years of participation in the plan, the additional tax is 25%.

Distributions that are not taxable such as distributions that you roll over to another qualified retirement plan are not subject to this 10% tax.

********There are certain exceptions to this penalty. The following five exceptions apply to distributions from any qualified retirement plan:**********

1. Distributions made to your beneficiary or estate on or after your death. (That sucks. You will not be able to enjoy it.)
2. Distributions made because you are totally and permanently disabled. (That sucks too. You will not be able to work at any job. You practically need to kill yourself to do that.)
3. Distributions made as part of a series of substantially equal periodic payments over the life expectancy of the owner or life expectancies of the owner and the beneficiary. If these distributions are from a qualified plan other than an IRA, you must separate from service with this employer before the payments begin for this exception to apply.
(OK. This you can do. You will need to consult with an Insurance Agent or a financial advisor for that. That process is called annulitization. For instance, based on your age, health and the amount of money in the account, the insurance company will give you a set amount of money per month. (Like $1000 per month))

4. Distributions that are equal to or less than your deductible medical expenses, that is, the amount of your medical expenses that is more than 7.5% of your adjusted gross income. You do not have to itemize to meet this exception.

(That sucks too. I don’t want anyone to get hospitalized.)
5. Distributions made due to an IRS levy of the plan.
(That really sucks. I hope no one has IRS levy on them.)

The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:

1. Distributions made to you after you separated from service with your employer, if the separation occurred in or after the year you reached age 55,
(That’s OK for the early retirees. I got several of them.)
2. Distributions made to an alternate payee under a qualified domestic relations order, and
(If you need to get rid of your wealthy signaficant other, this will be ideal- Oh, this is call the QDRO. I need a QDRO to go.)
3. Distributions of dividends from employee stock ownership plans.
(This is always nice. Don’t see this often!)
The following exceptions apply only to distributions from IRAs:
(So before you need to use it. QUIT YOUR JOB AND ROLLOVER (transfer) your retirement fund to an traditional IRA account.)

1. Distributions equal to or less than your qualified higher education expenses,
(Do you or your kids or grandkids need to go to college?)
2. Distributions made to pay for a first–time home purchase, and
(Do you need to buy a house? Up to $10,000. By the way the word “first-time home” is deceiving. You may already qualify for it.)
3. Distributions made to pay health insurance premiums if you are unemployed.
(Yes. Quiet your job and get unemployment insurance. That’s way of life

Russia’s Mixed Message

Question: Can I early withdraw from a Roth IRA with minimal penalties if it has taken a loss?

I have a Roth IRA that has a current value of $5,000, but I have put $8,000 into it over the past few years. I am 31 years old. As far as I can tell from reading on the net, there is a 10% Early Withdrawal Penalty, as well as I would get taxed on the profits at my normal tax rate (28%?). In this case however, there are no profits, as I have lost $3,000 rather than making any returns on my investment. Would I be able to close this account and clear roughly $4,500 without any other tax penalties? Thanks much.

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

You can withdraw up to your contribution at any time without tax or penalty. If you choose to close this account and its value is less than your contribution, no tax or penalty will be owed.

If you have a $3,000 loss and this is your only IRA, you can take the loss as a miscellaneous deduction on Schedule A, subject to a 2% of AGI floor.