Early Withdrawal

Posts Tagged ‘early’

Question: Early Withdrawal? 401K or IRA?

Due to financial problem, I have decided to make a full Early Withdrawal of my 401K. Which one is better? Withdraw it right from 401K, minus TAX plus 10% penalty? or rollover to an IRA first then get it from there? They said early withdrawals from IRA still have TAX and penalty. I don’t wanna do a loan so don’t bother.

Answer: If you take the entire withdrawal directly from the 401(k) administrator, they are likely to withhold not just the 10% but also another 20% for taxes. It depends on the particular rules of the plan administrator.

A better route and one that offers more control is to do a rollover to an IRA and THEN take the distribution. You will be better able to decline to have taxes withheld by an IRA custodian if you so desire and you can worry about them later. Just remember to make sure you have enough put aside in a savings account or somewhere to cover the tax liability next April. A brokerage or bank acting as an IRA custodian can not force you to have taxes withheld. They will send you and the IRS a 1099 form early next year so you can not avoid paying the taxes, you just don’t have to pay them now.

401(k) withdrawals

Question: I want to make an Early Withdrawal from my SEP-IRA. What can I expect in penalties & taxes?

I spoke to my financial advisor about withdrawing money early from my SEP, but I’m confused. I assumed that if I wanted to withdraw $12,000-$13,000, then I would get that amount “cash-in-hand”. I would then have to pay the 10% withdrawal penalty and income tax (I’d get Form 1099-R) next year during tax time.

Answer: The law requires the custodian to withhold 20% for taxes. This is exactly like the taxes withheld from your paycheck by your employer. In most cases even that is NOT enough if you are taking an early distribution.

The distribution is taxed as ordinary income. If you are under age 59 1/2 there is a 10% penalty on top of the tax in most cases. (There are some exceptions such as for medical expenses or to purchase a first home, etc.) If you are in a 15% tax bracket, the total will be 25% with the penalty so the 20% withheld would not be enough. And if you were in a 25% tax bracket, you’d be short by 15% at filing time and would need to make an estimated payment of that amount immediately on that large of a distribution to avoid any chance of penalties and interest for underpayment of tax when you do file. That means you’d need to pull $20k to have $13k net of taxes.

Inside Iraq – US Troop Withdrawal – Sept 19 – Part 2

Question: Early Roth Ira Withdrawal after 5 years Transfer?

In 1998 I transferred a Traditional IRA (approx. $15,000) into a Roth IRA and paid the appropriate taxes. Through bad investments the value of the Roth in 2007 was $12,000. I withdrew $11,000 to pay some debt. I know I don’t owe tax on Capital Gain but do I still need to pay the 10% penalty? Does the “5 year Rule” have any effect on the 10% penalty?

Answer: There are two conditions that must be met to avoid a penalty when withdrawing money from a Roth. One, you need to have had the account for at least 5 years, and you must be at least 59 1/2 when you made the distribution. If one of these two conditions are not met, you will pay a 10% penalty on the amount of the distribution as an “early withdrawl penalty”. You will also pay taxes on the earnings that are imposed in the event of a non-qualified distribution, which is basically an ordinary income tax (since your account didn’t earn anything you don’t have to worry about that).

If you are over 59 1/2 you don’t have to worry about it and shouldn’t have to pay any taxes or penalties.

Free Derry,The IRA guarding Bogside.Street Battle, Rosemount