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Marvin,EA
Marvin,EA, Enrolled Agent
Category: Tax
Satisfied Customers: 1663
Experience:  Enrolled to Represent Taxpayers Before The IRS
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I put 5000.00 in a 401K account last year from a settlement ...

Customer Question

I put 5000.00 in a 401K account last year from a settlement I recieved from an accident. The account lost 500.00 over the year. I have not paid taxes since 2003 because of an on going workers comp case. I requested the closure of the 401k and specifically cheked the NO withholding of state or federal taxes. They did and ignored my request. Is this lawful under fed tax laws and why?
Submitted: 6 years ago.
Category: Tax
Expert:  Marvin,EA replied 6 years ago.
Hello and thank you for using Just Answer. 20% federal income tax withholding is imposed on funds that are eligible to be rolled over but are paid directly to qualified plan participants. To avoid the withholding, you should have the funds transferred directly into an IRA or qualified plan without ever personally taking possession of the fund [IRC 401(a)(31)].
Customer: replied 6 years ago.
I apologize, it is an IRA and the emergency request was done by a hardship under a disability they simply ignored.
Customer: replied 6 years ago.
Reply to Marvin,EA's Post: I apoligize, it was an IRA and the request was made uder a hardship od disability which they seemed to ignore.
Expert:  Marvin,EA replied 6 years ago.
If the funds was from a IRS, distributions are not subject to the 20% withholding rule. The amount is taxable income and must be reported on you federal income tax return. How much did the bank withhold from your IRA?
Customer: replied 6 years ago.
$476.00
Expert:  Marvin,EA replied 6 years ago.
If you total taxable income for 2008 will only be $5,000 you can file for a refund of the $476.
Customer: replied 6 years ago.
That's it....no wrong doing on the side of the investment compnay....no law or ruling saying this is not right......just deal wirth the IRS.....unacceptable.

Also, the 5K investment was from a settlement that is non-taxable...how does that become taxable as you suggested.
Expert:  Marvin,EA replied 6 years ago.
You wrote that the $5,000 was invested into a IRA? Is the IRA a traditional IRA or a Roth IRA?
Customer: replied 6 years ago.
It is a traditional IRA.
Expert:  Marvin,EA replied 6 years ago.

I think you invest the $5,000 you received from the settlement which is not taxable into a taxable traditional IRA account. A traditional IRA is a personal savings plan that allows a taxpayer to accumulate money tax deferred until retirement. You have to have wages, salary (compensation) income to invest into a IRA account. For 2007, IRA contributions cannot exceed the lesser of $4,000 or compensation received for rendering personal services. For taxpayers age 50 or older, the limit increases to the lesser of $5,000 or compensation.

Customer: replied 6 years ago.
this answer is not acceptable.
Expert:  Marvin,EA replied 6 years ago.
I am sorry if the answer is not acceptable to you but your only recourse is to contact the IRS and file a complain against American Funds for withhold the funds from your IRA. The number is(NNN) NNN-NNNNfor the National Taxpayer Advocates Help Line.

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