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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
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Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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Resident of CA currently. Will move to NH and become ...

Customer Question

Resident of CA currently. Will move to NH and become resident of NH Sept 1st. If i do an early withdrawal of money from IRA before Sept 1st   much tax would i have to pay what about if i made an early withdrawal after sept 31st ? If i withdraw 100,000 from IRA and move it to an individual account and make 900,000 in capital gains on it within 60 days and return the original amount 100000 of IRA withdrawal back to IRA account within 60 days. What will the tax rate on the 900,000 be? Will i only have to pay capital gains ? Which state will i have to pay it in consierign i make the gains in Sept after my move to NH?
Submitted: 6 years ago.
Category: Tax
Expert:  Ed Johnson replied 6 years ago.

Dear anika,

Withdrawing the IRA money as an early withdrawal will befoe September 1 or after september 31 will not change the penalty or the tax from Federal.

But if you put it back in, within the 60 days, you will avoid the tax. However, you will not be able to avoid the withholding by the plan administrator; by law he has to withhold, UNLESS, you desigate the rollover account before you withdraw it.

To answer further, I need to know some additional information:

1. What species of IRA is it? Roth or Traditional

2. What kind of IRA is it: self directed or part of an employer retirement plan?

3. What was the capital gains from?

NOTE: Short term capital gains is going to be taxed as regular income, at your marginal rate, dependent on your adjusted gross income, in this case 35%.

 

 

Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience: GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
Ed Johnson and 6 other Tax Specialists are ready to help you
Customer: replied 6 years ago.
HI Ed, Thank you for your response.   To answer your questions and provide you a few more details :
1. I am currently a resident of California.
2. I took a year off after quitting my job. I dont plan to work in all of 2008 since i am enrolled in graduate school and want to concentrate on that. Currently as it stands my gross income is 0$.
3. The IRA account is a Traditional IRA to which i rolled over my 401K money when i quit work last year.
4. I learnt that i cant withdraw or take a loan from my IRA until i am 59.5 years old I am currently 32 years old and i find this highly inconvenient, since i prefer that i have more access to my money.
5. I learnt that if i withdraw early from IRA, all the money i withdraw will be considered Income. I would get slammed with 35% income tax + 10% penalty = 45% tax on my early withdrawal.
So i figured a workaround and i want your advice if this is valid :

a. On Aug 1st 2008 i have 100,000 in my IRA.
a.1 I moved and become resident of PA (which has lower income and capital gains tax that CA) on Aug 1st.
b. I withdraw all the money from my IRA and move it into an individual account.
c. I invest the 100,000 and make 900,000$ in capital gains within 60 days.
d. I return the original 100,000 back into my IRA (thus making the 60 day deadline on short term loan from IRA)
e. I am now left with 900,000 in my individual account all of which i made on capital gains in a year that i did not work and my income was 0$.
My understanding is that given my income bracket (0-8000) i will be taxed at a rate of 10% on my short-term capital gain and that is the only amount i will be taxed. Is that correct ?
Alternately , if i hold onto my stocks for more than 1 year and do not work in 2009 either then when i sell the stocks after 12 months the capital gains tax will be 0 since i will be in the lowest income bracket.
:) Am i dreaming ??? Can you clarify ??
Customer: replied 6 years ago.
you can reach me on my cell -- (NNN) NNN-NNNNif you need more information or clarification.
Thanks!
Expert:  Ed Johnson replied 6 years ago.

dear anika,

Thank you for the details.

My answer will be based on the information given, and the assumption that you are moving eventually to NH as stated in the original question. I will address a peculiar issue regarding California and residency.

As previously stated, with regard to the fedearl return. You would have to talk to he IRA adminstrator. Normally, this is a representative of the bank or institution it is in. Generally, they will withhold, by law, the estimated taxes on the early withdrawal, including penalty, unless you desigate it as a rollover before hand. Even then that will only avoid the withholding of the penalty. There are some who may agree, that if you are designating the withdrawal as a rollover before hand, to allow you to singn a statement attesting that you are responsible for any taxes, and ensuring you are aware of the 60 day rollover rule. I can tell you that if you money is in a credit union manged account, then they will only waive the withholding of penalties under these circumstances.

The 10 percent capital gains tax rule no longer exists. The rules for capital gains have changed since then.

Now the rules are for capital gains are:

Long term gains: the rates vary by which investment you have. You never told me what you were investing in. But it really does not matter for you, since you will be holding your investments for less than a year, they will be short term.

FOR SHORT TERM GAINS: Your income level will not matter, because it is always taxed at the rate as determined by your adjusted gross income. BUT here is the catch. The 900,000 capital gain, will be added to your adjusted gross income. so even if you had zero earned income from any source (including unemployment, intrest, etc), you will add 900,000 to your gross income of zero, and that will give you an adjusted gross income of 900,000 which will be taxed at 35%.

http://www.irs.gov/pub/irs-pdf/p550.pdf

Now about California: California considers all residents to be residents when they move away, in some cases, unless they break all ties to california. YOu have to be strong in your signal to california that you intend to establish your residence else where, and that you do not intend on returning to California. This is the only state, in my experience, that does this.

Also, if the IRA is in a California Bank, and you withdraw it, it is California sourced income. California will want to buy it. The general rule on intangibles does not apply to IRA's which would be a california sourced income. (if the IRA was in a California Bank or Financial Institution)

To avoid these kinds of issues, and being in a situation of having to do battle with california, I recommend creating your rollover account in your destination state.

REGARDING YOUR STOCKS: If you hold on to them for more than a year, the long term gain will be 0% if you continue to have a zero gross income. This is because the rules for long term gains is different than the rules for short term gains. (if you sell these in the year of the short term gain you are proposing, you will have to pay capital gains at 15% on the long term stocks). You have to hold the stocks for one year and one day to be eligible for long term capital gains treatment.

The new zero rate is for tax years from 2008 to 2010; it expires in 2010.

 

 

 

Customer: replied 6 years ago.
Thank you so much edward !!! You've been very helpful. I have one last question... if you know the answer
I spoke to fidelity and they said they would allow an in-kind transfer from my IRA to my individual account. If i move 50K out of my IRA and the closing value on day of move was 1$. and the shar appreciate to 3$. Do i have to return to my IRA , 50K X 1$ worth of share ? or do i have to return 50K shares immaterial of the dollar value.

Thank you for all your help.
I will accept right away. But if you can clarify this too for me, that would be great !!
Expert:  Ed Johnson replied 6 years ago.

Dear anika,

Thank you for your feedback and comments.

An in-kind transfer is a transfer from one IRA account to another IRA account.

I see your IRA has stock shares.

You have to transfer the entire holdings regardless of appreciation.

If the stocks appreciate, and you withold some, that would be considered a distribution on that portion and would be taxable. since it would be an early distribution, that portion would be considered at penalty.

 

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