Have a Tax Question? Ask a Tax Expert
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You're welcome, I hope you can help me
Yes....I know the answer ....but I always want to give you the links to back it up....do you mind waiting just a second?
(slower computer here)
That sounds good....I'll be happy to wait.
Thank you. Unfortunately, the answer is no....if he had separated from service (quit his job) at age 55 or later, then he could have taken it penalty free
(my proof is still loading)
I generally tell people to either leave the 401K where it is if its doing well, or to roll it into an IRA
The reason is that if you take %
Well, the thing is that we need it to live on until he finds another job and in these times it's not that easy to find a job paying what you need.
if you take $50,000 (full $ amount in 401K) and it turns out that you really only needed $25000, then you've paid penalty and tax on all of the distribution
I understand where you're coming from....but you can take multiple distributions. You don't have to only take 1
Oh, I see......is there a penalty each time?
What is the percentage of the penalty?
The hope is that your husband will find a job before you empty the 401..no, the penalty is on the TOTAL withdrawls
plus your graduated tax bracket
He seems to think he was going to lose 30%
what do you mean by graduated tax bracket.....the taxes we'll have to pay on what we withdraw?
So say we take out increments of $10,000 and we do it 3 times.....
many companies withhold 20-30% automatically however most also allow you to "opt out" of the 30% and only have 20% withheld if that's what you want
However, depending on your income, lowering your withholding could cause you to have a tax payment due at the end of the year
if you take 3 distributions of $10,000, then you will receive 1 1099R for $30,000
think of it in terms of your W2
you get paid weekly or biweekly, and only receive 1 W2
and that's what we pay tax on.....but where does the 10% penalty come in and i'm confused on what you said about companies withholding 20-30%.....is that also for taxes?
Yes. I've been doing taxes 25 years, so let me give you some background if you don't mind...ok?
so are we going to lose 10% plus 20 to 30 percent also
you will pay 10 % as a penalty for taking the money before age 59 1/2, AND the distribution will be added to all of your other income (W2, interest income, etc) and become part of your Adjusted Gross Income, and you pay on your AGI at your individual graduated income tax level.
Where I really started seeing alot of this was in the early 80's when the hospitals here asked people to take early "buy outs"
these buy outs included their pension plans, and the people didn't understand that the money was taxable AND subject to the 10% penalty (most hadn't reached age 55 yet)
So, in order for people to not have to pay so much tax at the end, and in order to follow IRS
IRS's "pay as you go" plan....the IRS passed legislation that all companies must withhold at least 20%
(the 10% penalty, and the other 10% to help cover the additional income )
For most people that wasn't enough
so they "upped it" to 30%
Like I said, you can ask to have less withheld, but I wouldn't do that without running the numbers first
Also, its now close to the end of the year
so if we have $90,000 after it's all said and done we'll get about $60,000????
if you took a smaller distribution now, you could take more in Jan, and you will probably have less overall income due to your husband being unemployed at the moment
and that will be looked at as income that we have to pay more taxes on at the end of the year???
OH, I see what you're saying
If your employer doesn't want to do this, then go to a bank and do 'AN INSTITUTION TO INSTUTION" rollover to a Traditional IRA
That way, you have more control over when you want your money, but the 10% penalty and the fact that the additional income is taxable still applies
And you suggest just taking it out as we need it......but we only take the 10% penalty once, right?
Here's your link by the way
Tax on Early Distributions
once per year
Oh, so if we take out some this year we will have to pay 10% more at the beginning of next year, correct?
yes, but if your overall income is less, then you pay at a lesser rate based on your income
I can't make the 10% disappear, but I can help you pay less tax overall
Your link came from here:
Publication 560 (2010), Retirement Plans for Small Business
Does that make sense to you?
Its a hard concept
good, cuz I'm all for paying the bare minimum to the IRS
I surely don't see why they are trillions in debt.....they sure do suck the money from the taxpayers, that's for sure.
let me tell you a true story
my husband HONESTLY believes that IRS is at the root of ALL evil in this world
and that myself, and all of my tax prep colleagues are just IRS agents in disguise
he HONESTLY believes this
I've been a tax preparer for 25 years, we've been married 7 years
I figure he knew what he was getting
however, he refuses to go to the yearly banquet.....cuz he's in "enemy territory"
You've got to be kidding me.....wow!!!! So to sum it up.....10% penalty, and 20% tax....and take only what we need to avoid more taxes.
You've got it
That proves he REALLY loves you :)
and my husband would absolutely agree with your point of view
(so do I, but I'm not usually allowed to say so)
lol I never thought of it like that
I won't tell anyone lol......thanks for all your help and I will be using the site in the future!
Please come back if we can hep you again....you may ask for me by name
I'm not here much during tax season, so please put a long time limit if the question can wait
if not, there are alot of good pros here
they're just not as much fun!
Thanks Anne, I'll keep that in mind :) No, you have been wonderful, that's for sure! Take care and thanks again!
You're most welcome
Best of luck to you
Thank you very much
By the way....is this conversation in my email or should I save it?
I'm sorry that I don't know the answer to that
I've never seen the customer side
but I got paid recently for an answer I gave n 2010
so it must be saved SOMEWHERE
I know you can go to your "profile" and do a
(I hate this format.....it keeps jumping )
but if you want to be safe, by all means save it
or bookmark it
:) good idea, thanks!
hey, I never said I was computer literate...lol
I started taxes before computers.....some days I wish it was still that way
it was so much less complicated
If you have no other questions....I'll hit "save & exit" from my side...you can proceed to "accept" from here if you're done