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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4380
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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I am 62 years old. I was let go at my job in May. I have

Resolved Question:

I am 62 years old. I was let go at my job in May. I have a Profit Sharing Plan which I have $50,000.00 in. If I want a check they said they have to take a mandatory 20%. I thought once you were 59 1/2 that you didn't have to pay such a large payout to the government. I could put it in a traditional IRA but my current husband will not consent to let my daughter from my previous marriage to be the beneficiary.

My husband gets a 1099 and hasn't paid any income taxes this year. If I pay 20%, and I really don't need to from my profit sharing account, I'm afraid that the government will keep the overage because he hasn't had taxes taken out of his paychecks.
Submitted: 2 years ago.
Category: Tax
Expert:  Lane replied 2 years ago.

Hi, I can help you today.

The 20% withholding is typically seen when someone distributes qualified plan money (IRAs, 401(k)s, profit sharing, etc) as you said, before age 50 and 1/2 ... and it's just that, withholding.

In that scenario, (pre- age 59 and 1/2) if you decide to get that money back into an IRA within 60 days, all that withholding will come back to you when you do your taxes for that year. If you don't "roll it over" to an IRA then the withholding is simply extra withholding for that tax year (and depending on your tax bracket) may offset some or all of the extra 10% penalty (on top of ordinary income tax on that extra income).

Even though you won't face the extra 10% penalty for early retirement distribution, your company MAY be simply withhold as a default, to help you offset the extra income tax (again, just tax no extra penalty, if you're over 50 and 1/2) that the distribution generates for that tax year.

Depending on your plan, you MAY be able to elect not to have the taxes withheld IF you are over 59 1/2.

Finally, the amount that is withheld (if it is) is simply like withholding from you're W-2 at work. If you don't owe that much for that tax year, you get refund.

Finally, to roll to an IRA, may give you more control. You take a distribution only when you need, and only that amount is included in your taxes for that year (and, again, no penalty only ordinary taxes, since you're over 59 1/2).

Also, on your IRA, you may not be required to disclose your beneficiary to anyone. Either way, It's your choice, no-one else's.

Hope this helps!

Customer: replied 2 years ago.

My company gave me paperwork that states if I go to a financial institution, my husband has to sign a waiver saying he doesn't want any claim to the money if I am not assigning him as the beneficiary. If I want the cash I have to agree to the 20% withdrawal. I was making $46,000. per year, so my tax bracket shouldn't be so high that the company should hold 20%. I also asked if I paid 20% when I didn't need to and my husband didn't pay taxes and getting a 1099, at tax time will they penalize me since we do joint tax returns.

Expert:  Lane replied 2 years ago.

Yes, qualified plans DO require that if you name someone other than your spouse as beneficiary, they have to sign off on it.

But

If you do end up rolling it to an IRA at a separate institution you wouldn't be naming the beneficiary on the IRA, until you do the application with THAT new IRA custodian. (Some companies DO try to get you to stay with the same people, Fidelity for example, for the IRA)

And remember that 20% is withholding NOT a withdrawal. It's just paid to uncle scam UNTIL you do your taxes (sort of like being on deposit ), then you get it back, if you don't owe taxes, and I would bet from what you're telling me that your taxes would not be as high as 20%, especially with the standard deduction and exemptions for filing jointly.

Finally, if you do elect to just have the check paid to you I'd bet you can elect for only 10% withholding, and again, it's just withholding against that year's taxes. They don't keep it.

Listen, I have to meet with a client, but I will be back here later this afternoon.

Maybe you could attach a copy of the paperwork.

Then I'd be able to help you better.

I'll be back around 4:00

Lane



Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4380
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 4 other Tax Specialists are ready to help you
Expert:  Lane replied 2 years ago.
Hi,

Just checking back in.

If you'd like to attach the paperwork I can take a look.

I've been looking at these forms for years, and they're often confusing, sometimes badly written and every so often have mistakes.

I'd be glad to take a look.

Let me know...



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Lane
Lane
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Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986