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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 16547
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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Hi, I am 56, I withdrew amount from my 401K account in Nov

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Hi, I am 56, I withdrew amount from my 401K account in Nov '12. I was planning to deposit back within 4 months. But, I could not. Now, i can deposit all money back in my plan within 1 year of withdrawal. How much penalty is to be paid? What are Income tax consequences? I live in California and I am not working and have no other income. I would like to get an advise how to consider this amount as a loan and what would be required to avoid penalties and Income tax. Because I borrowed money for some needs (can not be classified as Emergency Needs - like Medical expenses,...)

MyVirtualCPA :

Thanks for asking your question! I'm sorry to hear about your tax issue and I'm going to try my best to help you understand or resolve it.

MyVirtualCPA :

How are you tonight?

MyVirtualCPA :

I hate to be the bearer of bad news, but now that the money is out of the 401(k) and was not placed back into a qualified retirement plan such as an IRA within 60 days of the withdrawal, it is fully taxable to you. There is no way to put this money back into your retirement account or classify it as a loan

MyVirtualCPA :

The penalty on a 401(k) withdrawal before age 59.5 is 10%

MyVirtualCPA :

You will be taxed on the money taken out of the 401(k) just as if it were other income.

Customer:

This is standard information. I was told to consult tax adviser as there are are some exceptions for age 56 - retired persons...

MyVirtualCPA :

There's no exception that would allow you to place your money back into the plan

MyVirtualCPA :

If you leave your employment after the age of 55, then you can get around paying the 10% penalty

MyVirtualCPA :

But, you would still need to pay income tax on the amount taken out of the plan.

Customer:

How can this be classiified as loan?

Customer:

How sure are you about your advise?

MyVirtualCPA :

You would have to have taken it out as a loan initially

Customer:

Can it be not classified as loan now?

MyVirtualCPA :

I'm positive. You can take money out of a 401(k) and place it into an IRA and avoid tax, but only within 60 days of your withdrawal

MyVirtualCPA :

No, it cannot. It would have had to have been a loan from the time you took it out. You would have had to sign a promissory note and started making payments back to yourself.

Customer:

So, if it was taken out as loan for one year, all penalties and taxes are not payable>

MyVirtualCPA :

It would have to be classified as a loan from the time you took the distribution. If you left your employment during that year, then whatever wasn't paid back would be classified as income

MyVirtualCPA :

So, if you took out a $5,000 loan and paid back $2,500 and then retired and left your job, the remaining $2,500 would be income

Customer:

I took moey out after few years of leaving job and retired

MyVirtualCPA :

Then you would not qualify for a loan in the first place.

MyVirtualCPA :

You can only get a loan from the 401(k) if you are still working

MyVirtualCPA :

Because your payments would be payroll deducted

MyVirtualCPA :

You will not pay the 10% penalty, but you will owe tax on the amount of your withdrawal

Customer:

So, no pint in depositing money back now in 401K?

MyVirtualCPA :

You cannot deposit the money back into the 401(k)....it's not allowed

MyVirtualCPA :

Also, were you at least age 55 when you left your job?

MyVirtualCPA :

If you were not 55 when you left your job, then you would owe the penalty.

Customer:

no - 52

MyVirtualCPA :

You have to separate at age 55 or older to be able to avoid the 10% penalty

Customer:

In addition to penalty is there additional 2.5% tax in CA? Or standard Income tax for CA?

MyVirtualCPA :

Yes, there is also a state penalty. This penalty is 2.5%

MyVirtualCPA :

You will also owe tax to the state.

Customer:

are all taxes and panalty payable on 15th April 2014? And taxes will be after my deductions?

MyVirtualCPA :

Yes taxes are payable on April 15, 2014. You will pay tax as ordinary income, so if you have deductions you can use them to lower your tax. However, the 12.5% penalty is non-negotiable

Customer:

And you are 500% sure that there are no exceptions - which can be used if everything is paid back...

MyVirtualCPA :

Yes. The only thing you can do when you withdraw from a 401(k) to avoid tax is to deposit it into an IRA within 60 days.

MyVirtualCPA :

You cannot pay it back.

Customer:

As I withdrew money in Nov 2012, i did not report in my 2012 return on 15th April 2013. Do you see any issue with that?

MyVirtualCPA :

Yes, you will need to amend your tax return for 2012

MyVirtualCPA :

I assumed you took the withdrawal in 2013

Customer:

No, in my question, I tated at the beginning that i took it out in Nov '12

MyVirtualCPA :

I'm sorry I missed that

Customer:

Upto what time i can amend return and when do i have to pay tax?

MyVirtualCPA :

You will need to amend your returns and pay the tax. Additional penalties and interest will apply as tax was due in April

MyVirtualCPA :

The tax is due now. You should amend ASAP. The amount is reported to the IRS and if you do not amend, they will adjust your account and bill you plus penalties and interest

Customer:

How much are these penalties and interest?

MyVirtualCPA :

The IRS will calculate them. It's based on a variety of factors

MyVirtualCPA :

They will take your return, calculate the penalties and interest, and send you a bill for the remainder

Customer:

ok.

MyVirtualCPA :

It all depends on how much you owe, when payment was due, and how quickly you get the amended return in and make the payment

Customer:

Thank you. I hope your advise is correct, It is very confusing due to so many sources giving different facts!

Customer:

Please do not publish this chat anywhere...

MyVirtualCPA :

I understand.

Customer:

I was told by one of CPA that money can be taken out for 4 months....

MyVirtualCPA :

Ok. Please take a moment to rate my response as 'excellent' so that I may receive credit for assisting you tonight with your issue

MyVirtualCPA :

It's 60 days.

Customer:

How do you guarantee your advise?

MyVirtualCPA :

What do you mean?

Customer:

May i ask if you have a professional qualification for me to rely upon your advise - or i need to ask another profesional advisor

MyVirtualCPA :

I am a CPA

Customer:

In CA?

MyVirtualCPA :

I also am a CMA (Certified Management Accountant) and CFE (Certified Fraud Examiner)

Customer:

ok

Customer:

For future advise, how can we contact you?

MyVirtualCPA :

No, I am not licensed in California. I am licensed in Tennessee

MyVirtualCPA :

You can contact me here: http://www.justanswer.com/finance/expert-myvirtualcpa/

MyVirtualCPA :

I used to audit Employee benefit plans, such as 401(k) so I am very familiar with the process of withdraws and loans

Customer:

But, my virtual cpa can be anothe rperson as well - or that is your screen name?

MyVirtualCPA :

That's my screen name.

MyVirtualCPA :

My name is Megan

Customer:

ok. WIll i get script of our chat by email?

MyVirtualCPA :

I believe the website does this but you can also save using your print function

Customer:

Thank you

MyVirtualCPA :

You're welcome. Please take a moment to rate my response as "excellent" so that I may receive credit for assisting you today

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