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emc011075
emc011075, Tax adviser
Category: Finance
Satisfied Customers: 3170
Experience:  IRS licensed Enrolled Agent and tax instructor
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I need assistance in moving money from a retirement system

Customer Question

I need assistance in moving money from a retirement system to an IRA and making a withdrawal while also avoiding penalties.
Submitted: 1 year ago.
Category: Finance
Expert:  emc011075 replied 1 year ago.

Hi. My name is ***** ***** I will be happy to help you.

Do you want to move all of it into IRA or you want to take a distribution?

Customer: replied 1 year ago.
I would like to take a distribution but the current retirement system that the money is in is an all or nothing. I would have to transfer it to a 401k, 403b or IRA if I would like access to the funds. If I pull funds straight from retirement system (cash out) I would face a 10% penalty and a 20% penalty.If I transfer to a 401k it is my understand I would face both 10% and 20% penalties.If I transfer to an IRA I would only face a 10% penalty.Would a SEPP withdraw work? As I am 58 years old.
Expert:  emc011075 replied 1 year ago.

If you are not 59 1/2 and you take a distribution, the distribution will be subject to income tax as well as 10% early distribution penalty, unless you qualify for one of the exceptions. There's no 20% penalty. Substantial equal periodical payments (Sepp) is one of the exceptions.

Expert:  emc011075 replied 1 year ago.

The SEPP can be used for both 401K or IRA.

To move the money from 401K into IRA you want to do direct trustee to trustee rollover. Do not take a distribution or you will have 20% withheld for taxes that you will have to replace with your own funds.

Customer: replied 1 year ago.
Can you calculate the SEPP payout? and what happens with SEPP once I turn 59 1/2?
Customer: replied 1 year ago.
34;If you are not 59 1/2 and you take a distribution, the distribution will be subject to income tax as well as 10% early distribution penalty, unless you qualify for one of the exceptions. There's no 20% penalty. Substantial equal periodical payments (Sepp) is one of the exceptions."Where do I move it to avoid the 20%?If I move it to an IRA, and only take partial distribution I will only face 10% penalty correct?
Expert:  emc011075 replied 1 year ago.

The avoid 20% tax withholding (again, it is not a penalty), you will need to do direct rollover. Open an IRA and contact your current 401K administrator to request the rollover form. You will need account number of your IRA. Your 401K funds will be directly sent to your IRA, not distributed to you.

There are several methods to calculate your SEPP, your IRA or 401K broker can give you the options. If you take a distribution before 59 1/2 you will have to pay regular income tax and 10% early distribution penalty. Usually 10 or 20% will be withheld to cover the tax liability.

Here are qualifying exemptions: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions

Expert:  emc011075 replied 1 year ago.

the 20% is just a withholding to cover your tax liability and is required by the IRS if the receiver is younger than 59 1/2 or qualify for any of the exceptions. It is not additional tax. You will get a credit for taxes withheld from distribution the same way you get a credit for taxes withheld from your W2.

Any questions? Where do you plan to open your IRA?

Expert:  emc011075 replied 1 year ago.

I see you offline now. So if this answered your question, please take a moment to rate my response so that I may receive credit for assisting you today. You find the rating bar on the top of the page – 5 stars. However, if you need clarification, or want to discuss this issue further, let me know. Thank you.

Customer: replied 1 year ago.
I plan to open a IRA with charles schwab. so even if i roll it into an ira I will still face a 20% tax? I want to roll the entire amount into an ira and then take a portion of it.
Expert:  emc011075 replied 1 year ago.

The 20% is not a tax. It is a withholding. It is mandatory, if you take early distribution. You will get a credit for it when you file your tax return.

If you do rollover (from 401 into IRA directly), there will be no withholding. If you take a distribution (cash out some of it), 10 or 20% will be withheld for taxes.

Expert:  emc011075 replied 1 year ago.

A withholding is an estimated payment. You actual tax will be calculated on your tax return.

Customer: replied 1 year ago.
34;If you take a distribution (cash out some of it), 10 or 20% will be withheld for taxes."....meaning 10% and up to 20% or just up to 20%
Expert:  emc011075 replied 1 year ago.

Some investment companies will ask you how much do you want to have withheld or if you qualify for any early distribution penalty exception, some will automatically withhold 20% on every early distribution (before 59 1/2): 10% for the penalty and 10% for the income tax. On a very large distribution that push you into a higher tax bracket, you can request 25%.

Expert:  emc011075 replied 1 year ago.

The main reason for the withholding to prepay your taxes so you do not have to pay underpayment penalty or end up with a huge tax bill when you file your taxes. On early distributions minimum 10% is mandatory. After 59 1/2 you can request no withholding.

Expert:  emc011075 replied 1 year ago.

Do you have any questions? Is there anything else I can help you with today?

And if this answered your question, please take a moment to rate my response so that I may receive credit for assisting you today. You find the rating bar on the top of the page – 5 stars. However, if you need clarification, or want to discuss this issue further, let me know. Thank you.