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I put 5000.00 in a 401K account last year from a settlement ...

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I put 5000.00 in a...
I put 5000.00 in a 401K account last year from a settlement I recieved from an accident. The account lost 500.00 over the year. I have not paid taxes since 2003 because of an on going workers comp case. I requested the closure of the 401k and specifically cheked the NO withholding of state or federal taxes. They did and ignored my request. Is this lawful under fed tax laws and why?
Submitted: 9 years ago.Category: Tax
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6/3/2008
Tax Professional: Marvin,EA, Enrolled Agent replied 9 years ago
Marvin,EA
Marvin,EA, Enrolled Agent
Category: Tax
Satisfied Customers: 1,672
Experience: Enrolled to Represent Taxpayers Before The IRS
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Hello and thank you for using Just Answer. 20% federal income tax withholding is imposed on funds that are eligible to be rolled over but are paid directly to qualified plan participants. To avoid the withholding, you should have the funds transferred directly into an IRA or qualified plan without ever personally taking possession of the fund [IRC 401(a)(31)].
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Customer reply replied 9 years ago
I apologize, it is an IRA and the emergency request was done by a hardship under a disability they simply ignored.
Customer reply replied 9 years ago
Reply to Marvin,EA's Post: I apoligize, it was an IRA and the request was made uder a hardship od disability which they seemed to ignore.
Tax Professional: Marvin,EA, Enrolled Agent replied 9 years ago
If the funds was from a IRS, distributions are not subject to the 20% withholding rule. The amount is taxable income and must be reported on you federal income tax return. How much did the bank withhold from your IRA?
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Customer reply replied 9 years ago
$476.00
Tax Professional: Marvin,EA, Enrolled Agent replied 9 years ago
If you total taxable income for 2008 will only be $5,000 you can file for a refund of the $476.
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Customer reply replied 9 years ago
That's it....no wrong doing on the side of the investment compnay....no law or ruling saying this is not right......just deal wirth the IRS.....unacceptable.

Also, the 5K investment was from a settlement that is non-taxable...how does that become taxable as you suggested.
Tax Professional: Marvin,EA, Enrolled Agent replied 9 years ago
You wrote that the $5,000 was invested into a IRA? Is the IRA a traditional IRA or a Roth IRA?
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Customer reply replied 9 years ago
It is a traditional IRA.
Tax Professional: Marvin,EA, Enrolled Agent replied 9 years ago

I think you invest the $5,000 you received from the settlement which is not taxable into a taxable traditional IRA account. A traditional IRA is a personal savings plan that allows a taxpayer to accumulate money tax deferred until retirement. You have to have wages, salary (compensation) income to invest into a IRA account. For 2007, IRA contributions cannot exceed the lesser of $4,000 or compensation received for rendering personal services. For taxpayers age 50 or older, the limit increases to the lesser of $5,000 or compensation.

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Customer reply replied 9 years ago
this answer is not acceptable.
Tax Professional: Marvin,EA, Enrolled Agent replied 9 years ago
I am sorry if the answer is not acceptable to you but your only recourse is to contact the IRS and file a complain against American Funds for withhold the funds from your IRA. The number is(NNN) NNN-NNNNfor the National Taxpayer Advocates Help Line.
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