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IRA withdrawal/taxes
Old 11-01-2011, 01:58 PM   #1
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IRA withdrawal/taxes

My job search isn't going very well so i'm thinking about withdrawing part of my IRA. I would take out as much as I can and still stay in the 15% tax bracket. I am under 59 1/2 so i'll have to pay an exta 10% as a penalty. Is there any reason not to wait to pay the taxes until I do my regular tax return? If I need to take more next year then the amount I would have to pay in in 2013 would be approaching $10000. Is that okay or am I required to do quarterly estimated payments in that case?
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Old 11-01-2011, 02:13 PM   #2
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I'll defer the tax question to others. But before you go this route, check out IRS rule 72(t).

Here is a link to Investopedia (which is sometimes a little easier to understand than the tax code).

Rule 72(t) Definition
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Old 11-01-2011, 02:18 PM   #3
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I'll defer the tax question to others. But before you go this route, check out IRS rule 72(t).

Here is a link to Investopedia (which is sometimes a little easier to understand than the tax code).

Rule 72(t) Definition
I'm 32 years old with barely a 6-figure potfolio. 72t isn't an option for me.
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Old 11-01-2011, 02:20 PM   #4
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Sorry about the job search.

I googled this and found that at least you shouldn't have to pay the penalty for early withdrawal if you've been collecting unemploymenf for 12 weeks: How to Withdraw From an IRA During Unemployment | eHow.com
and on p. 53 of the IRS publication here: http://www.irs.gov/pub/irs-pdf/p590.pdf
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Old 11-01-2011, 02:23 PM   #5
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I'm 32 years old with barely a 6-figure potfolio. 72t isn't an option for me.
Didn't know that. Then the 72(t) is definitely not for you.

Sorry to hear of your situation.
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Old 11-01-2011, 02:24 PM   #6
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Sorry about the job search.

I googled this and found that at least you shouldn't have to pay the penalty for early withdrawal if you've been collecting unemploymenf for 12 weeks: How to Withdraw From an IRA During Unemployment | eHow.com
and on p. 53 of the IRS publication here: http://www.irs.gov/pub/irs-pdf/p590.pdf
Thanks but unfortunetly i'm not eligible for UE benefits.
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Old 11-01-2011, 04:14 PM   #7
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If I need to take more next year then the amount I would have to pay in in 2013 would be approaching $10000. Is that okay or am I required to do quarterly estimated payments in that case?
What does this mean? The tax you pay in Apr 2012 for TY2011 is 10K?
How much tax will your tax be for 2011............total tax, not what you still owe in April. What was your total tax for 2010? Did you work in 2011? Will you meet one of the safe harbors? Did you withhold in 2011
at least 90% of the 2011 total tax or 100% of the 2010 total tax? (assuming AGI < 150K). If you don't meet one of the safe harbors, you could owe a penalty by the amount that you miss. That will be something like 3 mos. interest on the amount that you missed the safe harbor by.
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Old 11-01-2011, 04:28 PM   #8
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What does this mean? The tax you pay in Apr 2012 for TY2011 is 10K?
How much tax will your tax be for 2011............total tax, not what you still owe in April. What was your total tax for 2010? Did you work in 2011? Will you meet one of the safe harbors? Did you withhold in 2011
at least 90% of the 2011 total tax or 100% of the 2010 total tax? (assuming AGI < 150K). If you don't meet one of the safe harbors, you could owe a penalty by the amount that you miss. That will be something like 3 mos. interest on the amount that you missed the safe harbor by.
I worked part of 2011. Now i'm planning to withdraw some money from my IRA this year. If I tell the company holding my IRA not to withhold anything(10% penalty or taxes) then I will have to pay that when I do my taxes in early 2012. My rough estimate says i'll have to send a check to the IRS for about $3000 by April 15th 2012. In 2012 if I don't work at all and take out say $35,000 from my IRA can I not pay any taxes until I do my return in early 2013 or do I have to pay earlier in some way. If I pay it all at the regular tax time, i'll have to write a check for something like $8000.
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Old 11-01-2011, 04:43 PM   #9
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I'm 32 years old with barely a 6-figure potfolio. 72t isn't an option for me.
I didn't know that you lost your job. Sorry that happened to you.

Can you drive a cab? A school bus? Move to North Dakota or South Texas and get an oil field job? Maybe drive one of those medical lab pickup routes? How about over the road truck driver? Being clean WRT drugs and arrests and traffic violations can speak volumes in your favor.

You may also be able to get into the service at your age, but I am not sure at present.

If you possibly can, stay out of your retirement accounts. If you leave them alone, you may be able to qualify for various doles. At least food stamps, maybe other things too. Is your condo big enough to take a roomate?

A office cleaning service is cheap to start, and since you have no job now the opportunity costs are small.

Best of luck!

Ha
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Old 11-01-2011, 05:25 PM   #10
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aaron,

Not a tax expert (REALLY, I'm not!) but I'm pretty certain you must file quarterly taxes if you take money from your IRA and owe taxes. My guess is that you will have to pay 20% withholding on all withdrawals anyway. Both of these are true for me (withholding 20% and filing quarterly even though I am retired.)

I cannot identify with the desperation that many must feel right now as they look for w*rk. At least you do have some assets to draw upon - even though at a high cost. Not being eligible for unemployment must really hurt!

I don't know what I would do in your situation. My gut tells me that I would be looking for pick-up w*rk like yard/garage cleaning, power washing driveways (A $200 sprayer can earn you $20 to $30/hour, cash (nod, nod, wink, wink). A young'un like you probably has some options for physical labor that, while not particularly well paying, could help protect your nest egg. I'd think about buying a couple of sets of coveralls, have my name and "company logo" professionally placed over the breast pocket and start knocking on little-old-ladies' doors. Buy one of those magnetic signs for your vehicle (a pick up would be great if that's what you already drive!) If you can use a screw driver and hammer, there are infinite little tasks that folks need done and they are willing to drop $25/hour to get them done (once again, think cash!) Hauling crap to the dump is big in many areas too. Now that the weather is turning, how about installing insulation, installing new weather stripping around doors/windows, calking, "winterizing" for Mrs. X or Y. If you can clear $100 cash/day - 5 days/week, you could forget taking money from 401(k)/IRA sources. YMMV.

Stating the obvious, there are also ways to cut expenses, but you've seen it all before in these pages.

I know I speak for all here who wish you the best. Check back often and let us know how it's going. Once in a while it helps to talk about it.
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Old 11-01-2011, 05:48 PM   #11
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aaron,

Not a tax expert (REALLY, I'm not!) but I'm pretty certain you must file quarterly taxes if you take money from your IRA and owe taxes. My guess is that you will have to pay 20% withholding on all withdrawals anyway. Both of these are true for me (withholding 20% and filing quarterly even though I am retired.)
The form I was givin gives me 2 options. 1- check the box that says "I elect to have no Federal income tax withheld from my distibution. 2- Fill in the blank a % withheld(10% or greater).

Lets say I tell them to withhold 20%. How do I know how much more(if any) I will need to pay in taxes. What if I don't have a job at all next year and wait until the 4th quarter to make a withdrawl of an unknown amount. I can't pay taxes ahead of time if I don't know what my income will be.

Should I just have them withdraw 25% from my distributions. That way i'll get a refund at the end of the year. Don't want to give Uncle Sam an interest free loan but better than getting fines and penalties because I didn't do something right.
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Old 11-01-2011, 06:21 PM   #12
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Originally Posted by aaronc879 View Post
The form I was givin gives me 2 options. 1- check the box that says "I elect to have no Federal income tax withheld from my distibution. 2- Fill in the blank a % withheld(10% or greater).

Lets say I tell them to withhold 20%. How do I know how much more(if any) I will need to pay in taxes. What if I don't have a job at all next year and wait until the 4th quarter to make a withdrawl of an unknown amount. I can't pay taxes ahead of time if I don't know what my income will be.

Should I just have them withdraw 25% from my distributions. That way i'll get a refund at the end of the year. Don't want to give Uncle Sam an interest free loan but better than getting fines and penalties because I didn't do something right.
Again, as a total non-expert (hey, experts, help us out here) I can't really answer your questions. It's true that you need to stay roughly "even" or ahead of the IRS requirements to avoid penalties. However, if you can get "close", the penalties are usually quite small. I've often been hit with a $80 or $100 penalty for shorting the feds or state. I figure I probably came out ahead by keeping the money. You can look up the general rules on this stuff (e.g., how close you have to estimate and the rules regarding how much tax you payed in the previous year, etc.) I would suggest you estimate your total tax rate, calculate the taxes, throw in a fudge factor and send/deduct it to the IRS and don't sweat it too much.

The big question I really, really don't know is whether you need to file quarterly even if you have the IRA custodian withhold TOO much as you suggest. Experts! What say yee?
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Old 11-01-2011, 06:56 PM   #13
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The form I was givin gives me 2 options. 1- check the box that says "I elect to have no Federal income tax withheld from my distibution. 2- Fill in the blank a % withheld(10% or greater).
.
You are correct that you don't need to withhold anything on IRA distributions
(this is different than withdrawing from a company plan). You might want to ask the trustee if you can override the withholding instructions at any time and how much flexibility you have.

Generally you have 2 choices
1) Pay quarterly estimated taxes , either equal amounts each quarter (the simplest) or proportional to income each quarter, or variations thereof;
With estimated taxes even if you paid the correct amount, you could have a underpayment penalty if the quarterly payment weren't equal or properly
phased to the income.
2) Pay withholding.....one of the advantages of withholding is that it is considered as being paid evenly throughout the yr. This means that you could not withhold until the last quarter (when you might have a better idea of your tax liability) and then withhold in one lump or several late in the yr
and not be penalized for being late. If you got a job, the withholding from wages could also be lumped late in the yr as it could be for the IRA withholding.

You should check if the IRA trustee to see if e.g. they would allow 100%
late in the yr after being 0% the rest of the year.

You also should be using a tax calculator (google "Taxcaster") or software to be estimating your tax as you go through the year. Become familiar with the 2 safe harbor concepts so you know what your target is.

Good luck on the job hunt.
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Old 11-01-2011, 07:33 PM   #14
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Originally Posted by aaronc879 View Post
My job search isn't going very well so i'm thinking about withdrawing part of my IRA. I would take out as much as I can and still stay in the 15% tax bracket. I am under 59 1/2 so i'll have to pay an exta 10% as a penalty. Is there any reason not to wait to pay the taxes until I do my regular tax return? If I need to take more next year then the amount I would have to pay in in 2013 would be approaching $10000. Is that okay or am I required to do quarterly estimated payments in that case?
Aaron, I just skimmed the thread, but didn't see it clarified. By IRA, are we to presume you mean Traditional IRA? If you have a Roth, your contributions can be withdrawn both tax and penalty free at any age. This "benefit" of the Roth, if you want to call it that, is because the government already got its share. The earnings have certain provisions where they can also be withdrawn penalty free as well (after 5 years, I believe?).

Assuming you did mean Traditional, would you consider a Roth the next time you are employed and can save again, if for no other reason, so that you will have the above-referenced benefits of the Roth?

Unless you had a really high paying job where your marginal rate was at least 28%, you would have arguably been better served in a Roth. Certainly from a hindsight point of view, given this discussion.
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Old 11-01-2011, 09:36 PM   #15
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Not an expert, but a couple of tax-related points as I understand them:

(1) You can't know what you will get in 4th quarter ahead of time. So for cases like this, the general principle is that it should be sufficient that every quarter you pay based on your income in that quarter. There are more precise formulas I am sure but I think that general principle gives you an idea... So, in your example, you mentioned of having $0 income in all but last quarter. Then it's fine if you only send in sufficient payment for the last quarter.

(2) Another general principle - to avoid penalty for underpayment of fed taxes, you have to either
- pay what your taxes were last year (or 110% of them if your incomes was over 100k I think), or
- pay at least 90% of what your taxes will be due this year

So if you can do the former, you might be good to go.

State tax rules could be different...
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