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Old 12-19-2011, 01:30 PM
 
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Default 401K Withdrawal and Estimated Taxes

If I withdraw my 401K do I have to pay estimated taxes?
Should I spread the estimate out or pay a full estimate during the next quarter?

I am a one-person business and have to pay estimated taxes. However, I am not sure of how to handle a 401K withdrawal scenario.

I need the funds to pay credit card debt (debt would then be zero) and provide living expenses for the next six months. I understand the negative ramifications... 20% immediate, 10% penalty when I pay my taxes, then I pay taxes at my tax bracket, depending on my taxable income.

Any feedback is appreciated.
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Old 12-19-2011, 04:31 PM
 
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they generally will withold 20% but you will owe more . it all depends on your age and tax bracket.

have you looked into a 72t election? will that help at all?
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Old 12-19-2011, 05:28 PM
 
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Quote:
Originally Posted by mathjak107 View Post
they generally will withold 20% but you will owe more . it all depends on your age and tax bracket.

have you looked into a 72t election? will that help at all?
I saw a post on the 72t but I am not in that age bracket yet. I have no dependents.
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Old 12-19-2011, 07:04 PM
 
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age bracket? you can do it at any age. you have to just take yearly equal distributions until your 59-1/2.
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Old 12-19-2011, 09:19 PM
 
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Ok. I guess the distribution requirement was not okay with me. I need to use a large portion up-front for clearing debt. It's still up in the air if I will do this or not. I am hoping for a Christmas miracle business-wise.

I appreciate your feedback.
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Old 12-20-2011, 05:55 PM
 
Location: Albuquerque
5,553 posts, read 9,118,688 times
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Quote:
Originally Posted by AutumnTraveler
I understand the negative ramifications... 20% immediate, 10% penalty when I pay my taxes,
Are you 59 1/2 yet? If so, you won't owe any 10% penalty. You don't say.
You don't have to pay 20% "immediate." Chances are, you can just generate a payment on-line. I do it all the time.
Quote:
Originally Posted by mathjak107 View Post
they generally will withold 20%
You can have whatever you want withheld.
If you don't specify a percentage, then yes, it might be 20%.
Quote:
Originally Posted by mathjak107 View Post
but you will owe more . it all depends on your age and tax bracket.
First you say you generally will owe more, which is wrong. You don't know.

AutumnTraveler has not specified either their age or likely taxable income.

Then you say, "depends on your age and tax bracket" which is right.
If you are under 59 1/2 then you will owe a 10% penalty.

If you are under 55, then you can't use a 72t election. You also can't use it to withdraw
a larger amount than the 72t allows. Until their age is known, well, we don't know.
They said that they are not in that age bracket, so I assume they are also under 55.

The correct answer is that you will end up owing your marginal tax rate.

There is a 10% bracket. If you are in that bracket, then that's what you owe.
There is also a 25% bracket. You owe that if you are in there.

Make an estimate of what you are going to make in taxable income.
From the tax tables, determine your bracket. That's what you will owe.
It's a pretty easy calculation. The hard part is estimating your income.
As a business owner, that might be impossible for 2012, but easy for 2011.

Last edited by mortimer; 12-20-2011 at 06:11 PM..
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Old 12-20-2011, 06:13 PM
 
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he stated in his first post he knows he will pay a penalty so that tells us his age is under 59-1/2.....

you have quite a bit of inaccurate information in your post.

your wrong about the 72t election, it can be done at any age under 59-1/2. not sure where you are coming up with this 55 stuff.


the 20% is mandatory on an distribution taken that isnt rolled over directly.



"
If your distribution is eligible to be rolled over, 20% will be withheld for federal income taxes, unless that distribution
is directly rolled over or converted as specified in Section 5. You cannot elect out of 20% withholding for federal income taxes.
If you are taking a distribution of after-tax contributions or a minimum required distribution (MRD), the mandatory 20% withholding
for federal income tax does not apply. If the distribution is not eligible to be rolled over, IRS regulations require withholding
at the rate of 10% for one-time withdrawals or according to the IRS wage tables for periodic withdrawals, unless you elect not
to have the withholding apply
"

http://www.youtube.com/watch?v=l1DEHF_5vpY

Last edited by mathjak107; 12-20-2011 at 06:27 PM..
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Old 12-20-2011, 06:27 PM
 
289 posts, read 309,858 times
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Quote:
Originally Posted by mortimer View Post
Make an estimate of what you are going to make in taxable income.
From the tax tables, determine your bracket. That's what you will owe.
It's a pretty easy calculation. The hard part is estimating your income.
As a business owner, that might be impossible for 2012, but easy for 2011.
Ok, so this sounds like I would include the distribution that I get as part of my income, and divide by 4 for each quarter as an estimate?

For example, say the 401K has $20,000. Would I use $20K as my income for the quarter in which the distribution occurs? Or would I use $5K?

I would then also include my estimated income from business.

Last edited by AutumnTraveler; 12-20-2011 at 06:28 PM.. Reason: Added more info
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Old 12-21-2011, 03:23 AM
 
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you can figure 5k a quarter if your taking the entire thing ,plus the penalty .

just remember the marginal tax rate may change so whevetever your taxes are at 5k may be more at 20k on that money at the end of the year if it pops into the next bracket..

for those interested in 72t elections
Section 72(t) of the Internal Revenue Code allows taxpayers of any age to take a series of equal periodic payments without a 10% penalty.

These IRA distribution payments must continue for five years or until the IRA owner reaches 59 years old, whichever period is longer. While they are receiving the money, they cannot make any changes to the payments. However, they can irrevocably switch one time to the RMD method .

there is trouble though if you dont keep up with the plan, or modify the payments in any way as they will no longer qualify for the exemption from the 10% penalty. , the 10% penalty will be reinstated retroactively, to all prior years' IRA distributions.

Each IRA you own stands on it own, meaning that taking 72(t) IRA distributions from one of your account has no effect on the others. , you could set up a smaller, seperate account to withdraw from if more income is needed , then off in the future, you could begin equal distributions from another account as well.
There are three ways to calculate 72(t) IRA distributions and they do get complex so i wont go into all the details.

the important thing is you can do this at any age and if you can live with the periodic payments there is no reason to pay the penalty.

Last edited by mathjak107; 12-21-2011 at 03:58 AM..
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Old 12-21-2011, 08:24 AM
 
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if over 55 and no longer at your job you can take your 401k money with no penalty. that doesnt apply to ira money though,thats still 59-1/2.
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