Cashing out Simple IRA

[MM1976]

I have a simple IRA from an old job I had from 2000 to 2005. My new job that I've been at since then has a good 401K retirement plan. I never got around to rolling that little pot of money (the simple IRA) from the old job into the new job. Some people told me I couldn't. Others told me I could. I just never got around to it. I have no intentions ever of touching the 401K in my current job, but I could really use the money in the old simple IRA. There's not much in it. Maybe about $5,000, and I'm well aware of the penalties. 10% plus other penalties plus I'll be taxed on the full amount. I'm aware of all that and I'm aware of all the reasons I shouldn't do it. I know it's not the best idea in the world, but again, I know the downfalls. I simply have a question on the "taxed on the full amount" part.

So for example, if I make X number of dollars a year, in next year's tax return, it'd be taken as if I made the amount I make PLUS the full $5,000, correct? Even though I'll get less than that if I cash out the IRA due to the penalties? I just want to make sure I understand it correctly.

So, in practical sense, would my federal refund take a major hit next year or not so much since $5,000 is not that much?

Again, I know the downfalls. I know people advise against cashing these things out. I know all those things. I haven't even decided 100% if I'm going to do this for sure. I just wanted an answer on my questions above to toss around in my head this weekend.

Thanks guys!

[dfeucht]

Yes it is on the full $5,000. The penalty in essence is an additional tax on top of your marginal tax bracket.

It sounds like you know this is a terrible idea, so I won't try and talk you out of it, but I will offer an alternative.

If you are contributing to your 401k you PROBABLY (not sure how much you are contributing or what the match is so there are other considerations) would be far better off reducing your contribution until you were able to save the money you feel you need to get by taking the money out of the SIMPLE IRA. Take it for what it's worth.

[MM1976]

Good idea. I'll check into that. Thanks for the idea.

But, if I were to do the cashing in of the IRA, saying I make about $40,000 a year, how much would that affect my tax refund next spring? I usually do pretty well with the refund since I have three kids.

[disneysteve]

But, if I were to do the cashing in of the IRA, saying I make about $40,000 a year, how much would that affect my tax refund next spring? I usually do pretty well with the refund since I have three kids.

If you typically get a large refund, fix that today. Change your withholding so that you have that money coming in every week in your paycheck rather than waiting for the government to return it to you next year. That could fix your problem of needing the money out of the IRA and let you avoid paying those penalties. It is ridiculous to cash out the IRA and pay 35% penalty now just so you can get that much or more back as a refund next spring. That would be a huge waste of money.

[kork13]

It is ridiculous to cash out the IRA and pay 35% penalty now just so you can get that much or more back as a refund next spring. That would be a huge waste of money.

But Uncle Sam would certainly appreciate your contribution to paying down the national debt.


P.S. I'd recommend following DS's and/or dfeucht's advice. Also, if you like your current 401k, you can roll your simple IRA into it, then you can manage it all together.

[jpg7n16]

I have no intentions ever of touching the 401K in my current job, but I could really use the money in the old simple IRA.

What are your plans for the money from the IRA if you decided to cash it out?

Why do you need the extra cash?

There may be other ways to help you meet your goals without having to cash out any retirement money.


If you are in the 25% bracket, and you cash it out, you'll have to pay $1,750 in taxes and penalties - so your $5,000 would actually only get you $3,250. Which is lame.


Just to let you know, as DS and others state above, if you've been getting a large refund - you've just been paying too much in taxes all year.

A $2400 refund means you should have had an extra $200/month of income. $3600 means you could have had an extra $300/month, etc.

So I'd suggest using the IRS calculator to find what you need to claim on your withholdings:

2011 Withholding Calculator

[MM1976]

Ok guys, I took your advice and instead of cashing out the IRA, I looked into why I get a big tax refund in the spring. At the company I work for, you can update your W-4 online through our electronic employee system. My "allowances" say you can set it between 0 and 99. Mine were set at 4. A financial guru I know said to increase that to 5 and see what happens and then make incremental changes upward to see how it affects the paycheck. I set it at 5 and am now getting an extra 15 dollars in my bi-weekly paycheck. How do I know how high to set it for my situation? Sorry if this is a dumb question. Thanks in advance!

[disneysteve]

How do I know how high to set it for my situation? Sorry if this is a dumb question. Thanks in advance!

The IRS has a withholding calculator on their website. Google that, plug in your numbers and it will tell you how many exemptions you should claim. Most people think they can only claim 1 exemption per person in the family but it doesn't work that way. There may be 6 of you but you may need to claim 9 or 10 in order to come out about even on taxes.

[Petunia 100]

Good for you, MM1976. The day will come when you will be glad you have a retirement nest egg. Now may I suggest you find out what you are paying each year in custodial fees and expense ratios? If you're paying alot, you will want to move your money to a low cost custodian. The difference over time can be substantial, so you don't want to pay more than necessary.

How large is your typical refund? You will pay in about $225 less in federal taxes this year due to going from 4 to 5 on your W-4. ($15 per paycheck times about 15 paychecks) Is your typical refund larger than $225? If so, you still have room to change your withholding allowances.

[jpg7n16]

How do I know how high to set it for my situation? Thanks in advance!

The IRS has a withholding calculator on their website. Google that, plug in your numbers and it will tell you how many exemptions you should claim.

There's a link in my post above directly to the calculator as well. Quoted here for convenience:

So I'd suggest using the IRS calculator to find what you need to claim on your withholdings:

2011 Withholding Calculator

[MM1976]

Sorry for the delay in responding again. Thanks for all the advice guys. It's been very helpful. I've adjusted my withholdings and am happy with the results so far.

Now I have a question I'm asking for a message-board illiterate family member of mine who has asked me for advice knowing that I read this board and that I've gotten good advice here. He has a similar situation to me. An old simple IRA from an old job that has about $6,000 in it and he wants to cash it out. I gave him all the same advice you guys gave me and have strongly discouraged him in cashing out, but he really needs the money.

He called the simple IRA company to ask about fees and they said the typical stuff. 10% IRS fee plus $50 in early termination fees, etc. They didn't say anything about taxes so he called back and they told him that he could choose to have an amount withheld now so he doesn't have to worry about it at tax time next year or he could just wait until tax time next year.

I'm assuming if he's insistent on closing this thing out that the wise thing to do would be to have them withhold the taxes now, correct? And how much do you know to have them withhold? I guess it depends on your tax bracket? Similar to me, he makes around $40,000 or $41,000 a year.

Thanks in advance.

[disneysteve]

Sorry for the delay in responding again. Thanks for all the advice guys. It's been very helpful. I've adjusted my withholdings and am happy with the results so far.

Now I have a question I'm asking for a message-board illiterate family member of mine who has asked me for advice knowing that I read this board and that I've gotten good advice here. He has a similar situation to me. An old simple IRA from an old job that has about $6,000 in it and he wants to cash it out. I gave him all the same advice you guys gave me and have strongly discouraged him in cashing out, but he really needs the money.

He called the simple IRA company to ask about fees and they said the typical stuff. 10% IRS fee plus $50 in early termination fees, etc. They didn't say anything about taxes so he called back and they told him that he could choose to have an amount withheld now so he doesn't have to worry about it at tax time next year or he could just wait until tax time next year.

I'm assuming if he's insistent on closing this thing out that the wise thing to do would be to have them withhold the taxes now, correct? And how much do you know to have them withhold? I guess it depends on your tax bracket? Similar to me, he makes around $40,000 or $41,000 a year.

Thanks in advance.

I believe they routinely withhold 20% though you could ask them to withhold more if you wish. I'm not sure how they handle that.

I hope your family member realizes what a horribly bad decision this is. $600 will go to the penalty and about $1,500 will go to taxes. He'll only be left with about $3,900. It is going to cost him $2,100 to get $3,900. That's a really, really lousy deal.