yeah buddy, getting a 6K tax return

[97guns]

i just did a rough draft on my taxes and it looks like im getting just over 6K back. i closed down 3 401K's for 47K, had $11,500 withheld and with all my rental property deductions getting a nice chunk of it back. i didn't loose as much as i thought i would, rental property proves to be a great tax shelter once again.

[Mr Nice Guy]

Hmmm, 6k seems like a paltry sum for someone who is retired and holds a substantial collection of precious metals.

[97guns]

6K is a nice chunk of change to me, i cringe when i waste $10 through a loophole but thats not what im excited about. when i was researching closing down my 401's everyone i asked told me i would be taking a bath by doing so, figured on a good 20% hit and the "penalty" that everyone scared me with. after its all said and done ive lost only 12% by closing down the 401K's.

[jpg7n16]

after its all said and done ive lost only 12% by closing down the 401K's.

Umm - the penalty alone is 10%. So you're in the 2% bracket? (which doesn't exist)

I think you may need to reconsider your joy over this. The only way I see you getting enough deductions to reduce taxes that far is with depreciation deductions.

Something doesn't seem right.

And just FYI for the future: Depreciation recapture - Wikipedia, the free encyclopedia

[disneysteve]

ive lost only 12% by closing down the 401K's.

How is that possible? There is a 10% penalty for early withdrawal and then ordinary income tax on the amount withdrawn. Even if you are only in the 15% bracket, that would be a total of 25%.

Umm - the penalty alone is 10%. So you're in the 2% bracket?

Exactly.

[97guns]

who penalizes, the irs or the company distributing the 401?

[disneysteve]

who penalizes, the irs or the company distributing the 401?

I'm honestly not sure but it wouldn't affect the bottom line either way. If you cashed out 47K, you'll pay $4,700 in penalty plus income tax on 47K which would be at least the 15% bracket and probably the 25% bracket even if you had no other income. So that's a minimum of $7,000 in taxes for a total of $11,700 or 25% of the amount cashed in.

The only exception would be if this was a ROTH 401k. In that case, the money wouldn't be taxed but I think you'd still pay the penalty. I'm not positive about how that works though.

[jpg7n16]

who penalizes, the irs or the company distributing the 401?

The IRS. Your brokerage firm doesn't care.

The 10% penalty is a federal penalty tax on early withdrawals.

From: Tax Topics - Topic 558 Tax on Early Distributions from Retirement Plans, Other Than IRAs

To discourage the use of retirement funds for purposes other than normal retirement, the law imposes a 10% additional tax on certain early distributions of these funds. Early distributions are those you receive from a qualified retirement plan or deferred annuity contract before reaching age 59 1/2.

The only way to truly see the impact of your withdrawal, would be to calculate your tax liability w/o the $47k distribution, and then recalculate it with it.

My guess is, you likely owe approx. $15k more due to the early withdrawal. Given that your refund is $6k, and $9400 was withheld from the distribution, my estimate is - w/o the 401k, your refund would have been about $12k, not $6.

Assumption is 25% bracket on income including the $47k + 10% penalty tax = $16,450 tax owed

[Frügal]

$6,000 does sound paltry...

My wife and I got back $4,600 this year. Then again, we only made $11,000 and have a child.

[97guns]

well this was just a rough draft, im taking a 5,000 loss on the rental properties and i have a running $3K deductable that i take every year for 20 years from a big dot com loss. i didn't see anywhere to input the penalty, wouldn't the penalty be withheld. they held over 11K from the total distribution of 47K which works out to a 25% withholding

[disneysteve]

ive lost only 12% by closing down the 401K's.

they held over 11K from the total distribution of 47K which works out to a 25% withholding

What makes you say you only lost 12%? Whether or not you had other deductions that reduced the bite of the 401k closures, you need to look at those closure penalties independently to know what doing that actually cost you.

[MonkeyMama]

Actually, all of the above is quite possible. The tax code isn't so simple.

But it does sound like the 10% penalty was missed? Some states get you too, so penalty can be more than 10%.

Use Tax *Form 5329* to report 10% penalty on early withdrawal from IRA.

Jpg nails it on the head. Sounds like you likely have no tax without the IRA withdrawal? Compare the with and without to see true tax hit. Sounds like some of the IRA withdrawal was tax-free (though not penalty-free) with your bigger tax situation.

Individual situations will vary significantly - it's hard to get any useful tax advice in a forum like this with a line or two of information. OP has capital losses, rental losses and who knows what other deductions he may have. But, the 10% penalty is entirely unavoidable, which is why I think it's pretty safe advice to say, "avoid that penalty at all costs." I can't think of any reason why one should pay a 10% penalty. Maybe if you had a compelling reason and your tax rate is -0-. Then you know, what's a flat 10% tax? Beyond that though...

[MonkeyMama]

P.S. If using tax software, you put the type of IRA distribution in when you report the IRA withdrawal. Your 1099 should have a distribution code. Code 1 = early distribution. So putting the code 1 into the tax software should compute the penalty.

[maat55]

The only exception would be if this was a ROTH 401k. In that case, the money wouldn't be taxed but I think you'd still pay the penalty. I'm not positive about how that works though.

There are some differences when it comes to early withdrawals between the roth and the roth 401k. My son-in-law has mentioned it a few times, but it has not fully sunk in. You do not get to claim constributions the same. This better explains it.

401(k) IRA matrix - Wikipedia, the free encyclopedia

[NuggetBrain]

How on earth is 6k paltry?