Free Tax Tips

Posts Tagged ‘ira’

Question: Help with fafsa questions?

I am doing the parents income estimator. I have no problem getting the income information from my father but would like to know what these questions mean.

it ask for the amount of Wages, salaries, tips, etc.

also,

IRS-allowable adjustments to income (payment to IRA and Keogh Plans, one half of self employment tax, self-employed health insurance deduction, interest penalty on early withdrawal of savings, alimony paid, and student loan interest deduction).

I am confused, can anyone help me out?
thanks

Answer: Those adjustments are found on lines 23 to 35 of your parents tax return (IRS Form1040). The following link will give you a blank copy of that form. It is rare that anyone can complete the FAFSA forms without having a copy of the last years income tax return for their parents and or their own.
http://www.irs.gov/pub/irs-pdf/f1040.pdf?portlet=3

12 Traps To Avoid When Converting To a Roth

12 Traps To Avoid When Converting To a Roth

If you're new to our fine Tax blog, you may want to subscribe to our RSS Tax Tips feed. We post often! Thanks for visiting!

The 401k early withdrawal penalty
If you withdraw money from your 401k retirement plan before your reach the age of 59 and 1/2 years, you will have to pay a penalty on the taxable amount, which is known as 401k early withdrawal penalty. You will also have to pay income tax on the “early withdrawal” amount from your 401k. To calculate your 401k early withdrawal penalty, you need to understand two components of early withdrawal. The first one is how to calculate the federal and state tax that will be come due. The second is the tax penalty on early withdrawal, included in most plans. Below you will find the method for calculating your 401k penalty.

Step1 – Federal Tax Due: Determine what federal tax rate you are paying. Once you take the money out of the 401k it is considered income, as the withdrawal is from money that is pre-tax, and must be taxed. The federal income tax rate runs from roughly 15 percent to 35 percent for the majority of Americans. To find your tax bracket, check your previous tax returns and also make sure that your withdrawal does not propel you into a new tax bracket. For example, if you take out $30,000 from your plan, you will have to pay $6,000 as a penalty if your tax rate is 20%, assuming that the distribution is all income.

Step2 – State Tax Due: In this step, you will have to determine the state income tax bill on the 401k withdrawal. Check the state income tax you paid the previous year, as this amount of money should be accounted for as well. From the example above, if you state income tax rate is 5%; you will pay $1,500 to the state on the income of $30,000.

Step3 – Early Withdrawal Penalty: Add 10 % to the amount of the withdrawal you are making to get your final penalty. IRS rules generally states that you are charged 10% as an early withdrawal penalty, unless you qualify for some exception. This amount will be in addition to the taxes mentioned above. For instance, if you are taking $30,000 and are in a 20 percent tax bracket in a state with 5 percent income tax, your $30,000 withdrawal will net you less than $20,000. You lose $3000 for the penalty, $6000 for the federal income tax and $1500 for the state income tax.

Determine whether you qualify for an exemption from the penalty, as in certain instances, you can access your money early without paying the taxes.

Potential exceptions to early 401k withdrawal penalties

Potential exceptions to early withdrawal penalties from a Traditional IRA

The 401k early withdrawal should be seen as a last resort. The best option to save you from 401k withdrawal penalty is to inquire about the possibility of obtaining a 401k loan; such loans are not subject to tax and penalties. The good news is that you will not have to pay 401k early withdrawal penalties if you withdraw money when you leave your company, the same year you reach the age of 55 years or greater.

When to Borrow From Your 401K

Money101@FOXBusiness.com , and let us take off some of the pressure. Dear Money101: Should I take money out of our (my wife) 401K to pay off our house before the stock market falls or the dollar …

How to: Leave your job/ retire? what are your 401k options

Question: Accounting question dealing with buying a house and cashing out an IRA.?

I have a traditional IRA with $10,119 in it and I would like to withdraw this money to buy my first house. According to the IRS website, I can take an early withdrawal of up to $10,000 for a first house without paying the 10% penalty. If I withdraw the full amount, would I only be charged the penalty on the $119 or would I have to pay it on the $10,119 since it is more than the maximum amount I am allowed to withdarw without the penalty?

Answer: The first $10,000 would be penalty free, and the remainder subject to the 10% penalty. To avoid the penalty on the $119, just withdraw an even $10000. However note that you will avoid the penalty on this transaction, but not the taxes on any withdrawals made on your traditional IRA. Since the money you invested in the traditional IRA was before taxes, you will have to pay tax on all the withdrawals. You should consider the taxes due on any withdrawals to figure your true net amount of funds to be available for your house.

Roth IRA Rules

Kim Lankford responds to more questions about converting a traditional IRA to a Roth and opening an account for a child.

Question: can I return my RMD without a penalty in 2009?

IRS suspended RMDs for 2009. I read that we could return the distribution to the mutual fund company, etc. and they would deposit in the IRA with no penalty. Is this true?

Answer: Check with your custodian. If it’s been more than 60 days, all bets are off.

6 Mistakes to Avoid When Converting to a Roth IRA

RISMEDIA, January 5, 2010—(MCT)—As years go, 2010 is on course to be a blockbuster for retirement-account owners. Starting this month, all Americans who own a traditional IRA— not just those who have modified adjusted gross income under $100,000—will be able to…

Finance & Investment Tips : Early Withdrawal Penalty on a CD Held in an IRA

Question: Tax question– I withdrew funds from a Roth IRA (before the 5 yr mark) to make a down payment as a first time?

home buyer, in 2005. I am many years less than 59. My “advisors” had not informed me that this sort of early withdrawal is only tax exempt if it is made at least 5 yrs after the creation of the Roth (the Roth started in 2002); I thought it was tax exempt just because it was used as a first time homebuyer cost. I made this unfortunate finding just now, as I research my reply to the CP2000 the IRS sent me a few months ago, stating that I owe them $900 in taxes. My question: is this true? Am I screwed? I have also read that your contributions to the Roth can be withdrawn “anytime” without tax or penalty. Can this be true? If so, and if contributions are the first to be withdrawn, then didn’t part or all of my $3000 distribution in 2005 actually consist of contributions, so that part or all of it should be exempt from tax? Anyone?

Answer: I assume the contributions to your Roth did not come from another retirement plan.

If you had previously contributed $3,000 to your Roth, the full $3,000 distribution should be tax-free. However, when you have a distribution from a Roth, you are required to attach Form 8606 to your tax return. Since you did not do this, the IRS is assuming the the entire distribution is taxable, hence the $900 tax and penalties.

To fix this, you can amend your return and attach a properly filled out 8606, or it may be possible to send in the 8606 separately. Take the letter you received to a tax preparer who will figure out which course of action is appropriate.

Although you used your distribution for a home purchase, I recommend you not put this on your 8606, since the entire distribution is tax-free as long as you made that amount of contributions. You have one life-time $10,000 exclusion from penalties for the first-time homebuyer, you may as well keep that entire exclusion should you need it in the future.

See Form 8606 for 2005, Part III.

http://www.irs.gov/pub/irs-prior/f8606–2005.pdf

line 19: $3,000
line 20: 0
line 21: $3,000
line 22: enter the amount of all your contributions
line 23, 24, 25a: 0

Is the Roth right for you?

With the income cap gone, investors should pause before converting traditional IRAs and 401(k) account and ask: With the income cap gone, investors should pause before converting traditional IRAs and 401(k) account and ask:

JCCC Board of Trustees Meeting, 2-19-09