WITHDRAWALS FROM YOUR IRA OR 401K SAVINGS
Often, it appears that withdrawing money from your traditional IRA or 401K is a sensible financial alternative to high interest credit card debt, or a financial crisis, and that may be true,
BUT BE AWARE OF VERY NASTY FEDERAL TAX CONSEQUENCES, WHICH MAY SURPRISE YOU AT TAX FILING TIME
These Federal tax consequences include taxes due on the withdrawal, and possibly a 10% penalty as well. You may not be aware of, nor prepared for these consequences.
Here are the basic facts:
- Traditional IRA and 401K savings are pre tax, meaning you were never taxed on your contributions. While the withdrawal is in fact your money, since it was never taxed, you will need to pay taxes on the withdrawal when you file your Federal and/or State taxes.
- Further, if you are under the age of 55, you may incur a penalty of 10% of the withdrawal, in addition to the taxes.
- As we explain elsewhere in our Savings Series, these traditional IRA’s and 401K’s are powerful savings vehicles, as they allow you to contribute pretax earnings, and defer taxes on both the savings and the earnings until withdrawal. They are designed to be long term retirement savings plans.
- If you decide to withdraw your savings from one of these plans, you can choose to have tax withheld from the withdrawal.
This article is an introduction to the issue of Traditional IRA, and 401K withdrawals. We often find when we prepare Federal and State taxes for our clients who have executed a withdrawal, that the Client is shocked at the Tax and Penalty due, and unprepared for the tax bill. We hope to help you understand the consequences before you act.
Please don’t hesitate to call us to discuss the tax consequences of these withdrawals, and the impact on your Federal (and possibly your State) tax return(s). We can help you calculate and withhold the proper amount of tax. We can also discuss possible alternatives. We are open year round, and are always available for you.