Home     Forum     401k     401k Rollovers
    Register   Login   Members   Search   FAQs     Recent Posts    




Is IRA only for someone who works ?

Reply to topic
Money Talk > Retirement Planning

Author Thread
evafla
Member


Cash: $ 2.45

Posts: 10
Joined: 24 May 2012

Is IRA only for someone who works ?  Reply with quote  

The title is my question , if so never mind my previous post today .

However I have still another questions .
When a few months ago I wanted to cash my 401 , I was informed ,
I would have to pay 20% tax , plus 10% of something else , I even did not get this details in full .
Is it always tax on taking 401 so high ?
Does it not change with time ?

Another concern;

When I log in to my account , I see the amount is oscilating , rather down
than up , in the limits of 1000-1200 dollars . can it go REALLY down ?
Does the large risk exist the money can be gone ?

Should I cash this money ?

I was not able to do it few months ago, but now I can ,
what is better, keep in 401 or cash it, when you already
in age , when is no penalty ?

If I cash it , after this 20 % tax, do I still report it on my taxes ,
and pay federal tax from it ?

thank you e
Post Sat Nov 17, 2012 2:33 am
 View user's profile Send private message
Publius
Preferred Member


Cash: $ 31.00

Posts: 151
Joined: 12 Oct 2012
Location: Georgia
 Reply with quote  

To your first question, yes, you have to have earned income to put money into an IRA.

2. The tax that you pay on early 401k withdrawals depends on your tax rate. The 20% is just the amount that will be withheld much like federal income tax is withheld from your check each month. If your highest tax rate is 25%, you will pay 25% tax (because the withdrawal is in on top of your current income, so it is all in your highest tax bracket or can even push some of the money into the next tax bracket). The 10% is a penalty that the federal government imposes for withdrawing from a qualified account (an IRA, 401k, 403b etc) before the age of 59.5 to discourage early withdrawal. There are certain circumstances where this 10% isn't owed, but they are specific and I will let others that know better than me touch on those.

3. Yes, it can go really down, but this is a volatile time in the stock market. What you are seeing is short term losses that happen from time to time. The generally accepted method to make money in the stock market is to invest it and leave it there. From day to day, week to week, month to month the balance will go up and down, sometimes sharply. The reason people stay in the market is because, over time, there are more ups than down. The S&P500 has averaged about 11% annually over the life of the index. If the short term losses make you want to pull your money out of the market, you don't have the risk tolerance to be invested in stocks.

That said, you can move your money out of stocks and put it in fixed assets like a money market account (usually available in some form in a 401k) without cashing out your 401k. Just change what the money is invested in and avoid the 10% penalty. (I am not suggesting this, just pointing out that it can be moved to other asset classes without taking it out of the 401k).

And yes if you take an early withdrawal, it will be reported to the IRS and you will pay taxes on the income in addition to the penalty.
Post Sat Nov 17, 2012 2:50 am
 View user's profile Send private message
Publius
Preferred Member


Cash: $ 31.00

Posts: 151
Joined: 12 Oct 2012
Location: Georgia
 Reply with quote  

I just read your first post, so let me add a couple of things. It looks like you are 61 now, so I don't know why they told you you would have to pay the 10% penalty. You should just have to pay income tax on the amount you withdraw.

Also, any income that you pay taxes on can be used to add to an IRA and that includes alimony I believe. There are some on here that will hopefully correct me if I am wrong. However, since you are basically at retirement age, there isn't an advantage that I see to you depositing money into an IRA. You can save money in online bank accounts or investment accounts that are not in an IRA.
Post Sat Nov 17, 2012 2:59 am
 View user's profile Send private message
clydewolf
Senior Member


Cash: $ 50.25

Posts: 248
Joined: 27 May 2012

Re: Is IRA only for someone who works ?  Reply with quote  

quote:
Originally posted by evafla
The title is my question , if so never mind my previous post today .

Generally that is true. However Alimony is qualified income to contribute to an IRA.

Also QDRO money from an IRA or 401k can be transferred to your own IRA.
quote:


However I have still another questions .
When a few months ago I wanted to cash my 401 , I was informed ,
I would have to pay 20% tax , plus 10% of something else , I even did not get this details in full .
Is it always tax on taking 401 so high ?
Does it not change with time ?

Typically we must separate from the employer sponsoring the 401k before we can take a distribution.

At age 59 1/2 or older, the 10% penalty goes away for distributions from a 401k.

If an employee is age 55 or older when they separate from the 401k sponsoring employer, that employee can receive penalty distributions from the 401k plan.

A distribution from a 401k will be taxed as ordinary income. The 401k administrator is required by law to withhold 20% of a distribution to you for federal income tax.

We can transfer our 401k money tax free to our IRA. A transfer is not a distribution, as the transfer is done between the 401k administrator and the IRA custodian.
quote:

Another concern;

When I log in to my account , I see the amount is oscillating , rather down
than up , in the limits of 1000-1200 dollars . can it go REALLY down ?
Does the large risk exist the money can be gone ?

I do not know what the frequency is that you are logging into your account.
But yes, your account balance may vary over time depending on how it is invested, and how those assets are varying in market price.
quote:


Should I cash this money ?

I would say no. If you are no longer employed by the 401k plan sponsor, you may want to transfer the money to your IRA. A good place would be Vanguard, Fidelity.

A better investment for you may be the Vanguard Wellington fund: https://personal.vanguard.com/us/funds/snapshot?FundId=0021&FundIntExt=INT
quote:

I was not able to do it few months ago, but now I can ,
what is better, keep in 401 or cash it, when you already
in age , when is no penalty ?

If I cash it , after this 20 % tax, do I still report it on my taxes ,
and pay federal tax from it ?

Do not cash your 401k. Transfer it to an IRA.

Call Vanguard, and tell them what you want to do. They will send you the necessary paperwork, and handle the transfer to your IRA.

If you choose to cash out the 401k plan, 20% will be withheld for Federal income tax. In January of the following year you will receive a 1099-R form from the 401k folks. This shows how much you took from your account, how much is taxable, and the 20% that was withheld.

On your 1040 you will show the total amount distributed on line 15a, the taxable amount on line 15b. This is added into your total income.
The 20% withheld will be reported in the payments section of your 1040 on line 62.

Cashing the 401k in one year is likely to give you a big boost in your income tax.
Transferring to an IRA is a non taxable event.
Post Sun Nov 18, 2012 9:45 pm
 View user's profile Send private message
Anton Martin
Full Member


Cash: $ 15.00

Posts: 73
Joined: 23 Nov 2012
Location: Florida, USA
Transfer it ti IRA Account  Reply with quote  

Withdrawing your money from 401k is not good idea as it is taxable, rather transfer your money to IRA account. Transferring 401k savings to IRA account will be good option always.

Good Luck.........
Post Fri Nov 23, 2012 9:59 am
 View user's profile Send private message Visit poster's website

Reply to topic
Forum Jump:
Jump to:  
  Display posts from previous:      





Money Talk © 2003-2018