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Posted: 9/8/2010 9:14:10 AM EDT
[Last Edit: 9/8/2010 12:47:27 PM EDT by TxLewis]
Anyone know the penalty for converting an IRA to cash?

Currently, I have some money in an 401k that is with my old employer.

I want to move it to an IRA (rollover type)

Then I am gonna make it a bit more liquid. (I have a degree in Fin, yes, I know it's against conventional wisdom)

So PLEASE, do not waste one post telling me not to do this.

Please please post what you know about the tax penalties, and any recommended IRA firms that can help accomodate this.

Thanks

TXL
Link Posted: 9/8/2010 10:34:18 AM EDT
I believe it is the full taxes on the amount plus a 10% penalty.
Link Posted: 9/8/2010 10:56:34 AM EDT
[Last Edit: 9/8/2010 10:57:10 AM EDT by ReflectionsBurn]
converting to cash that you are going to pull out of??

to roll it over there is no tax or penalty, can even be in a cash account wherever you roll it over too (money market, cd, cash acct, etc...) and still be labeled as an ira

penalty occurs when you take the premature distribution which is 10% plus whatever your tax bracket is...just about any firm out there can facilitate an ira rollover...usually however 401k plans do require their own paperwork which is usually available through human resources at your former employment
Link Posted: 9/8/2010 11:31:20 AM EDT
I am over 59 and one half yrs old and retired. When I retired last year I rolled my 401k over to self directed roll over IRA. Because of all this talk about confiscation I cash mine out last week. No 10% penalty, just full taxes on the amount. If you delay on paying taxes till next year there is a penalty according to my CPA. I don't know how much it would have been. Had the people that had my account deduct the taxes.
Link Posted: 9/8/2010 12:47:14 PM EDT
thanks all
Link Posted: 9/8/2010 7:47:05 PM EDT
Originally Posted By Paps-Zapf:
I believe it is the full taxes on the amount plus a 10% penalty.


This is correct. However, if you liquidate the investments and leave them in the IRA, there is no tax.

Link Posted: 9/9/2010 3:45:14 AM EDT
the rollover isn't taxed

if you convert it to cash (out of an IRA, real money, you can access) under 59.5 years of age the penalty is 10%

right off the top, nothing you can do.

the rest is taxed like ordinary income.
Which is what it is, and was protected from when you put it in. (You only pay tax on it once)

If your income is real low this year or you have a LOT of deductions to lower that income (starting a new business is the most common) you can offset that income and basically get out with only paying the 10% penalty.

BTDT beat that.

it's not like tax rates are going to go down anytime in the future.

The conventional wisdom is usually wrong. Do your own research.
Link Posted: 9/9/2010 7:14:06 AM EDT
I guess I was gonna convert to rollover ira, and then close it, pay the taxes, and the 10%

Can I just take it as distribution from the 401k, have them send me the check, and just do the taxes as required, (take it as income, pay the 10%, and get on with life)?

Is there a diff between taking it from the 401 and an IRA?

Thanks

TXL
Link Posted: 9/9/2010 10:27:02 AM EDT
you can take it from your 401k, taxation/penalty will be the same
Link Posted: 9/9/2010 2:29:09 PM EDT

Originally Posted By TxLewis:
I guess I was gonna convert to rollover ira, and then close it, pay the taxes, and the 10%

Can I just take it as distribution from the 401k, have them send me the check, and just do the taxes as required, (take it as income, pay the 10%, and get on with life)?

Is there a diff between taking it from the 401 and an IRA?

Thanks

TXL

IIRC you can get the 401k cashed out if you quit or are fired, otherwise you have to put it in an IRA or in a few limited situations you can get a hardship withdraw while you are still employed there.
Link Posted: 9/9/2010 4:48:48 PM EDT
Originally Posted By TxLewis:
I guess I was gonna convert to rollover ira, and then close it, pay the taxes, and the 10%

Can I just take it as distribution from the 401k, have them send me the check, and just do the taxes as required, (take it as income, pay the 10%, and get on with life)?

Is there a diff between taking it from the 401 and an IRA?

Thanks

TXL


yes
you can do that
Effectively a 401k and a Regular IRA are the same thing to the taxman.
Just in a 401k you get few choices and an extra layer of fees.

but if you want to cash out, you can do that.
Be aware they will withhold 20% off the top. (so, if you are cashing out 10k, you'll only get a check for 8k)
the 20% is withheld, just like your regular paycheck. The 10% is of course gone, but you might be able to get the other 10% refunded next year, if your income is low enough.
Link Posted: 9/11/2010 2:08:19 AM EDT
Gentlemen, I work with this stuff every day and there is a little known (to the masses) difference in The IRS code describing early withdrawals for 401's vs. IRA's. The difference is that if you terminate employment (voluntary or not), you can withdraw (without the 10% penalty) at 55 instead of 59 1/2. Thought that may help some of you down the road. Keep in mind, also, that the 10% can be avoided on withdrawals if they are offset by first time howmeowner, education or certain healthcare expenses. The penalty is also voided for death or disability. About the only other way to access IRA money without the 10% penalty is to take a payment (monthly, annually) for 5 years or until you reach 59 1/2, whichever is longer. Once set the payment cannot be changed or you must pay back penalties on all of the money distributed. The amount paid out depends on your age at the time, account balance & an interest rate that The IRS uses. Practically, payments tend to be in the 5% (annually) range if you are in your 50's.
Link Posted: 9/11/2010 4:27:33 AM EDT
Thx. Walter
So if it's only for cash. No repay. It's the same penalty for 401 and ira closure?

Thx
Link Posted: 9/11/2010 5:57:59 PM EDT
Originally Posted By BozemanMT:
Be aware they will withhold 20% off the top. (so, if you are cashing out 10k, you'll only get a check for 8k)
the 20% is withheld, just like your regular paycheck. The 10% is of course gone, but you might be able to get the other 10% refunded next year, if your income is low enough.

not sure about being able to recoup the 10%. I believe that it the early withdrawal penalty occurs, then the check will look more like $7K.

unless, like Walter says, certain conditions will exempt you from the 10% hit.
some time ago, our job expired, and I withdrew those funds and fortunately, we used the first-time homeowner feature.
IIRC, the custodian can make all of the deductions and you will get a friendly 1099 for your 1040
Link Posted: 9/12/2010 5:03:02 AM EDT
Originally Posted By troy808:
Originally Posted By BozemanMT:
Be aware they will withhold 20% off the top. (so, if you are cashing out 10k, you'll only get a check for 8k)
the 20% is withheld, just like your regular paycheck. The 10% is of course gone, but you might be able to get the other 10% refunded next year, if your income is low enough.

not sure about being able to recoup the 10%. I believe that it the early withdrawal penalty occurs, then the check will look more like $7K.



Nope
BTDT
the 10% penalty is part of the 20% withholding and just goes onto your taxes.
You have to pay the 10% (if under 59.5, less the other rules), but you don't "pay" it til your that year taxes are due.

Link Posted: 9/12/2010 5:12:03 AM EDT
My IRA is in a Vanguard mutual fund. What I do is make my full allowable 5K per year contribution to it, and then put more
money into a separate non-IRA account, which is in the same mutual fund. Of course, its income is taxable but there's no penalty
for early withdrawal since it's not an IRA. Just ownership of stock in a mutual fund. If I need to tap into my investments, I'll leave
the IRA alone and tap the second account instead. There's also no limit on how much I can put per year into the second account.

Since Vanguard does a great job of adjusting the asset allocations in that fund in response to market condition changes, its performance
is top rate and is likely to stay that way. I have no problem with the two accounts NOT being diversified.


And they're pulling in 15 percent over the last year. As the economy improves, the results should only get BETTER.



CJ
Link Posted: 9/12/2010 11:08:42 AM EDT
How the 20% works goes like this: The IRS assumes that you have to pay the penalty so 10% is taken care of then another 10% is for the Federal income tax. If your making around $60k or more depending on your tax status (single, married, head of household) then you may have to pay 25% in Fed taxes (or more) plus the 10% (making it necessary to pay 35% Fed tax). Best thing to do is find out from your taxpreparer approximately were you'll be and save or send in the tax needed to cover it. Just don't want you running into a nasty surprise next April!
Link Posted: 9/13/2010 5:02:45 AM EDT
Originally Posted By WalterSobchek:
How the 20% works goes like this: The IRS assumes that you have to pay the penalty so 10% is taken care of then another 10% is for the Federal income tax. If your making around $60k or more depending on your tax status (single, married, head of household) then you may have to pay 25% in Fed taxes (or more) plus the 10% (making it necessary to pay 35% Fed tax). Best thing to do is find out from your taxpreparer approximately were you'll be and save or send in the tax needed to cover it. Just don't want you running into a nasty surprise next April!


thx, i'll confer with the turbo(tax)..

lol

I am prepared to pay my tax rate, (30+%) and the 10% penalty, no concerns there.
I was just wanting to make sure that there is NO DIFFERENCE taking the withdrawal from the 401k and rolling it over to an IRA, and THEN taking it out.

If it's the same, no need for me to pay a commission to a broker to open an ira i intend on closing.

Thanks

TXL
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