IRA early withdrawal question?

Question

Due to some massive tax credits and deductions I was in the 10% tax bracket last year. Due to further investment in a business, I'm looking at the 10% bracket once again. If I withdrew $100K from an IRA rollover (it used to be a 401k, now it's an IRA) what would I be hit with? 10% tax plus the 10% penalty or would I be hit with my tax rate at the time of accumulating the 401k (33% or so).

Thank you Yahoo Answer Community in advance!

Answer 1

Neither of your tax scenarios is true. Let's suppose your taxable income before the IRA withdrawal is $7,000 after all your deductions and credits. When you take out the $100,000 from your IRA, your taxable income jumps to $107,000 and you are taxed on all of that, plus you will pay the 10% penalty on $100K, or an additional $10,000.

However, if you are in fact in the 10% bracket, and want to take some money out, you could figure how much you could take out and still be in, for example, the 15% bracket. Then the effective tax on your withdrawn amount would be 25%, which you may consider acceptable.

Now that NGC has those tax brackets in the previous answer, you can see that if you had $7k in taxable income, you could add say another $24K and still be in the 15% bracket. Your penalty would be $2,400.

If you are tempted to cash out the IRA because of your current low tax bracket, you might consider a rollover to a Roth IRA instead. You will be taxed at a low rate only on the amount rolled over. You will not pay a penalty, and after five years the Roth money can be withdrawn tax free.

Answer 2

The tax rate will be higher than the 10% you'd be in if you hadn't done the withdrawal. The $100K is added to your other income, and the tax rate is whatever that gives, probably 25 or 28% - that doesn't mean you pay that rate on everything, just on the amount that's over the limit for that bracket.

The rate will have nothing to do with the tax rate when you accumulated the assets in the 401K.

In addition to the income tax, you'll have to pay the 10% penalty.

Answer 3

best thing to do outside of not cashing it out and waiting till 59 1/2 would be to pull out the max that you can before bumping yourself up to the next tax bracket, assuming of course you actually need this money for something. If not leave it where it is. Also you can avoid the penalty on a first time home purchase but only up to 10k, secondary education, and medical expenses, but these are all still added as ordinary income.

Answer 4

Since you say you are going to be in the 10% bracket, that means before the IRA withdrawal, you will have less than $7,825 in taxable income. As an example, let's assume you have $7,500 in taxable income. After you withdraw the $100,000 from the IRA, you will have $107,500 in taxable income.
The first $7,825 will be taxed at 10%,
from $7,826 to $31,850 is taxed at 15%
from $31,851 to $77,100 is taxed at 25%
from $77,101 to $107,500 is taxed at 28%.

Your tax liability should be close to $783 + $3,604 + $11,312 + $8,512 + $10,000 penalty = $34,211
Unless you have additional deductions that you'll be able to apply, that number should be close.

Answer 5

The tax rate on an IRA withdrawal would be your tax rate in the year withdrawn. The rate when you contributed the funds is not used.

Answer 6

An IRA distributions counts as ordinary income so it will increase your tax bracket......plus the 10% penalty.