My wife is quitting work for good in December when we have our third baby. We're then planning on cashing out one of her IRAs that she had at her original job to pay off our car and a smaller home loan. She now works 3 days a weeks and she'll make about $40,000 this year. Next year having quit her job she'll obviously be making $0. Will it be better to cash out the IRA in January of next year or in December of this year? Will it make a difference?
We figure we'll need to pay about 25% in taxes plus the 10% penalty. It's my understanding that they'll withhold that from the distribution up front and then you just claim the total on your income taxes at year end, is that right?
2007-08-14 09:29:58 · 5 answers · asked by Fred M 1 in Business & Finance ➔ Taxes ➔ United States
Wait till January of next year. That way the IRA can substitute on the tax return for the $40,000 that she won't be earning. If she cashes it in in December she'd have her $40,000 in wages, plus the cashing in of the ira. She'd have a double whammy. If she does it in January, then she'd only have the $40,000 in wages for this year, and the ira withdrawal for next year. You also need to see if your state taxes the ira withdrawal as well. Massachusetts for example doesn't allow a deduction on the state tax return for IRA contributions, so Massachusetts allows you to get back tax-free your original contributions and then taxes you on the excess. You should make sure with whoever is handling your wife's ira that they take out how much you think you'll need in taxes. If they can't or won't you'll have to make up that amount some other way. But as long as you have paid in taxes for 2007 what you had for a tax liability in 2006 you won't have any penalty if you owe for 2007 (as long as you pay the tax by 4/15/08).
2007-08-14 10:15:47 · answer #1 · answered by Anonymous · 0⤊ 1⤋
If you must take an early distribution from your IRA, do it in the year you have less income, so that would be 2008. The distribution is added to your other income, and in 2008 you may be in a lower tax bracket.
Taking a tax penalty to pay off a deductible home loan is not a good move taxwise.
As for the withholding, the normal withholding is 20%. This will not cover your taxes and penalty, so you need to plan ahead for the additional taxes that will be due. You might ask the IRA trustee to hold out additional taxes.
2007-08-15 23:12:28 · answer #2 · answered by ninasgramma 7 · 0⤊ 0⤋
Your taxable income would be less next year so it would be beneficial to withdraw the IRA next year . You can decide whether or not to have taxes withheld on your distribution. The IRA distribution is reported on your tax return on the IRA distributions line (2006 1040 line #15a) and if any tax is withheld it is reported on the Federal income tax withheld from Forms W-2 and 1099 line (2006 1040 line #64).
2007-08-14 17:05:49 · answer #3 · answered by Pat 1 · 0⤊ 0⤋
If your tax bracket will go down when she quits, then wait until January - otherwise it doesn't matter. The 10% penalty is there regardless, but the amount withdrawn is taxed at whatever your bracket is for the year when it's withdrawn.
2007-08-14 16:37:59 · answer #4 · answered by Judy 7 · 0⤊ 0⤋
Generally, the trustee will withhold only 20%. You will have to come up with the rest (plus state taxes if applicable) at taxtime .
2007-08-14 16:37:18 · answer #5 · answered by Wayne Z 7 · 0⤊ 0⤋