cheese
First Time Poster
Cash: $ 0.25
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Joined: 19 Oct 2012
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| Early Withdraw - Pension |
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Hello,
I have approximately $8500 in funds in the North Carolina Teacher's Retirement System after 4 years of service. I moved out of state and already purchased the service credit in my new state. My husband and I could really use a few extra dollars right now as most of my savings were just eaten up with a new home purchase.
We usually have our taxes planned fairly well to avoid any large refund or amount owed. If I take the lump sum, less the 20% withheld, and not roll it over to my 403(b), will this cause a decent sized tax hit come April?
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Fri Oct 19, 2012 2:21 pm |
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oldguy
Senior Member
Cash: $ 751.85
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Joined: 21 May 2006
Location: arizona
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If your joint marginal tax bracket is 25% and your state tax is 5%, then the tax/penalty on $8500 will be about $3400 - ie, you'll net $5100.
Whether you pay 20% of it now ($1700) or pay the $3400 in April is merely a timing thing - ie, you can pay half now and pay half in 6 months, or you can wait and pay it all in April.
But I would roll the $8500 into an IRA and keep it. If you have an immediate need for say $5000, borrow it and pay the $500/yr interest for the use of the money, that's quite a bit cheaper than getting hit with a $3400 expense.
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Fri Oct 19, 2012 3:15 pm |
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clydewolf
Senior Member
Cash: $ 50.25
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Joined: 27 May 2012
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| Re: Early Withdraw - Pension |
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quote:
Originally posted by cheese
Hello,
I have approximately $8500 in funds in the North Carolina Teacher's Retirement System after 4 years of service. I moved out of state and already purchased the service credit in my new state. My husband and I could really use a few extra dollars right now as most of my savings were just eaten up with a new home purchase.
We usually have our taxes planned fairly well to avoid any large refund or amount owed. If I take the lump sum, less the 20% withheld, and not roll it over to my 403(b), will this cause a decent sized tax hit come April?
Cheese,
Look at Old Guy's advice, it is a much cheaper option.
You could even put that on your Credit Card.
This time of year, retail stores are hiring seasonal part time help right now. That could be an opportunity to earn more to help pay off the loan.
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Fri Oct 19, 2012 3:34 pm |
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clydewolf
Senior Member
Cash: $ 50.25
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Joined: 27 May 2012
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quote:
Originally posted by coaster
quote:
Originally posted by oldguy
Whether you pay 20% of it now ($1700) or pay the $3400 in April is merely a timing thing - ie, you can pay half now and pay half in 6 months, or you can wait and pay it all in April.
Will they get hit with an underpayment penalty?
The best answer to any tax question is - It Depends!
All other things being right on target for the 2012 tax year then include the $8,500 of which only half of the tax was withheld, they would owe a penalty.
But if the total amount withheld is at least equal to last year's tax, they would not owe a penalty.
The penalty is currently less than 4% of what is owed.
They have until January 15, 2013 to make an estimated payment. Get the tax owed
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Sat Oct 20, 2012 10:16 pm |
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clydewolf
Senior Member
Cash: $ 50.25
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Joined: 27 May 2012
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quote:
Originally posted by clydewolf
quote:
Originally posted by coaster
quote:
Originally posted by oldguy
Whether you pay 20% of it now ($1700) or pay the $3400 in April is merely a timing thing - ie, you can pay half now and pay half in 6 months, or you can wait and pay it all in April.
Will they get hit with an underpayment penalty?
The best answer to any tax question is - It Depends!
All other things being right on target for the 2012 tax year then include the $8,500 of which only half of the tax was withheld, they would owe a penalty.
But if the total amount withheld is at least equal to last year's tax, they would not owe a penalty.
The penalty is currently less than 4% of what is owed.
They have until January 15, 2013 to make an estimated payment. Get the tax owed
I want to add some more information to the Under Payment issue, ideas that could be used to help avoid any penalty:
- As was mentioned earlier, having this year's withholding plus refundable credits be equal to the previous year's tax.
- For the tax year, your withholding plus refundable credits will have you owing less than $1,000.
- For the tax year, your withholding plus refundable credits will be 90% of the current tax bill.
Any one of those 3 situations wold avoid a penalty. The penalty would be applied to to the lowest underpayment from any of the above situations.
Withholding is the preferred method of paying your income tax. If the IRS receives a large withholding amount on December 31, it is as though the withholding was received throughout the year. That is not the case with estimated payments.
Here are some ideas the OP could employ to increase their withholding:
- The OP could ask to have an additional amount withheld from the distribution. The 20% withholding is a Minimum that the administrator must withhold when making a cash payout.
- The OP could increase their withholding from their pay.
If they should end up with a penalty, the OP could ask to have the penalty waived because this was a one time payout from a pension plan late in the year.
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Sun Oct 21, 2012 6:43 pm |
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oldguy
Senior Member
Cash: $ 751.85
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Joined: 21 May 2006
Location: arizona
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quote:
The penalty is currently less than 4% of what is owed.
I normally just pay the penalty. The IRS suggests that you let them calculate it and bill you. They charge 4% for the amount over $1000, and only for the months that the consider you "underwithheld'' (so it's really only 1% or 2%). I consider it to be a cheap cost for the use of the money. (They bill you via mail in about October for the previous year - I could be getting a bill anytime now.)
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Sun Oct 21, 2012 11:21 pm |
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Bolainmarsh3
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Joined: 14 Nov 2012
Location: usa
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1. The holder of the account became totally and permanently disabled.
2. The withdrawl was used to pay for uninsured medical expenses that exceeded 7.5% of your Adjusted Gross Income, even if you did not itemize those medical expenses.
Depending upon the type of retirement account there may be other ways to avoid the penalty such as a first time home purchase or educational expenses. Not all retirement accounts are eligible for that treatment so you probably check with a tax professional for guidance specific to your situation.
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Wed Nov 14, 2012 5:59 pm |
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clydewolf
Senior Member
Cash: $ 50.25
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Joined: 27 May 2012
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quote:
Originally posted by Bolainmarsh3
1. The holder of the account became totally and permanently disabled.
2. The withdrawl was used to pay for uninsured medical expenses that exceeded 7.5% of your Adjusted Gross Income, even if you did not itemize those medical expenses.
Depending upon the type of retirement account there may be other ways to avoid the penalty such as a first time home purchase or educational expenses. Not all retirement accounts are eligible for that treatment so you probably check with a tax professional for guidance specific to your situation.
I did not see anything posted about a disability.
You are right, it is the IRA that has an Early Penalty Free Distribution for medical expenses that exceed 7.5% of your AGI. Income taxes would still apply.
The 403b and 401k do not have that exception to the 10% early distribution.
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Wed Nov 14, 2012 8:05 pm |
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