By Ever you have completed your tax return to discover you are obliged to federal government more than a thousand dollars? If yes, I hope it was just because you raided your retirement plan or pension. If this painful lesson gives you no learning to you, keep reading this article to avoid paying IRS thousands of dollars in future.
‘Never Pull Funds of Your Retirement Plan’ have you read such signs in your tax accountant’s office? Indeed this was overstated, but I understand why every accountant office has such sign. Any tax accountant has to console shouting clients explaining them that they are now obliged to pay 1000s of dollars to government because they withdrew funds from their pension or retirement plans. The worst part is that these withdrawals are usually in times when they are already facing situations like foreclosure, bankruptcies and job losses.
If you are taking money out of your retirement or pension plans, first find out that the federal government withholds 20% of your money. This news really upsets people as it is a big deal of money after all.
Most if not all, taxpayers still have to bother about state and federal tax laws. If you are in the 28% tax slab, you will be obliged to the Federal government for another 8% of the withdrawal amount. The worst part is that if you are under 59 1/2 years of age, you might be penalized another 10%. Moreover, most states will charge tax of 5-10%.
How your tax bill is affected by this?
If $20,000 is withdrawal amount and withhold tax is 20%, you will be left with $16,000 only. At the mid of the month, you will realize that you are obliged to pay another $1,500 to state and $3,600 to federal government. So at the end, you are only left with $10,900 only. So now it can really be understood what this statement “NEVER PULL FUNDS OF YOUR RETIREMENT PLAN” always seen hung at tax accountant office means.
No doubt, exceptions are there. You may find many ways to avoid 10% penalty using the retirement proceeds for medical, first time home purchase or education expenses that are up to $10,000. Some countries don’t have income tax and these penalties and tax don’t apply to ROTH Individual Retirement Accounts.
Always keep this in mind that your tax advisor can explain the financial consequences that particularly are relevant to these situations for you. They may suggest alternatives like Goldleaf Retirement Plans or taking loan out against your retirement plan.
