Cost of Client taking money out of 401K

[PIGLEE]

CLIENT FORGOT A 1099R FOR 2010 AMOUNT WAS FOR 5237.00. HE GOT A CP 2000.

HIS TAX BILL WAS

751 INCREASE TAX
400 LOSS OF RETIREMENT CREDIT
524 10% PENALTY
839 LOSS OF EIC
136 WILL OWE AZ

He also lost 200.00 in Retirement Credit for 2011 (income a littler higher), and will loose it again in 2012.

3050.00 IS WHAT HE OWES OUT OF 5237.00 IRS GOT MORE MONEY THAN HE DID.

Just thought I would pass this on, just in case a client ASKS you, if he should do it.

[AZ-Tax]

Must be epidemic in AZ

My client averaged $6K Fed refund for the last 5 years now will need to pay in $6K for IRA early distribution except it gets worst, the custodian didnt withhold any money.

[PIGLEE]

of course no withholding on mine also. Do you think someone is teaching a school on what not to do???

[AZ-Tax]

Yea probably the bank teller and/or securities rep

Actually I think my client had a miscommunication with their securities rep. A bank teller is usually new to the financial services business and thinks they know it all. Most securities reps when they are about to loose their client, they could care less. Remember, its all about commission for which they earned already so why bother with any customer service. Another reason I added tax preparation to my securities business.

[mrbill]

Cost Of Client Taking Money Out Of 401k

I have a client, who works for Fidelity, perhaps the largest custodian of 401K funds. She withdrew $50K for home improvements. She felt confident when she had 10% withheld for FIT. When I informed her that she lost 40.3% to taxes, she was stunned, (25% FIT / 10% penalty / 5.3% State tax). You would have thought that she would have been aware of the tax impact. life goes on.....

[JohnH]

Should you ask her how many transactions of this type she handles in a given year?

[Burke]

I know. I have one who did the same thing from an IRA to buy a house. $28,300 is costing her $10K in taxes. And she's over 59 1/2.

[ddoshan]

A few years ago a major employer in our area went out of business here. Many of the employees took all of or large sums out of their 401K's figuring they needed the money to pay bills and live on.
I almost wanted to cry when doing their returns and seeing that around 45% of what they took out went to the IRS and or State to pay taxes. What a waste of hard earned saved money.

Some powers to be want to rid SS and go to strictly private accounts for retirement which would be a total long term disaster in my opinion. But if they did, I hope they would have some rule that the person could not withdraw the money for any reason.

[Burke]

If the 401k plan was administered by a custodian, they are required BY LAW to notify all the participants of the possible taxation of withdrawals they may be subject to. This probably was done, don't you think?

[AZ-Tax]

Only way I would support private accts

Some powers to be want to rid SS and go to strictly private accounts for retirement which would be a total long term disaster in my opinion. But if they did, I hope they would have some rule that the person could not withdraw the money for any reason.

No way with private accts. After this last crash, DIY investors told me when it comes back I will move my money into a "No market risk investment" but most are still waiting for it to come back and those that did come back, never moved their money. Then you mix commissions sale reps and asking for major trouble. The only way I would support private acconts is "fixed insurance annuity" NOT variable and/or FDIC backed deposits.