IRA Rollover

Question: IRA early withdrawal 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: 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 Then the effective tax on your withdrawn amount would be 25%, which you may consider acceptable.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 You will not pay a penalty, and after five years the Roth money can be withdrawn tax free.

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