Accounting News and Notes

Atlanta CPA: Don’t Let a Premature Distribution Ruin Your Whole Tax Year

Don’t Let a Premature Distribution From Your 401K or IRA Ruin Your Whole Tax Year. Frequently the taxes and penalties on early distributions will approximate 50% when all added together creating a tax problem, rather than solving the financial crisis a taxpayer may have been striving to resolve. The below is a sample letter we might use to communicate the financial hardship that early distributions may/can/will cause:

Regarding your 401K withdrawals of 100K this year please be sure you have enough withheld/paid to cover your year-end taxes. This income (not counting the 10% penalty) will be approx. the same as your prior year income. Therefore (not counting the 10% penalty) you will owe approx. $18K to the IRS and $6K to GA just based upon this income. 

Please note that the statutory withholding amounts required to be withheld from 401K distributions are MUCH less than your tax bill usually is.  

Please note the if you also owe the 10% penalty that your IRS tax bill will rise to approx. $28K. 

The IRS hardship rules in general say (this is directly off of their web site at http://www.irs.gov/retirement/article/0,,id=162416,00.html 

Whether a need is immediate and heavy depends on the facts and circumstances. Certain expenses are deemed to be immediate and heavy, including: (1) certain medical expenses; (2) costs relating to the purchase of a principal residence; (3) tuition and related educational fees and expenses; (4) payments necessary to prevent eviction from, or foreclosure on, a principal residence; (5) burial or funeral expenses; and (6) certain expenses for the repair of damage to the employee’s principal residence. Expenses for the purchase of a boat or television would generally not qualify for a hardship distribution. A financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee.

The qualification for these monies needs to be coordinated with your 401K provider as they will be creating the tax document from which your taxes have to be prepared so working with them to mark your year-end Form 1099 if they deem you qualify is critical/essential. Please call me after you receive so we can discuss.

Call us today to take advantage of our free initial consultation. Most all clients we have worked with over the years fail to fully contemplate the tax disadvantage of pulling monies out early of a 401K or an IRA as most middle class America will wind up losing approximately 50% of their premature distribution, creating a tax problem rather than solving a financial crisis the monies were intended for.

 John Dillard, CPA of His CPA, PC (An Atlanta Christian CPA firm) 1940 Woods River Lane, Duluth, GA 30097  Phone 770-757-0556    http://www.hiscpa.com/irs-representation.html To retain John Dillard CPA (An Atlanta Christian Speaker/Author) for your business group or church congregation, you can contact him today at 770.814.9304. 

We serve clients that are located in Atlanta GA, Gwinnett County, North Fulton County, Cherokee County, DeKalb County, Hall County, Clayton County, Cobb County, Forsyth County, Hart County, Jefferson County, Duluth, Alpharetta, Johns Creek, Lawrenceville, Marietta, Milton, Norcross, Snellville, Roswell, Buford, Smyrna, Marietta, Cumming, Grayson, Hartwell, Suwanee, Sugar Hill, Loganville, Lilburn, East Point, Gainesville, Snellville, Buckhead, Buford, Peachtree City, Dunwoody, Kennesaw, Decatur, Conyers, Stone Mountain and Decatur, Barrow, Bartow, Carroll, Cherokee, Clayton, Coweta,  Douglas, Fayette, Forsyth, Fulton, Gwinnett, Henry, Newton, Paulding, Pickens, Rockdale, Walton, Barrow, Bartow, Carroll, Henry, Newton, Bartow, Walton, Rockdale, Barrow, Spalding, Coweta, Dawson, Douglas, Fayette, Newton, Paulding, Spalding, Walton, Henry, Paulding, Douglas, Coweta, Canton, Covington, Douglasville, Druid Hills, East Point, Forest Park, Griffin, Lithonia, Mableton, McDonough, Milton, Mountain Park, Newnan, Powder Springs, Stockbridge, Union City, Villa Rica, Winder, Woodstock.

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This entry was posted on Saturday, January 22nd, 2011 at 8:35 am and is filed under Business Loans & Money Management, Business/Tax Consulting, Financial Planning.
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