I just want to make sure I am thinking of this correctly.
My husband has a degenerative disease (cystic fibrosis), so this causes him to have a reduced lifespan.
I would like him to have a fun retirement time before he gets real sick, I'm thinking a likely time frame would be like he retiring in 21 years when he is 45 with a likely lifespan of 50-55 years.
I was thinking of saving this retirement money outside of a 401k/ IRA to avoid the 10 percent withdrawal fee as I we wouldn't want to wait for him to get real sick and disabled before stopping work and withdrawing the money saved for this.
But I was reading and just realized that even though we would have to pay the 10% for withdrawing early, we would still get the tax benefits and our taxes are way way more than 10%.
Is this correct, that we don't loose the tax benefits even if we withdraw the retirement money early, just loose the 10%?
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Answers & Comments
Verified answer
If you withdraw this money early before age 59 1/2, you will pay a 10% penalty plus federal income tax.
There are however exceptions for early withdrawals.
http://beginnersinvest.about.com/od/401k/a/aa12210...
Do you happen to have 2 separate 1099R in your hand yet for the distributions for each purpose direct transfer trustee to trustee 401K to your IRA account and then another 1099R for the IRA distribution amount that you did receive during the 2012 tax year for this purpose and time in your life. 1099R IRA distribution 1040 page 1 line 15a and 15b 1099R 401K distribution line 16a and 16b Taxes withheld 1040 page 2 line 62 for this purpose. The 10% early withdrawal penalty amount will be entered on the 1040 page 2 line 58 during the 2013 tax filing season for the 2012 tax year No you can NOT use the early withdrawal penalty amount for any other purpose at this time. And you do know that any under payment of your FIT liability income tax amount is going to be costing you penalties and some interest amounts when you do end up owing MORE than 1000 of FT for 2012 tax year that should have been paid by January 15 2013 as estimated tax using the number 4 payment voucher for the 2012 tax year at that time. Hope that you find the above enclosed information useful. 01/26/20`13
If you do a rollover from one account to another, you will not have any penalties. A direct rollover will be the best way to go. If you withdraw your money, you will have to roll it over within 60 days from withdrawing the money. Say for instance you withdrew $20,000. Your tax from the is $4,000 with a total of 16,000. Like I said, to avoid the penalty, you will need to roll the entire $20,000 into another account.
If you have a Roth IRA you can withdraw your contributions without penalties after 5 years. It is a post tax account. The profit you could still be penalized on.
We don't know what taxes will be in a few years, so to give you that advice would be beyond the crystal ball.
If you think you can beat taxes and the 10% penalty, give it a shot, but remember, no one knows what is going to happen in a few years.
Helen, EA in PA