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Author: Ude Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121256  
Subject: Cashing out. How bad will it hurt? Date: 9/5/2000 1:36 PM
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A while ago I moved my 401k into an IRA rollover. Now I have to cash out my IRA. I'm in my early 40's and I live in California. Can anyone tell me what percent of my gross monies will be taken by taxes and if there will be any penatiles, what would that come to as well. I hate doing this, but I'm in a real bind.

Thanks for the help.
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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39555 of 121256
Subject: Re: Cashing out. How bad will it hurt? Date: 9/5/2000 2:05 PM
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Ude: "A while ago I moved my 401k into an IRA rollover. Now I have to cash out my IRA. I'm in my early 40's and I live in California. Can anyone tell me what percent of my gross monies will be taken by taxes and if there will be any penatiles, what would that come to as well. I hate doing this, but I'm in a real bind."

10% penalty for early withdrawal. Total withdrawal added to your income for the year and taxed as income at boththe federal and state level at whatever marginal bracket you are already in (or part at a higher if the additional income moves you nto a higer bracket).

10% + 15% min. FIT, most likely (may well be 28%, or possibly higher) + x% Cal. IT (9.3% max., I believe). You could easily lose 47.3% to taxes.

Why do you "have to cash out [your] IRA"? Mostly a rhetorical question, so do not feel compelled to respond, but it is difficult to sugest alternatives without any knowledge of the situation.

Regards, JAFO




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Author: Ude Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39557 of 121256
Subject: Re: Cashing out. How bad will it hurt? Date: 9/5/2000 2:52 PM
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I don't mind answering.

I just lost my job and my first instinct was to scramble back on the saddle. I stopped and made myself take a hard look at what I can do. One of my options was to cash out my IRA. With it I would put half in a 6 month CD (that's the half that will end up going to taxes) so I don't spend it. With the rest I would pay off my debts and knock out the interest that goes with it. What I spend on debts in one year is more that I make with my IRA. What I have left over I can live off while I take my time looking for a new job and maybe get some education to get me into a better job.

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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39564 of 121256
Subject: Re: Cashing out. How bad will it hurt? Date: 9/5/2000 4:50 PM
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Ude writes (in part):

With it I would put half in a 6 month CD (that's the half that will end up going to taxes) so I don't spend it.

I reply:

Actually, you'll probably owe estimated taxes since it appears that your income has dropped. (If your income had risen, you might have been able to use a safe harbor.) --Bob

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Author: EGUSC Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39565 of 121256
Subject: Re: Cashing out. How bad will it hurt? Date: 9/5/2000 5:00 PM
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In addition to the Federal 10% penalty, California has a 2.5% penalty on premature distributions. If you are in the top federal bracket (only $283,150 MFJ) and live in taxifornia you will net less than 40% of a premature IRA distribution after taxes and penalties.

EG

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Author: gurdison Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39571 of 121256
Subject: Re: Cashing out. How bad will it hurt? Date: 9/5/2000 6:51 PM
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<In addition to the Federal 10% penalty, California has a 2.5% penalty on premature distributions. If you are in the top federal bracket (only $283,150 MFJ) and live in taxifornia you will net less than 40% of a premature IRA distribution after taxes and penalties.>


And the earthquakes are a just an added bonus I guess?

Do California taxpayers consider it a fair system? You must be getting the best services in the country since you are paying the highest taxes? Or do your politicians have a stench every bit as rotten as the ones we have here in NJ?


BRG



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Author: EGUSC Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39577 of 121256
Subject: Re: Cashing out. How bad will it hurt? Date: 9/5/2000 7:24 PM
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Do NJ and NY taxpayers have it worst than CA 9.3%? I thought you northeastern states had even higher tax rates than CA?

EG

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Author: Ude Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39578 of 121256
Subject: Re: Cashing out. How bad will it hurt? Date: 9/5/2000 7:31 PM
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Sorry, I'm not up on all the tax stuff. What is MFJ?

I was only pulling down low 60's so my income wasn't much.

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39580 of 121256
Subject: Re: Cashing out. How bad will it hurt? Date: 9/5/2000 7:41 PM
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Ude: "Sorry, I'm not up on all the tax stuff. What is MFJ?"

I have lost the context of this question (and I am too lazy to go back and find the original post), BUT on this board:

MFJ usually means "married, filing jointly".

Hope this helps. Regards, JAFO

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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39585 of 121256
Subject: Re: Cashing out. How bad will it hurt? Date: 9/5/2000 8:07 PM
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The original response was...

<<<In addition to the Federal 10% penalty, California has a 2.5% penalty on premature distributions. If you are in the top federal bracket (only $283,150 MFJ) and live in taxifornia you will net less than 40% of a premature IRA distribution after taxes and penalties.>>

And BRG responded:

<<And the earthquakes are a just an added bonus I guess?>>

LOL!!!

No, actually, the earthquakes are a given. It's the annual summer/fall brushfires and annual winter flooding that the REAL bonus!!

<<Do California taxpayers consider it a fair system? You must be getting the best services in the country since you are paying the highest taxes? Or do your politicians have a stench every bit as rotten as the ones we have here in NJ?>>

I can't speak for ALL CA taxpayers, of course. But I can tell you that I was a native Californian...live there for over 40 years. Some of the most beautiful country and seacoast in the world (don't believe me...check out Morro Bay...or take a walk down 17 mile drive in Pebble Beach...or watch the sunset over the Laguna Beach cliffs).

I relocated to Arizona about 8 years ago. The taxes, tax system (income, property, the whole kit and kiboodle), the regulations, and the politics all had a hand in driving me out. But the taxes were the major issue.

TMF Taxes
Roy




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Author: MakingTrax One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 39591 of 121256
Subject: Re: Cashing out. How bad will it hurt? Date: 9/5/2000 8:58 PM
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Ude --

Sorry about the job. I'm sure it's unnerving to be without a steady income, but there has got to be some better options than cashing out the IRA.

First, it's unclear from your post how much of your IRA you are intending to cash out. It sounds like you want to cash out the entire thing, not a very Foolish thing to do. [You mention wanting to live off of it for a while in addition to paying off your debts -while holding half in a CD -- sounds like you are talking about an amount $40K or more.]

Why are you assuming that it could take months to land a new job? What if you cash everything out and than get a great offer in 6 weeks? Not only will you get hit with the huge tax bill, but you will have lost your opportunity to have those funds accrue tax free.

You may want to visit the Consumer Credit/Credit Card Board (negotiating with creditors to lower interest rates), the Living Below Your Means Board (lifestyle adjustments) and Budgeting Boards (goal setting for living w/in your means, cash reserve, etc.) for some tips on how to tide you over during this transitionary period in your life.

But since this is a Tax Strategies board -- a few thoughts (that hopefully the experts can embellish upon):

1. Rather than cash the entire amount out, perhaps cash out only what is necessary to carry you through the minimum living expenses for a 3 month period. Let the "tax amount" stay in the IRA until you are sure that you need it. This will minimize your tax hit for this year. You can always make a 2nd withdrawl next year to cover taxes (and additional living expenses if absolutely necessary)-- and if you are still unemployeed then, your tax rate may very well be lower.

You mentioned you earn about $60K annual -- meaning you've probably earned about $40-45K this year. If you have a lot of deductions (i.e., mortgage), it's possible that you are on the cusp of the 15% FIT bracket. Any large cash out will most assuredly place you firmly into the the 28%. If you have few deductions and pull out the entire amount at this time, you could easily escalte yourself in to the 31%.

So, be strategic and pull out only the minimum or that which will keep you in the most beneficial tax bracket.

2. If you are serious about going back to school, consider the various types of education tax credits that you might be able to claim and try to coordinate these to their best tax advantage to offset any IRA withdraws.


A few other questions to ponder. Do you own a home that you could sell and profit from the equity so that could tie you over?


Whatever you do -- consider your long-term financial future and not just pride. Help from the saddle (I assume this means family -- sorry if I've misinterpreted) might be better at this point than later.


Good Luck.

Making Trax

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