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IRA liquidation question?

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Posts: 7

ogmike

Veteran

Joined: Jul, 2002

Posts: 2947

Posted: Jul. 1, 2011 - 3:22 PM ET #1

Got a question for you guys. What will I be getting taxed at if I were to liquidate my IRA early, say in the next few years. I don't plan on it, but just curious in case I was desperate at some point. Here's my story.

I was at my company for over 5 years, and have contributed to 401K from the get go. Got laid off in the Fall, so I rolled it over to IRA with Smith Barney. I'm 29 years old, and am not currently working. When I was working, I was paying about 28% in taxes. Since I currently have no income, how would they tax me? Also, what is early withdrawal penalty? I don't anticipate needing that money, but if some ventures that I get into over the next few years don't pan out, I'd like to know how bad I'm going to take it in the ass for withdrawing. Thanks guys!

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Rush51

Captain

Joined: Jan, 2005

Posts: 7966

Posted: Jul. 1, 2011 - 8:08 PM ET #2

Liquidating your 401k or IRA should be your last resort.

I think the penalty right off the top is 10%. Not sure what tax rate the tax man will charge you for all that income and interest that has been tax-sheltered. It won't be nice.

I'd figure you'd get anywhere from 50%-60% of the value of your current account, once it's all said and done.

But the greater damage is to your retirement income years down the line.

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Ktrain

Captain

Joined: Oct, 2009

Posts: 6580

Posted: Jul. 1, 2011 - 8:34 PM ET #3

I'm kind of in the same boat as you. I'm thinking of liquidating my 401k as a last resort as well. I'm planning on getting about 62% of it. Same tax bracket as you etc. I figure 28% for past taxes plus 10% penalty.

If I'm wrong let me know.

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wallstreetcappers

Covers Linesmen

Joined: Feb, 2003

Posts: 56778

Posted: Jul. 1, 2011 - 11:03 PM ET #4

If you have it in a 401k and just need the money short term, you can either get a 401k loan (if employed) or request a rollover check and use the money, then get it back into an IRA before the rollover date passes.

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depeche2

Legend

Joined: Feb, 2002

Posts: 67006

Posted: Jul. 6, 2011 - 2:02 PM ET #5

Normally I'd say no, but if you have none or virtually no other income for the particular year then the hit might not be that bad. You don't pay tax on the first $X of income. So if you keep it pretty small to where you wouldn't pay much if any tax then you're only facing the 10% penalty. Might actually be less than the tax later. Still, it's removed from a tax-deferred account, which isn't good, but if you're in a pinch. Think through it carefully though.

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thorpe

All-Star

Joined: Sep, 2002

Posts: 12927

Posted: Jul. 12, 2011 - 2:03 PM ET #6

Quote Originally Posted by depeche2:

Normally I'd say no, but if you have none or virtually no other income for the particular year then the hit might not be that bad. You don't pay tax on the first $X of income. So if you keep it pretty small to where you wouldn't pay much if any tax then you're only facing the 10% penalty. Might actually be less than the tax later. Still, it's removed from a tax-deferred account, which isn't good, but if you're in a pinch. Think through it carefully though.

I agree. If you will have no declared income for the year, then the 10% penalty id offset by not paying any tax on the deferred income, especially if you are only pulling out 10,000 or less.

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ogmike

Veteran

Joined: Jul, 2002

Posts: 2947

Posted: Jul. 13, 2011 - 12:39 PM ET #7

Thanks guys. Like I said, I don't have any plans to liquidate my IRA. I was just curious b/c of my current situation. I didn't know how it would work with the taxes/penalty considering I have no income at the moment. If worse comes to worse, I now have an idea.

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IRA liquidation question?

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