I’d like some seriously advanced feedback from CPAs, Tax Attorney’s and those that REALLY know Federal and California Tax law.
Here’s the situation -
I pulled about 19k out of my traditional IRA in February, with the hope I would get a bonus from my employer to cover the withdrawal within 60 days.
Why? My income dropped by 2/3rds and I had to pay the note on the house while looking for a new job. Yeah, I know… This is considered a prohibited event according to the IRS, but IRA managers offer it for a reason, so there is obviously a lot of leniency with this type of transaction.
Anyway, I got my bonus and it was around 20.5k. Unfortunately, it came in the form of a SEP IRA. I tried to rollover the SEP to the traditional and they said, "Ok, but it doesn’t count towards the distribution you took. You need to use post-tax dollars to repay this within the 60-day window."
We all know I will be paying taxes on the rollover when I deduct it later in life, but the IRS appears hell-bent on double-taxing the money I withdrew, since my employer got a corporate tax break by putting money into the SEP.
Is there any way around this situation?
I’ve tried to reclassify the money in the SEP to traditional IRA, but that doesn’t matter. Same with re-classifying the funds after I move them from SEP to Traditional. Neither seem to avoid the penalty. I know I could convert the SEP to a Roth, but then I’d pay income tax on it and would only avoid the 10% early withdrawal fee.
Serious suggestions only please.
{ 2 comments… read them below or add one }
Unless you can put cash back in the IRA, you are screwed..
NEVER NEVER NEVER cash out your traditional IRA or 401 K… you pay the 10% penalty.. PERIOD.
Its not double taxed…. the 10% is a PENALTY… and you pay ordinary income tax on the distribution. Traditional IRA’s are funded with PRETAX money, so you got a deduction from your income taxes when it went in, and DEFERRED the tax on that deposit until you pulled the money out.
The only difference between now and when you are 65… is at 65.. you wouldnt get hit with the 10% penalty…but WOULD pay taxes on the distribution because of its tax DEFERRED status…
Your corporation didnt get a dime in tax relief for doing the SEP.. It is an expense to them , just as if you were on the payroll…
You have exactly 2 choices:
1. You can FIND 19K to put back into the IRA.
2. You can pay the 10% penalty for an early withdraw.
Next time, ask these questions in time for someone to tell you it is a TERRIBLE plan. At the very least, make sure you KNOW you are getting the bonus and in what form BEFORE you commit to using it for ANYTHING.
You must log in to post a comment.