Perhaps the most frustrating experience I have as a tax professional is calculating the tax from an early distribution of an IRA or other pension account.
These situations usually occur when you are leaving an employer who sponsors a 401K or other pension plan. This situation almost always creates a balance due. Clients believe they are covered because taxes were withheld. But, the taxes withheld seem to NEVER be enough to cover the amount owed.
There are 3 taxes on these early distributions. First, there is a 10% penalty on the gross amount of the distribution. Second, there is a federal income tax at the highest marginal bracket you are now in because of the extra income you are now recognizing. Third, there are state and local income taxes that are owed (for which there never seems to be withholdings).
The taxes on these distributions are easily avoidable.
Here is where we can be helpful. Call us before you take the money. Do just a little bit of planning. There have been many situations where I have saved clients thousands of dollars in taxes from distributions that they really did not need. There was NO emergency.
And even if there is an emergency, a little bit of planning in the way you take the money-or the time that you take the money, can save several hundred, if not thousands of dollars in taxes.
Don’t give your hard earned pension money away to the IRS! Call us to find out how to take the money you have saved with the lowest possible tax liability.
November 8, 2014