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Assume that for whatever reason, there is a year where my taxable income is very low or even negative, and I know that before the end of the year already.

If I take Early Distributions from my Traditional IRA or 401(k), do I still have to pay 10% early withdrawal tax? (there are no 'qualifying' reasons).

Or will I not have to pay those/get them back when I file my taxes?

Alternatively, can I use such a year to move a large chunk of 401(k) tax-free to 401(k)ROTH ?

5

The 10% penalty for nonqualified withdrawals from IRAs applies in addition to income tax owed (if any). So, yes, you do have to pay that amount even if the rest of your tax bill shows zero tax. As to "taxable income being negative", it all depends on how Line 43 Taxable Income on Page 2 of Form 1040 came to be negative. Line 43 is calculated as

AGI (Line 38) Minus the Itemized or Standard Deduction (Line 40) Minus Personal Exemptions (Line 42) except that if AGI Minus Deduction (Line 41) is smaller than Personal Exemptions (Line 42), then 0 must be entered on Line 43

So, could you provide some details as to how Line 43 came to be less than 0?

  • At this time, it is a planned/theoretical situation: I am considering selling rental property with accumulated losses. This would reduce my taxable income for the year to around 0 or less. I am not sure if it will be really negative, but it could happen. I just thought I could 'use' that year to get money out of the 401(k) 'tax-free'; but it seems I can't. – Aganju Sep 16 '16 at 15:06
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    There is no 10% early distribution penalty of you are rolling over a Traditional IRA into a Roth IRA, and I assume the same applies to 401(k) plans as as well. You do owe regular income tax on the amount rolled over. – Dilip Sarwate Sep 16 '16 at 15:22

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