This is my first posting to this forum.
Throughout the years I put a lot of my pre-tax income into my 401(k) (before I got married). Last year my company was sold so I rolled my 401(k) into a Traditional IRA. I'm not putting money into my IRA but I am putting money into my new company's retirement because they had such a good deal. They match up to 6% and give us 3% at the end of the year so you can't beat that. The other company I worked 25 years for didn't match any contributions and gave me a $65K pension.
I decided to take my pension as a lump sum (so to speak) so I rolled $15K and $10K from my pension to my IRA and will $10K a year for the next four years. That's just the way they had to set up.
I'm 46 and my IRA is already worth $464K. My financial adviser said I was on track. When will I retire? No later than 59.5, sooner if I can. My house is paid off so I am not really in any major debt.
Here is my question. A few years later I got into a financial bind. Long story. I had to take out a $35K loan against my 401(k). I tried paying it back $630 a month at a time and got the loan down to $27K until I rolled my 401(k) over to an IRA and decided to just default on the loan. Trying to pay that much money back and the loan itself had been a dark cloud over my head for three years.
The other issue is my wife gets $12K in disability per year. So this has put me above the $76K threshold into the 25% tax bracket. Not only that but 85% of her disability is taxable. I'm allowed to make up to $153K (which I will never earn) before I end up in the 28% tax bracket so I've pretty much accepted I'm in the 25% tax bracket.
This is the first year I've never gotten any money back and have ever had to pay money to the IRS which is around $1300. So instead of getting back around $5500, I'm $1300 in the hole.
So where is this going?
Is taking small sums from your IRA really that detrimental? I mean as far as tax is concerned?
I know the stock market can take a dump and I can lose money but I'm averaging a gain of around 6% or $6,000 a month (sometimes $1800 a day when the stock market is up) which almost twice my take home pay.
Someone please correct me if I am wrong about this but I did some rough math one day.
My company is going to be sold once again! I'm not sure what kind of retirement the new owners are going to have but if they are not going to match any contributions, I'm rolling what I little I have in my current 401(k) over to my IRA and would like to contribute to my IRA.
I can put $5500 in my IRA before taxes, SS and medicare tax. Isn't the 10% "penalty" really to cover SS and the medicare tax that you did not pay before putting money into your retirement?
If I managed to save (or not spend) $5500 and contributed that to my IRA before taxes (including SS and medicare tax) that money would gain 6% interest. Well assuming the stock market does well.
But if I put that money in my bank's money market account, I'd be paying income tax, SS and medicare tax then earning .03% interest (sorry isn't it).
Would it not be better to contribute that $5500 to my IRA and if I didn't need it, great, let it grow but if I did need it toward the end of the year, do an early withdrawal?
I don't think you can pay taxes up front when making an early withdrawal from an IRA can you? Reason being, how would the government know how much to tax you on at the end of the year based on your total earned income?
So if I needed to withdrawal $5500 and I am in the 25% tax bracket, I would owe the government $1925 in taxes+ 10% penalty. So if I withdrew $7425 to cover the tax and penalty, I would then be taxed $2600 (an additional $675). Sounds like a cat chasing it's tail trying to cover the tax.
I'm sure these figures are not 100% correct. Am I totally off track?
I've heard people say taking any money out of an IRA, you'll get hit paying 40% tax on the money. But based on this year's W-2 form, I had an accountant do my taxes and the $27K loan was added as earned income then in another block there was the $2700 amount for the penalty.
I guess what I am trying to ask is, how can I make a withdrawal from an IRA without having to pay tax on tax. Does any of that make sense?
Like I said if I have $464K in my IRA, my house is paid off and I'm at least 13 years from retirement, is taking $5000 a year really going to hurt me?