Early Withdrawal with no income…
So my GF needs to take money from her IRA to pay for grad school because she can’t get financial aid this semester. She has a Rollover IRA which she is planning on closing and taking the funds without taxes withheld to place in her after-tax account to pay for school, car, life, etc.
My question for you true experts (I actually am a Series 65 guy who worked in Retirements for 5 years, but I dealt with DBs and 401(k)s, not IRAs) in the IRA space is as follows: If she has an income of $0, will she need to pay ANY taxes on that money? If the 10% is waived because it’s for education, will the income tax be fully deducted/waived because she’s got nothing coming in?
The amount she’s taking is about $20,500 of qualified money without a penny withheld, how much of that should she set aside to cover her tax liability as a California resident with no other sources of income?
Thanks for your help!
Permalink Submitted by Dan Pasternack on Thu, 2012-08-23 15:43
Nobody knows the answer to this?
Permalink Submitted by Clyde Wolf on Thu, 2012-08-23 17:38
[quote]Nobody knows the answer to this?[/quote]
Many regular posters here know the answer. It is just that sometimes there are more important things that need attention.
If the $20,500 was all tax deferred, it will be reported on line 15a and 15b of her 1040.
That makes it all taxable.
The 10% Early Distribution Penalty will be applied to the amount that does not qualify for higher education expenses.
See IRS Pub 590, Individual Retirement Arrangements, page 50, Higher Education Expenses: http://www.irs.gov/pub/irs-pdf/p590.pdf
Permalink Submitted by Alan Spross on Thu, 2012-08-23 17:54
If 20,500 is her total income and she files single with the standard deduction, her federal tax liability will be around 1,175, not counting the 10% penalty on amounts not waived due to the higher education exception. If she reduced the distribution by 2,000, which is the amount that falls in the 15% bracket, the ordinary taxes would be reduced by about $300.
CA rates are fairly progressive, so the hit in CA will probably not be much, however CA has a separate 2.5% early withdrawal penalty of it’s own.