Free Essay: Withdrawal from the IRA in US

Published: 2022-11-03
Free Essay: Withdrawal from the IRA in US
Type of paper:  Research paper
Categories:  United States Penal system
Pages: 3
Wordcount: 709 words
6 min read

In the US, early withdrawal from the individual retirement account is subjected to ten percent penalty. The client is age 56. In this case, if he withdraws the amount at the age, the ten percent penalty will automatically apply. One of the methods that the client can consider is to do a back-roll over in which the amount in the IRA is rolled over to the 401k plan. In this case, the money in the IRA is not affected by the penalty rule especially if a person intends to retire at fifty-five. Therefore, the client should, at the beginning of the year, consider transferring the amount in the IRA to a 401-k retirement plan, and they make the contribution at the beginning of the year as a 401k contribution as opposed to the IRA contribution. In this case, the client will be able to withdraw his money at the 401k without incurring the early withdrawal penalties. However, the client has to check and ensure that his employer-sponsored 401k allows the reverse roll-over since currently, only 69% of the employers allow this function. Once the client is sure that the back roll-over is allowed, the client then has to make a deposit of the entire fund into a 401k account within sixty days. Then the roll-over should be reported accurately to the 1040 tax return, indicating a $0 taxable amount in the form and giving "Rollover" as the reason for the $0 taxable amount distribution.

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Alternatively, the client can consider making the regular payment for the IRA for the next three-and-half years until he reaches the age of 59 and a half. In this case, the client will then legally avoid the ten percent early withdrawal penalty. However, the client must be aware that even at the age of 59, he will still be exposed to the regular income tax on every withdrawal made as the income tax charges stop when a person reaches the age of seventy.

Another alternative to making the withdrawal without the ten percent charge is to withdraw the amount with the intention of paying for long-term medical charges that are not covered by insurance. In this case, the medical charges will also have to above ten percent of the client's total income.

In the same way, the client can plan to use the amount in the IRA to pay college fees, which also include the tuition fees as well as books and supplies purchased for the college learning of the client, his spouse or any other dependent. In this case, the amount withdrawn from the IRA will not be exposed to the ten percent early withdrawal charges. Additionally, the amount was withdrawn by the client to pay for room and board of a college-going spouse or dependent and the student is part-time or full-time will also not be subjected to the ten percent early withdrawal penalty. However, the client should also be aware that the IRA distributions are classified as taxable income when withdrawn for the educational purposes, thereby becoming disadvantageous to the client as it reduces his chances of qualifying for other financial aids.

The last method of avoiding the ten percent is to withdraw the IRA amount with the intention of buying or building a first home. In this case, the client must not have owned any home for the last two years prior to the withdrawal period. However, the maximum amount withdrawable from the IRA scheme is $10,000 for an individual and twenty thousand for a couple. In case the purchase of the home is canceled or delayed, the client will be expected to put the money back into the IRA account within the first one hundred and twenty days of the receipt of the sum or else the ten percent penalty will apply.

Having considered the above methods of avoiding the penalty, the best method is to apply the backward rollover of the IRA amount into an employer-supported saving scheme such as the 401-k. this will provide legal protection against both the income tax and the ten percent penalty. Being 56 years old, the client can also consider making payments for the next four years to reach the 59-year mark and withdraw his cash without penalties.

Works Cited

IRS. "ROTH Comparison Chart." IRS, 2018.

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