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Old 02-25-2009, 10:02 PM
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IRA Distribution and Income Tax

Dear Sir,

I was 59-1/2 + in May 2008 when was laid off from my Job. Just before that my wife had a stroke and she was in emergency care for couple of months.
I had two grown up kids dependent on me beside my wife. I got the 401K plan rolled over to IRA roll over plan of American Century in May 2008.
I took all the money ($43000.00) out to meet my wife’s treatment and other family hardship liabilities. I spent hospital expenses, insurance bills, my daughter college fees and cost of lab. Testing and other family expenses. I withhold 20% for federal taxes before distribution.
I have received unemployment compensations for about 8 months before I got a job in Jan 2009.
At the time of my laid off I had unpaid 401K loan of $20000.00 which was also rolled over to American Century.

Should I need to pay taxes on 43000 + 20000 or there are some tax benefits I can get since I was unemployed and spent hundreds of dollars on Medical Insurance and on my Wife’s treatment.
I used to file form 1040 jointly with my wife; she is not an earning member.

Please advice, Thanks

Last edited by SAPSAV : 02-25-2009 at 11:27 PM.

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Old 02-26-2009, 12:59 AM
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It seems that you may qualify for the early withdrawal penalty associated with the premature withdrawal of an IRA and the 401k due both to your Age being in excess of 59 1/2 and due to your Wife's medical condition. Both of these facts are allowable conditions that would preclude you from being assessed an early withdrawal penalty of an IRA.

However, both the withdrawals of the IRA would subject you to pay taxes on these amounts at your ordinary tax rate which may be in the 15% tax bracket. Since, you withheld 20% for Federal Income tax purposes, I think that you might actually be getting a refund of approximately 5% of the total amount of the distribution or $3,150 (5 % x $63,000). Your actual tax refund may be perhaps higher if you were to itemize and have sufficient medical expenses that exceed your 7.5% of your adjusted gross income.

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Ask TaxGuru Please refer to the legal disclaimer.

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