Hi. My husband had his 401(k) rolled over to an IRA from a previous company he worked for about four years ago. He lost his job with his most recent company in January and has not been able to get anything else yet. I still have my job, but there is not enough to meet everything, even though we have tremendously cut our budget. Our emergency savings will be running out soon. We are thinking we are going to have to tap into his rollover IRA, which I know is not an ideal solution, but one that we may be forced into.

I have a question regarding withdrawing money from the rollover IRA. I understand about the 10% early withdrawal penalty and never seeing that money again. The credit union where we have the rollover IRA stated that if we were to make the withdrawal, we could choose how much withholding is done.

Hypothetically, let's say that his rollover IRA is $20,000. I know $2,000 will be taken off the top. Say we ask that 40% be withheld, which would leave about $10,800 (I'm not clear on if the 40% is withheld and then the $2000 (10% of total) is taken away, or if the 10% is figured first, and then the 40% on the balance; I calculated the second way).

When we go to file our 2009 taxes, would we get taxed again on the $10,800? Will the $7,200 that was withheld be counted as far as taxes paid? And if we had too much withheld, would we get a refund for the difference?

I just want to ensure we have enough withheld that we won't have to pay anymore taxes on it when we file.

Thanks for any information!

If you withdraw $20K, that amount is included as income for purposes of incom tax calculations, so effectively your taxable income is $20K higher than it otherwise would have been. So obvoiusly you will owe income taxes on the $20K distribution. The credit union will withhold 20% or $4K by default - this withholding is a pre-payment on your 2009 taxes. Whether this is the appropriate amount or not depends on your tax bracket, which is based on particular situation. In addition, you will owe the IRS an additional early withdrawal penalty of 10% on the full amount of the withdrawal, or $2000. So if the credit union has the option of withholding that additional $2000 above the "typical" 20% withholding, that would be a good idea. Finally, if your state or municipality has an income tax then you will owe that as well - this is not something the credit union will withhold, but rather you must pay on your own. It is best handled with an estimated tax filing to your state/municipality when you receive the distribution.

If you withdraw $20K, that amount is included as income for purposes of incom tax calculations, so effectively your taxable income is $20K higher than it otherwise would have been. So obvoiusly you will owe income taxes on the $20K distribution. The credit union will withhold 20% or $4K by default - this withholding is a pre-payment on your 2009 taxes. Whether this is the apropriate amount or not depends on your tax bracket, which is based on particular situation. In addition, you will owe the IRS an additional early withdrawal penalty of 10% on the full amount of the withdrawal, or $2000. So if the credit union has the option of withholding that additional $2000 above the "typical" 20% withholding, that would be a good idea. Finally, if your state or municipality has an income tax then you will owe that as well - this is not something the credit union will withhold, but rather you must pay on your own. It is best handled with an estimated tax filing to your state/municipality when you receive the distribution.


Thank you!!