IRA early withdraw


J

JoeG

Hi, I need some help here:

I read form 5329 and 1040 instructions, and I do not find an
answer to my question.

I am planning to make an early withdraw in my IRA. Early
withdraw is penalized at 10% tax which is added to regular
income as per IRS rules.

My income is practically zero, I am unemployed and the money
will be used to setup an open a new business.

I presently have a sole prop internet retail small business
that's began loosing money. Reported on schedule C

My question: Is the early withdraw penalty tax of 10%
affected by losses reported on schedule C.? How is it
affected?

thank you for your time.
 
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J

John H. Fisher

Hi, I need some help here:
I read form 5329 and 1040 instructions, and I do not find an
answer to my question.

I am planning to make an early withdraw in my IRA. Early
withdraw is penalized at 10% tax which is added to regular
income as per IRS rules.

My income is practically zero, I am unemployed and the money
will be used to setup an open a new business.

I presently have a sole prop internet retail small business
that's began loosing money. Reported on schedule C

My question: Is the early withdraw penalty tax of 10%
affected by losses reported on schedule C.? How is it
affected?

thank you for your time.
In any case, even if you have no taxable income, the penalty
will apply. IOW, if you have a $25,000 business loss,
leaving a net operating loss on the bottom line, and had
taken an early IRA distribution of $20,000, you would owe no
income tax but the penalty tax of $2,000 would still have to
be paid.

"Jack" - John H. Fisher - (e-mail address removed)
Philadelphia, Pa - Atlantic City, NJ - West Wildwood, NJ
My Newsgroups & Boards at: http://members.aol.com/TaxService/index.html

Where Ignorance is bliss, 'tis folly to be wise!=:)
 
B

Bill

(e-mail address removed) (JoeG) posted:
Hi, I need some help here:
I read form 5329 and 1040 instructions, and I
do not find an answer to my question.
I am planning to make an early withdraw in my
IRA. Early withdraw is penalized at 10% tax
which is added to regular income as per IRS
rules.
My income is practically zero, I am
unemployed and the money will be used to
setup an open a new business.
I presently have a sole prop internet retail
small business that's began loosing money.
Reported on schedule C
My question: Is the early withdraw penalty tax
of 10% affected by losses reported on
schedule C.? How is it affected?
The IRA early withdrawal is related to age. Presumably, you
won't reach age 59 1/2 this year.

The penalty is assessed without regard to the purpose or
future use of the funds. In addition, any funds withdrawn
will become income, which should be reported on the
appropriate line (15 for 2003). From that point on, the
income will become a part of your overall Adjusted Gross
Income. The Schedule C entries (line 12 for 2003) would be
mixed with all other income.

The 10% penalty is a separate item -- and, via Form 5329,
would be listed as an "Other Tax" (line 57 for 2003). In
other words, you will pay the penalty even though you owe no
other taxes.

Bill
 
T

Tom Healy

I am planning to make an early withdraw in my IRA. Early
withdraw is penalized at 10% tax which is added to regular
income as per IRS rules.

My income is practically zero, I am unemployed and the money
will be used to setup an open a new business.

I presently have a sole prop internet retail small business
that's began loosing money. Reported on schedule C

My question: Is the early withdraw penalty tax of 10%
affected by losses reported on schedule C.? How is it
affected?
There is no exemption for the 10% penalty for using the
funds to start a business. It's on top of your regular
income tax (which may well be zero).

You might want to look at whether it makes sense to convert
more of your IRA (other than what you need for the startup)
into a Roth IRA.

Tom

--
Thomas E Healy, CPA, PC
1650 38th St., Ste 202W
Boulder, CO 80301
Please send email to: (e-mail address removed), since I block all email at my
newsgroup address.
phone (303) 443-1804
fax (720) 489-3772
 
H

Herb Smith

JoeG said:
Hi, I need some help here:

I read form 5329 and 1040 instructions, and I do not find an
answer to my question.

I am planning to make an early withdraw in my IRA. Early
withdraw is penalized at 10% tax which is added to regular
income as per IRS rules.
Not quite. The early withdrawal surtax is added to your
OTHER income TAX.
My income is practically zero, I am unemployed and the money
will be used to setup an open a new business.

I presently have a sole prop internet retail small business
that's began loosing money. Reported on schedule C

My question: Is the early withdraw penalty tax of 10%
affected by losses reported on schedule C.? How is it
affected?
The IRA withdrawal is added to your other income, and may be
reduced by business losses (see Form 1040 instructions). The
penalty surtax for early withdrawal is NOT affected by your
regular income tax -- even if it is zero!
 
B

BMS

JoeG said:
Hi, I need some help here:

I read form 5329 and 1040 instructions, and I do not find an
answer to my question.

I am planning to make an early withdraw in my IRA. Early
withdraw is penalized at 10% tax which is added to regular
income as per IRS rules.

My income is practically zero, I am unemployed and the money
will be used to setup an open a new business.

I presently have a sole prop internet retail small business
that's began loosing money. Reported on schedule C

My question: Is the early withdraw penalty tax of 10%
affected by losses reported on schedule C.? How is it
affected?
How old are you? If you are over 55 you could take advantage
of 72a or 72t withdrawals and avoid the penalty.

Also if you have your own business with nobody other than
yourself and your spouse you could open up a solo 401k, roll
it over and borrow up to half or 50k, which ever is less,
and again avoid penalties.
 
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C

Christopher Green

JoeG said:
I am planning to make an early withdraw in my IRA. Early
withdraw is penalized at 10% tax which is added to regular
income as per IRS rules.

My income is practically zero, I am unemployed and the money
will be used to setup an open a new business.

I presently have a sole prop internet retail small business
that's began loosing money. Reported on schedule C

My question: Is the early withdraw penalty tax of 10%
affected by losses reported on schedule C.? How is it
affected?
You will pay the early withdrawal penalty, unless you have
an exception, and using your IRA to fund a business isn't
one of the exceptions. Even if you have no other income, and
enough loss to use up the entire withdrawal, you still owe
the 10% penalty. (If you're in California, the state takes a
2.5% penalty, too.)

Even if you were to have a refundable credit, such as Earned
Income Credit, the early withdrawal penalty will still eat
into the credit.

IRAs are very expensive sources of capital for purposes that
don't qualify.
 
H

Herb Smith

How old are you? If you are over 55 you could take advantage
of 72a or 72t withdrawals and avoid the penalty.
What does being age 55 have to do with anything? A SEPP plan
can be established at ANY AGE (the younger you are, the
longer it is in effect). The rules are "until age 59-1/2 or
five years, whichever is longer".
Also if you have your own business with nobody other than
yourself and your spouse you could open up a solo 401k, roll
it over and borrow up to half or 50k, which ever is less,
and again avoid penalties.
A loan has to be repaid within five years.
 
A

Arthur Kamlet

Bill said:
(e-mail address removed) (JoeG) posted:
The IRA early withdrawal is related to age. Presumably, you
won't reach age 59 1/2 this year.

The penalty is assessed without regard to the purpose or
future use of the funds. In addition, any funds withdrawn
will become income, which should be reported on the
appropriate line (15 for 2003). From that point on, the
income will become a part of your overall Adjusted Gross
Income. The Schedule C entries (line 12 for 2003) would be
mixed with all other income.

The 10% penalty is a separate item -- and, via Form 5329,
would be listed as an "Other Tax" (line 57 for 2003). In
other words, you will pay the penalty even though you owe no
other taxes.
The 5329 is used to exempt some or all of the distribution
from the 10% early distribution tax or other excise tax.

Since in this case there is no exemption from that 10% early
distribution tax, there is no need for Form 5329. Write
"NO" om (for 2003) Line 57 to indicate that form 5329 is Not
required, and enter the 10% on Line 57.

__
Art Kamlet ArtKamlet @ AOL.com Columbus OH K2PZH
 
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A

Arthur Kamlet

How old are you? If you are over 55 you could take advantage
of 72a or 72t withdrawals and avoid the penalty.
Sorry, there is no age 55 rule for IRAs.

For a qualified employer plan, e.g., 401k, the age 55 rule
requires that you must be at least age 55 during the year
you separated from service with your employer to exempt a
distribution from early distribution tax.

And if you plan to take a series of substantially equal
periodic payments (SEPP) to exempt you from the 10% tax,
then there is no age 55 rule here.

__
Art Kamlet ArtKamlet @ AOL.com Columbus OH K2PZH
 

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