USA Withdrawing State Retirement Pension Early


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Hi. Due to the health care system we have, my wife and i may have to withdraw all my retirement funds at once to avoid losing our house and filing bankruptcy. The amount available is 112K. They will take 20% federal and 5% state right off the bat, leaving me 84K. There is also a 10% fee for withdrawing early before the age of 55, leaving about 72K. Which is enough to save us. My question is: when we do our 2020 taxes next year, will we be taxed another time? If so, on what amount, 100K? And since our rate is 22% now, can i expect 22% to be taken from the 100K? Thank you for your assistance in this trying time.
 
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The above article looks promising, but my state retirement is a retirement plan that's classified as a 401(a) defined benefit plan by the Internal Revenue Service. The article talks of 401K and IRA. Does mine apply to what this article speaks of?
 

kirby

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article says "401k or IRA or similar type retirement acct, which should be you. So next step, contact your retirement administrator and ask "do the CARES act rules on early retirement withdrawal apply to my retirement account/". If so ask them for those rules in writing - should be same as rules in the article, but you want it "from the horse's mouth".

If they for some reason say 'no" (maybe they are unaware of the act) - ask for that "no" response in writing (I doubt they'll do that ) but then continue up the chain of command till you find a yes - should be a yes based on what article says.
 
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kirby

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Bottom line - don't withdraw until you have in hand the CARES act rules that your retirement admin has agreed apply to you
 
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OK. I got it in writing. Now onto the rest of my question, if you can answer i would appreciate so much. The amount available is 112K. They will take 20% federal and 5% state right off the bat, leaving me 84K. The 10% excise fee for withdrawing early before the age of 55 is waived, thanks to CARES. My question is: when we do our 2020 taxes next year, will we be taxed another time? If so, on what amount, 112K? And since our rate is 22% now, can i expect 22% to be taken from the 112K? 20% initial from State Retirement for federal, and then another 22% when we do taxes next year? Thank you for your assistance in this trying time.
 

kirby

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For one thing the special treatment under CARES act is to apply only up to a $100K withdrawal so stay under that amount.
For another the CARES act allows you to withdraw without having to pay a 20% withholding tax ( I don’t have info on the state 5% withholding right now. Maybe another forum member can help or you tell me what state you are in. ) so that tells me the admin folks don’t understand the CARES act.


Now here is the danger to you. The 20% is a withholding tax to pay Fed taxes. Just like when Fed tax is withheld from your paycheck. Without CARES rules, the admin would take out the 20% and apply it to your 2020 taxes. With CARES rules the admin cannot do that. So the danger is you get 100% of the money and if you forget to put away some of that for the big tax bill you will be in trouble as you will not have the cash to pay your tax.

So there is not a double 20% tax, bottom line. And to figure out the actual tax rate you will need to visit your tax person to figure out what will apply to you because I do not have knowledge of your complete tax situation.

Here is another write up that covers the fact that the admin is not to take out 20% at withdrawal.




I suggest you revisit the admin and confirm they will not take out the 20%.
 
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kirby

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Go to google and type in the name of the article “How the CARES Act Eases Retirement Account Rules During COVID-19” it is from Forbes.
 
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kirby

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One big reason to make sure the admin does not do the 20% withholding is that the Act allows you to be taxed on the distribution spread out over three years. That will reduce your tax rate. That info is in the Forbes article so be sure to read that.
 
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Ooops. Here's the deal: "While the IRS has made provisions for members to take loans from IRA and 401(k) account, the ASRS (ARIZONA STATE RETIREMENT SYSTEM) retirement plan is classified as a 401(a) defined benefit plan by the Internal Revenue Service (IRS) and is exempt from the CARES Act. Further, IRS regulations generally do not allow Members to borrow funds or take a withdrawal (full or partial) from our plan while they are still employed with an ASRS Employer. The ASRS is not permitted to provide provisions for hardship or emergency withdrawals as a result of these IRS regulations."

Which leaves the question from above: how screwed will i be next tax time (2021) if i pull the trigger? Owing hundreds? Thousands? Tens of thousands?
 

kirby

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If you were single, $100K income in 2020 at current fed rate is about $15K tax. So when they withhold 20% = $20K withholding . For 2020 taxes worst case is fed taxes you on the 100K = $15K tax then they apply the $20K that AZ withheld for Fed tax. So you get $5K refund. And that's it.
Hopefully the Fed will tax you on only a third of the $100K (get a Tax person at tax time to see if this part of CARES still applies to you) so you get a whopping refund, but then 2021 tax will have the second third and 2022 will have the final third so don't go spending all the 2020 refund. AZ is bizarre cause from what you said they waive the 10% penalty per CARES then ignore the rest of CARES. But hey waiving the 10% penalty is a gift!
 
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Well, i've since found out that my 401(a) is exempt from the CARES act. So wondering how screwed i will be in 2021 tax time.
 
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Anyway, that would be the last question i have: just how screwed will i be when doing taxes next year?
 
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kirby

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I explained that earlier today. Right after your post that starts “Oops”. You only pay Fed tax once on the withdrawal.
 

Werner Reisacher

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Irrespective whether you are applying for a waiver of the early withdrawal fee from your pension plan, under the Care Act or directly under the current rules of the IRS, the critical point remains your ability to justify the "hardship elements" of your situation and the kind of debts you are settling with the funds withdrawn. And, in both situations, you do have to get the agreement from your employer/fund manager to approve the distribution as a "hardship" payment. Another keyword for which the IRS is looking for when it comes to such an application is that the funds are needed to "avoid the loss of your primary residence" and not your regular expenses.
You will find additional information and links to sites that deal with the application process under URL:
 

kirby

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Original poster has said they have a 401a not a 401k. Also already been told CARES does not apply to them.
 
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Werner Reisacher

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Kirby,
If you doubt that the IRS early withdrawal rules on 401K and the application of the "hardship rule" do not apply to 401A plans, I suggest that you do your research. And no, I do not do that work for you as I did for KAT who was unable (or too lazy) to find FBAR under the Treasury Act FATCA, just to thank me in return for admitting my "mistake" and reminding me that posting correct information is of "vital importance".
About Cares, you might read again that I said that IRS rules apply when it comes to the issue of "hardship withdrawals" and "how the funds are applied". And these two points are key to both, 401K and 401A hardship withdrawals.
I respect your excellent knowledge when it comes to the accounting/tax subject matter expertise, but please try to keep the etiquette and professional behavior at a level that this forum deserves.
 

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