tax penalties http://www.wisebread.com/taxonomy/term/13905/all en-US Tax Penalties for Early Retirement Withdrawals http://www.wisebread.com/tax-penalties-for-early-retirement-withdrawals <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/tax-penalties-for-early-retirement-withdrawals" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/empty_pocket.jpg" alt="Man with empty pocket" title="Man with empty pocket" class="imagecache imagecache-250w" width="250" height="164" /></a> </div> </div> </div> <p>There are many different types of funds and plan options that allow you to save for retirement. Many plans are provided by an employer as a benefit. The following are examples of some of the common retirement plan options:</p> <ul> <li><strong>401(k)</strong> &mdash; This is a retirement savings plan funded by employee contributions and typically matched by employer contributions. These plans are tax free until they are converted or collected.<br /> &nbsp;</li> <li><a title="Why Roth IRAs Are Ideal for Young Professionals" href="http://www.wisebread.com/why-roth-iras-are-ideal-for-young-professionals"><strong>Individual Retirement Account</strong></a><strong> (IRA)</strong> &mdash; This is a plan that allows you to contribute a certain amount during your working years and defers the taxes on the earned interest until the plan is cashed in.<br /> &nbsp;</li> <li><strong>Pension Plan</strong> &mdash; A savings account that is arranged to be funded in part or full by your employer on your behalf.</li> </ul> <p>Best of all, most retirement savings plans are tax-deferred until the time when you begin collecting on them after retirement. Encouraging saving for the golden years was the idea behind retirement savings, and thus early withdrawal from a retirement account comes with heavy consequences. (See also: <a href="http://www.wisebread.com/the-10-step-staircase-to-a-comfortable-retirement" title="The 10-Step Staircase to a Comfortable Retirement">The 10-Step Staircase to a Comfortable Retirement</a>)</p> <h2>The Consequences of Withdrawals</h2> <p>Withdrawing from a retirement fund before retirement age is tempting, especially if an unforeseen situation puts you in financial hardship. But there are heavy penalties that come along with early retirement withdrawals. Consider every option before resorting to borrowing from your retirement savings.</p> <p>The <a title="Can You Settle Your Old IRS Debts" href="http://www.wisebread.com/can-you-settle-your-old-irs-debts">Internal Revenue Service</a> (IRS) governs the tax-related fees and penalties associated with early withdrawal from your retirement plan. All plan distributors must follow the IRS rules. In addition to the IRS penalties, specific retirement plan administrators may impose additional penalties for early withdrawal &mdash; some heavier than others. Many of these penalties add up and end up being very costly.</p> <p>The following penalties are common among most retirement plans:</p> <ul> <li>Being penalized for borrowing from a plan prior to the age of 59-1/2 or before formal retirement occurs.<br /> &nbsp;</li> <li>The amount borrowed becoming a part of your yearly taxable income.<br /> &nbsp;</li> <li>A 10% tax placed on early withdrawals unless you can qualify for an exception with the IRS by meeting certain criteria.<br /> &nbsp;</li> <li>The loss of the potential tax relief from having the money in a structured retirement fund.<br /> &nbsp;</li> <li>The loss of the potential gains from having the money invested in stocks or bonds. By withdrawing funds, you lose the opportunity to gain on the investments you could have earned from that money.<br /> &nbsp;</li> <li>In addition to the taxes you must pay on the money, many plans impose an additional penalty for early withdrawal.</li> </ul> <p>These are just a few of the consequences of borrowing from your retirement funds. This is not an all-inclusive list, but rather a general idea of some of the common penalties imposed on those who borrow from a retirement savings plan.</p> <h2>Alternatives to Taking an Early Retirement Withdrawal</h2> <p>Due to the financial consequences of taking money out of a retirement account early, you should consider alternatives before resorting to the withdrawal.</p> <h3>401(k) Loan</h3> <p>If you have a 401(k) retirement plan, you may be able to take a loan from the account rather than a hardship withdrawal. When you borrow money in the form of a 401(k) loan, it is not taxable as income unless you fail to pay it back. When you pay back your loan, you are paying yourself back.</p> <h3>Roth IRA</h3> <p>If you have a Roth IRA, you are making contributions with after-tax money. This means you can take withdrawals from a Roth IRA at any time without penalty or having to pay income tax. For that reason, if you have more than one type of retirement account, it is always advisable to withdraw from the Roth IRA before any other retirement fund.</p> <h3>Bankruptcy</h3> <p>If you are in an extreme hardship, you may want to consider bankruptcy instead of pulling money from your retirement plan. Money in an employer-sponsored retirement plan or an IRA is excluded from bankruptcy &mdash; meaning a creditor cannot take from a retirement account to satisfy your debts.</p> <p>The best advice is to consider every alternative before making an early withdrawal from any retirement fund. The financial consequences that come along with early withdrawal can be so heavy that making an <a href="http://www.wisebread.com/retirement-accounts-and-money-to-spend">early withdrawal from any retirement investment</a> is almost never a sound financial decision &mdash; or a good way to invest in your future.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/debbie-dragon">Debbie Dragon</a> of <a href="http://www.wisebread.com/tax-penalties-for-early-retirement-withdrawals">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-14"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/should-you-choose-a-roth-401k-or-a-regular-401k">Should You Choose a Roth 401k or a Regular 401k?</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/opening-a-roth-ira-for-your-kid">Opening a Roth IRA for Your Kid</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-tell-if-your-401k-is-a-good-or-a-bad-one">How to Tell if Your 401K Is a Good or a Bad One</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/did-your-parents-give-you-a-whole-life-insurance-policy-heres-what-to-do-with-it">Did Your Parents Give You a Whole Life Insurance Policy? Here&#039;s What to Do With It.</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/401k-or-ira-you-need-both">401K or IRA? You Need Both</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment Retirement Taxes early retirement withdrawal retirement and taxes tax penalties Thu, 18 Aug 2011 09:48:14 +0000 Debbie Dragon 550551 at http://www.wisebread.com 5 Estimated Tax Strategies for Business Owners http://www.wisebread.com/small-business/5-estimated-tax-strategies-for-business-owners <div class="field field-type-link field-field-url"> <div class="field-label">Link:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="http://www.openforum.com/articles/5-estimated-tax-strategies-for-business-owners" target="_blank">http://www.openforum.com/articles/5-estimated-tax-strategies-for-business-owners</a> </div> </div> </div> <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/small-business/5-estimated-tax-strategies-for-business-owners" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/iStock_000000385873Small.jpg" alt="" title="" class="imagecache imagecache-250w" width="250" height="166" /></a> </div> </div> </div> <p>Most business owners don&rsquo;t have withholding from a paycheck to cover their income tax bill for the year. Even the paychecks of S corporation owner-employees may not be large enough to allow for withholding to cover taxes due on their share of profits. Estimated taxes, which work as a substitute for withholding, usually are necessary for most business owners. With the second estimated tax payment for 2011 due June 15th, you should review your tax payment amounts and procedures to avoid penalties or overpayments as well as to simplify the payment process.</p> <h3>Figure Estimates Properly</h3> <p>The goal of estimated taxes is to approximate the tax liability that will be figured when the 2011 income tax return is completed next year. Pay too little and you&rsquo;ll owe penalties; pay too much and you&rsquo;ll have made an interest-free loan to the government.</p> <p>Estimated taxes must cover:</p> <ul> <li><b><i>Income taxes</i></b>. This includes your share of business profits;</li> <li><b><i>Self-employment taxes</i></b>. If you&rsquo;re self-employed, self-employment tax is comprised of Social Security and Medicare taxes on your net earnings from self-employment.</li> </ul> <h3>Rely on Safe Harbor Rules</h3> <p>You can avoid any penalties for underpaying estimated taxes by relying on certain safe harbors.</p> <h4>Prior Year Safe Harbor</h4> <p>If you anticipate that your income for 2011 will be the same or greater than it was in 2010, then fix this year&rsquo;s estimated tax payments based on last year&rsquo;s tax liability &ndash; the amount of tax reported on the 2010 income tax return. This is called the 100% prior year safe harbor. Of course, if you discover that you&rsquo;re short when you complete your 2011 return next year, you&rsquo;ll have to come up with the money to pay what you owe, but at least you won&rsquo;t owe any penalties, no matter how large the shortfall.</p> <p>If your adjusted gross income (AGI) in 2010 was more than $150,000 ($75,000 if you were married and filed a separate return), then you&rsquo;ll have to set your 2011 estimates at 110% of your 2010 taxes to avoid penalties. For example, if you&rsquo;re single and paid $20,000 in taxes on your 2010 return and expect 2011 to be a better year than last year, set your estimated taxes for 2011 at $20,000 (or $22,000 if your AGI in 2010 was more than $150,000).</p> <h4>Current Year Safe Harbor</h4> <p>Instead of basing your payments on last year&rsquo;s taxes, you&rsquo;ll avoid penalties if payments for the current year are at least 90% of what you ultimately owe. This method is preferable if you expect this year&rsquo;s taxes to be lower than last year&rsquo;s. Thus, if you expect to owe $20,000 in taxes and you pay at least $18,000 in estimated taxes, you&rsquo;ll escape penalties.</p> <h4>Other Safety Nets</h4> <p>There are other ways in which to figure estimated taxes in order to avoid penalties. These are explained in <a target="_blank" href="http://www.irs.gov/pub/irs-pdf/p505.pdf">IRS Publication 505, <i>Tax Withholding and Estimated Tax</i></a>.</p> <h3>Use Set-Asides to Ensure Sufficient Funds</h3> <p>One of the key reasons some owners fail to pay required estimated taxes is lack of cash. Make sure you have enough money on hand when needed. One way to do this is to set up a separate account for estimated tax purposes. Create a schedule to use for putting money into this account &mdash; weekly, monthly, etc &mdash; and stick to it.</p> <h3>Make Payments Online</h3> <p>Business owners may be too busy to remember the estimated tax payment dates or may be traveling away from home at these times. To ensure that a payment won&rsquo;t be late or overlooked, use the <a target="_blank" href="http://www.eftps.gov/">Electronic Federal Tax Payment System (EFTPS)</a>. You can schedule payments up to a year in advance. There is no charge by the government for using this payment method (check with your bank regarding any fees it may charge for electronic transfers). Using EFTPS.gov does not give the IRS access to the funds in your bank account or any authority to tap them for any reason.</p> <h3>Charge Payments to Your Credit Card</h3> <p>If you lack sufficient funds to pay estimated taxes and want to avoid late payment penalties, consider charging your payment to a major credit card. While the IRS and U.S. Treasury do not charge any fee for paying taxes this way, the IRS-approved card processor charges a &ldquo;convenience fee&rdquo; of between 1.95% and 2.35% of the amount charged (there&rsquo;s a flat dollar amount imposed for using debit cards instead of credit cards).</p> <p>To charge tax payments, go to:</p> <ul> <li><a target="_blank" href="http://www.officialpayments.com/">Official Payments Corporation</a></li> <li><a target="_blank" href="http://www.pay1040.com/">Links2Gov Corporation</a></li> <li><a target="_blank" href="http://www.payusatax.com/">RBS World Pay, Inc.</a></li> </ul> <p><b>Final Word</b></p> <p>Work with your accountant or other financial advisor to ensure that you meet estimated tax responsibilities. In some situations, it may make sense to incorporate a sole proprietorship or other non-corporate business in order to create wages for owner-employees. These wages, if sufficient, can be used as a withholding source to cover the tax obligations of owner-employees and avoid the need to make any estimated tax payments in the future.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/barbara-weltman">Barbara Weltman</a> of <a href="http://www.wisebread.com/small-business/5-estimated-tax-strategies-for-business-owners">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/250-tips-for-small-business-owners">250+ Tips for Small Business Owners</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-5-best-credit-cards-for-small-businesses">The 5 Best Credit Cards for Small Businesses</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/100-ways-to-make-more-money-this-year">100+ Ways to Make More Money This Year</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/6-helpful-tools-to-manage-your-small-business">6 Helpful Tools to Manage Your Small Business</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/4-inspiring-stories-of-normal-people-building-a-thriving-online-store">4 Inspiring Stories of Normal People Building a Thriving Online Store</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Small Business Resource Center estimated taxes income taxes safe harbor small business tax penalties Sun, 22 May 2011 22:00:10 +0000 Barbara Weltman 545044 at http://www.wisebread.com