Unemployment tax question

YourDirtisMyfood

I have a quick question and I thought for sure I saw someone post on here an answer. If you are unemployed and borrow from an IRA, can you avoid the 10% penalty if you have a spouse paying higher ed funds? This pertains to me from last year and I thought someone went through this on here.

Thanks much.

mookeywrench

You avoid the penalty, but you still have to pay income tax on it.

It can be for you, your spouse, kids, or even grandkids

YourDirtisMyfood

mookeywrench wrote:

You avoid the penalty, but you still have to pay income tax on it.

It can be for you, your spouse, kids, or even grandkids

Okay, I paid the income tax on the withdrawal when I took it out, so that should be all set. In addition to that, due to my ignorance on the rule, I also paid the full 10% penalty on the withdrawal (I believe this only pertains to Federal and not State tax as you don't pay a 10% penalty on State tax). Do you have a link for this for the unemployed where it states you can avoid the 10% if you are unemployed and borrow from your IRA if a spouse is paying college funds? I can't find it anywhere. I will be able to possible file an amendment due to overpaying.

Thank you Monkeywrench and anyone else who can help.

mookeywrench

http://www.irs.gov/publications/p590/ch ... 1000230896

(near the bottom)

Higher education expenses. Even if you are under age 59½, if you paid expenses for higher education during the year, part (or all) of any distribution may not be subject to the 10% additional tax. The part not subject to the tax is generally the amount that is not more than the qualified higher education expenses (defined later) for the year for education furnished at an eligible educational institution (defined later). The education must be for you, your spouse, or the children or grandchildren of you or your spouse.

mookeywrench

Also, I don't know how figurative or literal you are about the word borrowing.

but in the essence of pulling money out and putting the same amount back later...can not be done with an IRA

Once you distribute money from an IRA it's out of an IRA and all future contributions are subject to the same rules of any other IRA contribution.

YourDirtisMyfood

mookeywrench wrote:

Also, I don't know how figurative or literal you are about the word borrowing.

but in the essence of pulling money out and putting the same amount back later...can not be done with an IRA

Once you distribute money from an IRA it's out of an IRA and all future contributions are subject to the same rules of any other IRA contribution.

Hi, yes I took it as a distribution so it was not put back. For clarity, if the withdrawal taken out is larger than the school loan, does that matter? I don't even know what the school loan amount is but I am certain, especially in my circumstance that there must be a way where I can get some of that 10% earl withdrawal penalty back.

rollings

http://www.irs.gov/pub/irs-pdf/p590.pdf

Publication 590 is your friend

Page 52 starts with the "exceptions to the 10% penalty".
Page 54 has the "higher eductation expenses" section

I assume you got a 2010 Form 1099-R, I'm assuming that 100% of the distribution is taxable,
Also, I'm assuming that the Payor who withheld the federal taxes and the 10% was unaware as the use of the early IRA distribution, so I'm alo assuming Box 7 has a Number 1 in it, right?

When you file your 2010 taxes that is when you will get the 10% back (in the form of a refund or a reduction in any taxes owed)

you may or may not have to include 5329 with your 1040. I'll check & get back

rollings

You would have to fill out Form 5329. Just Part I, which is about 4 or 5 lines and easy as cake with german dutch almond-cherry chocolate with cocounut frosting.

To answer one of your questions, Yes, the amount exempt from the 10% would be limited to the amount paid for the higher education expenses.

From Form 5329:

Part I Additional Tax on Early Distributions

Complete this part if you took a taxable distribution before you reached age 59½ from a qualified retirement plan (including an IRA) or modified endowment contract (unless you are reporting this tax directly on Form 1040 or Form 1040NR—see above).

You may also have to complete this part to indicate that you qualify for an exception to the additional tax on early distributions or for certain Roth IRA distributions (see instructions).

1 Early distributions included in income. For Roth IRA distributions, see instructions . . . . . . 1

2 Early distributions included on line 1 that are not subject to the additional tax
(see instructions). Enter the appropriate exception number from the instructions: . . . . . . . . . 2

3 Amount subject to additional tax. Subtract line 2 from line 1 .............. . . . . . . . . . . . . 3

4 Additional tax. Enter 10% (.10) of line 3. Include this amount on Form 1040, line 58,
or Form 1040NR, line 56 . . . . . . . . .............................. . . . . . . . . . . . . . . . . . . . 4

YourDirtisMyfood

Thank you folks for your help. Diane, just got your message and I thank you much. I'll review now.