withdrawals from 401k and resulting sad clients

[Janitor Bob]

I am sooooo tired of telling clients they owe IRS because they took big withdrawals from their 401k...and listening to them complain with shock and sadness.  Yes, they did hold out Fed tax, but that was barely enough and did not cover the 10% penalty.  God forbid they consult their tax advisor prior to getting that cash in-hand.

 

[RitaB]

Yeah, and it gets so old being handed that form: "They held out the tax already."

For one thing, they don't know what the tax is. For another, why are you paying me to do your tax return if you don't think I can read a 1099-R?

[JMovichEA]

And then they take out more from their 401(k) to pay the tax..

[joanmcq]

At least mine have been saying "but I already paid the penalty" and figured they owed tax.

[Randall]

Then there are those who take multiple withdrawals and the company issues separate 1099Rs for each withdrawal (at the time of each withdrawal!).  But the client only brings you one 1099R.  How would you know?  I caught one because the client included the account statement which showed total withdrawals for the year and it didn't match the 1099R.  After asking the client, I find out there are several 1099Rs.

[Jack from Ohio]

"They said they already withheld THE taxes."  Those HR people that tell clients that should be publicly shamed and lose their jobs.  Yet they get away scot-free.  If we give advice like that, we get penalties.

[Gail in Virginia]

"They said they already withheld THE taxes."  Those HR people that tell clients that should be publicly shamed and lose their jobs.  Yet they get away scot-free.  If we give advice like that, we get penalties.

They get away with it because somewhere in the paperwork they give them is a disclaimer that actually tells the participant to "consult his or her tax adviser."  But do they ever do that?  Once in a very long while....

 

My brother-in-law complained yesterday because I told him how to set up his withholding FIVE years ago, and two jobs ago, and did not tell him that he should change it until this year he owes on federal.  Not that he ever consulted me when he changed jobs and completed new W4s; I should have just told him every year...

 

My back hurts.

[Abby Normal]

I'd support a law that requires a minimum 25% federal w/h from early retirement distributions unless the taxpayer can certify to the trustee that they qualify for one of the exceptions.

 

I had a client who took early distributions out of a SIMPLE within the 2 year period and got hit with the 25% penalty. It was my ex-wife's new husband so I feigned commiseration.

[RitaB]

I'd support a law that requires a minimum 25% federal w/h from early retirement distributions unless the taxpayer can certify to the trustee that they qualify for one of the exceptions.

Eh, let's not make any exceptions, that way they don't call us to research exceptions.

[RitaB]

I had a client who took early distributions out of a SIMPLE within the 2 year period and got hit with the 25% penalty. It was my ex-wife's new husband so I feigned commiseration.

Feigning commiseration is underrated. Good for you.

[FreedomTaxed]

We just had a client who was told by her large-financial-institution that her 401k distribution was covered under the "financial hardship" wavier for taxes. And yet, the 1099-R arrives and it (1) has federal taxes withheld, and (2) is code "1". So the client insists that we can "do something" about that.  

[schirallicpa]

"but it was a loan......".........yeah - but you didn't pay it back...........

"but why should i have to pay tax on my own money....."

 

yep

[TAXMAN]

Show them a prior W-2. Wages and ss Wages. See you didn't pay the tax. Some states don't allow this deduction anyway>

[MsTabbyKats]

We just had a client who was told by her large-financial-institution that her 401k distribution was covered under the "financial hardship" wavier for taxes. And yet, the 1099-R arrives and it (1) has federal taxes withheld, and (2) is code "1". So the client insists that we can "do something" about that.  

Did you ask the client what the hardship was?

I don't think the large financial institutions code for a hardship.  That's our job.

 

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Hardship-Distributions#2

Edited March 12, 2015 by MsTabbyKats

[SaraEA]

And hardship only means they allow you to take the money out early.  It does not mean you don't have to pay taxes on the money that was never taxed going in or penalties if you're too young to get away with it.

[Jack from Ohio]

"...but they said it was exempt..."

[Carolbeck]

The other issue regarding the early withdrawal is they "forget" about having any State Tax Withheld.  NYS loves to tax these unless you are over 59 1/2.  The problem I had is a person

who did this EVERY TIME she changed jobs. EVERY TIME she owed Mega bucks to NYS.  EVERY TIME I explain about the 10 % Penalty and the 25% Tax Bracket Federal and the approx 6% NYS Tax, so that about 50% is going to taxes.  Never Listens.. "I needed the money"  Than whines about owing..

[Patrick Michael]

^{Had a client the other day that insisted the 1099-R amount should not be included on her tax return because she already paid the tax on it and she would be paying the tax twice if I included it.  After explaining it to her she still does not believe me and wants to talk to her financial adviser.  Another one in the hold pile!} 

[Abby Normal]

The ones I hate are where every dollar they take out of their IRA makes roughly a dollar more of Social Security taxable. Take out $4,000, taxable income goes up by $8,000.

[RitaB]

^{Had a client the other day that insisted the 1099-R amount should not be included on her tax return because she already paid the tax on it and she would be paying the tax twice if I included it...} 

I've had that happen a couple of times too. I usually say, well do you think I should leave off your W-2 as well? Cause look - they held out taxes here.

[Jack from Ohio]

^{Had a client the other day that insisted the 1099-R amount should not be included on her tax return because she already paid the tax on it and she would be paying the tax twice if I included it.  After explaining it to her she still does not believe me and wants to talk to her financial adviser.  Another one in the hold pile!} 

And a fee increase!!