Nevadans face new challenge: unforeseen tax penalties on early withdrawals

Nevadans face new challenge unforeseen tax penalties on early withdrawals : During the economic downtown, some unemployed Nevadans dipped into their 401(k) or IRA retirement accounts to help cover everyday living expenses.

Now that tax season has arrived, they are discovering the ramifications of those decisions. Taxpayers who withdrew 401(k) or IRA funds will be taxed between 10 percent and

35 percent on their withdrawals, depending on their tax bracket.

In most cases, they also must pay a 10 percent early-withdrawal penalty. For an individual or family struggling to get by without a steady source of income, that double whammy is painful, if not impossible, to absorb. But the Internal Revenue Service wants its money.

"The 10 percent additional tax penalty for early withdrawals, that's just part of what's there if you are under age 59½," said Raphael Tulino, Internal Revenue Service spokesman for Nevada and Southern California. "You would get assessed that penalty if you take money out of a plan early. When you take distributions from qualified plans, such as an IRA or even a 401(k), it is taxed at regular tax rates because it's money that goes in tax-free. When you take distributions out, there's tax."

Mike Bosma, managing shareholder of Reno accounting firm Bosma Group, said he has seen a lot of this tax problem/penalty scenario, particularly in the past two years.

"Unfortunately, it's been very prevalent, especially with people with rentals or if they lost their job, and they're pulling money out of their retirement account to keep their mortgage current or keep the rentals out of foreclosure, those types of things," Bosma said. "I've seen it more this year and last year than I ever had previously in my career."

Bosma said taxpayers are often surprised by the large balance they owe the IRS. Many were unemployed and assumed they had no taxable income, he said.

"The surprise comes when they find out that the 10 percent penalty isn't an income tax, it's a straight additional tax," Bosma said. "You could have lost $100,000 and still end up paying 10 percent of whatever you pulled out of your IRA as a penalty."Read More....

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