401k cash distribution penalty and capital losses offset?
Daemon
Subject says it all I guess. I elected a cash distibution
from the 401k this week. The cashout amount is ~$18,000. My
capital losses from stock this year total at ~$19,000. I
have been out of the country most of the year and so have no
taxable income for this year.
Am I correct in assuming that the capital gains losses will
offset any tax penalties from the 401k cashout? I'm guessing
that I will still have to pay the 10% early withdrawal
penalty regardless, but will that be it?
Anyone know?
Thanks!
Dave
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Phil Marti
> Subject says it all I guess. I elected a cash distibution
> from the 401k this week. The cashout amount is ~$18,000. My
> capital losses from stock this year total at ~$19,000. I
> have been out of the country most of the year and so have no
> taxable income for this year.
>
> Am I correct in assuming that the capital gains losses will
> offset any tax penalties from the 401k cashout?
No, you are not. Only $3,000 of your net Schedule D capital
loss can be applied to other income, which is what your
401(k) distribution is. Thus you'd have approximately
$15,000 of AGI.
Phil Marti
Topeka, KS
Lanny Williams
> Subject says it all I guess. I elected a cash distibution
> from the 401k this week. The cashout amount is ~$18,000. My
> capital losses from stock this year total at ~$19,000. I
> have been out of the country most of the year and so have no
> taxable income for this year.
>
> Am I correct in assuming that the capital gains losses will
> offset any tax penalties from the 401k cashout? I'm guessing
> that I will still have to pay the 10% early withdrawal
> penalty regardless, but will that be it?
The cash withdrawal from the 401(k) is ordinary income, not
capital gain, regardless of the nature of the income within
the plan. Consequently, you cannot offset the capital
losses. If you have no other capital gains, you will be
able to deduct $3000 of losses and carry the remainder
forward to future years.
You say you have been out of the country for most of the
year and so have no taxable income. If, as you imply, you
have income outside the U.S., the exclusion may or may not
cover all of it, specially if you were not out of the
country for the entire year. Although the maximum exclusion
is $80,000, you can exclude that much only if you have
absolutely zero days in the U.S. Otherwise, the exclusion is
pro-rated based on the number of days you were out of the
country.
Ed Zollars
> Subject says it all I guess. I elected a cash distibution
> from the 401k this week. The cashout amount is ~$18,000. My
> capital losses from stock this year total at ~$19,000. I
> have been out of the country most of the year and so have no
> taxable income for this year.
Correction--you have no *other* taxable income this year.
However, you likely will have taxable income given the facts
you have just related. That is because...
> Am I correct in assuming that the capital gains losses will
> offset any tax penalties from the 401k cashout?
You aren't corrrect in that assumption. The capital loss
deductible for this year will be $3,000. You will have
$18,000 of income from the 401(k), or a net adjusted gross
income of $15,000. The $16,000 of capital loss that you are
not allowed to take this year will carry over into 2003 and
following years, to be used up either against future capital
gains *OR* at the rate of $3,000 a year (the net capital
loss deductible limit per year).
So *eventually* you'll get the full $19,000 loss. But not
this year.
> I'm guessing
> that I will still have to pay the 10% early withdrawal
> penalty regardless, but will that be it?
You'll owe the 10% excise tax *plus* likely have income tax
to pay on your taxable income.
Note that if the 401(k) distribution is an eligible rollover
distribution, you can roll the distribution to an IRA
account within 60 days and escape taxation. One
warning--since you took cash, the plan would have to
withhold income taxes from any eligible rollover
distribution that you took in cash. So you'd have to reach
into your pocket to come up with the cash to replace the
amount that was withheld. Of course, given the capital loss
and any other deductions you may have, you may find that you
don't need to roll the entire amount in order to escape the
income tax (though the 10% excise tax would continue to
apply on any amount not rolled over).
Don Priebe
> from the 401k this week. The cashout amount is ~$18,000. My
> capital losses from stock this year total at ~$19,000. I
> have been out of the country most of the year and so have no
> taxable income for this year.
>
> Am I correct in assuming that the capital gains losses will
> offset any tax penalties from the 401k cashout?
No. At most it will offset $3000 of the cashout. You will
end up with $15,000 of taxable income and a $16,000 capital
loss carryover to next year.
> I'm guessing
> that I will still have to pay the 10% early withdrawal
> penalty regardless, but will that be it?
10% of the full $18,000.
--
Don EA in Upstate NY
Herb Smith
> Subject says it all I guess. I elected a cash distibution
> from the 401k this week. The cashout amount is ~$18,000. My
> capital losses from stock this year total at ~$19,000. I
> have been out of the country most of the year and so have no
> taxable income for this year.
>
> Am I correct in assuming that the capital gains losses will
> offset any tax penalties from the 401k cashout? I'm guessing
> that I will still have to pay the 10% early withdrawal
> penalty regardless, but will that be it?
Withdrawals from your 401k plan are NOT capital gains,
therefore cannot offset capital losses - except for the
first $3,000 of such net losses. The remainder of your
capital loss is carried over to the next and future years.
See the Loss Carryover Worksheet in the Schedule D
instructions.
Except for the 10% early withdrawal penalty, your
assumptions are incorrect.
William P. Brown
> Subject says it all I guess. I elected a cash distibution
> from the 401k this week. The cashout amount is ~$18,000. My
> capital losses from stock this year total at ~$19,000. I
> have been out of the country most of the year and so have no
> taxable income for this year.
>
> Am I correct in assuming that the capital gains losses will
> offset any tax penalties from the 401k cashout? I'm guessing
> that I will still have to pay the 10% early withdrawal
> penalty regardless, but will that be it?
Up to $3,000 of net capital losses can be used to offset
ordinary income. From your facts I'm guessing you will have
about $7,000 of taxable income, $18,000 subject to the 10%
penalty (unless the $18K is net of tax withholding), and a
$16,000 capital loss carry over.
Regards,
Bill
~~~~
Associate Professor of Accounting
Longwood University
Department of Accounting, Economics & Finance
http://www.longwood.edu/staff/wpbrown/
Opinions expressed by me are mine, not my employer's.
Rich Carreiro
> Subject says it all I guess. I elected a cash distibution
> from the 401k this week. The cashout amount is ~$18,000. My
> capital losses from stock this year total at ~$19,000. I
> have been out of the country most of the year and so have no
> taxable income for this year.
>
> Am I correct in assuming that the capital gains losses will
> offset any tax penalties from the 401k cashout?
No! Only $3000 of the loss can be used against the $18,000
in income caused by the cashout.
And that's just in determining the income tax. the 10%
penalty is *over and above* that.
--
Rich Carreiro rlc...@animato.arlington.ma.us
"Home is where you wear your hat." "Character is what you are in the dark."
401khelpcenter.com
> therefore cannot offset capital losses - except for the
> first $3,000 of such net losses. The remainder of your
> capital loss is carried over to the next and future years.
> See the Loss Carryover Worksheet in the Schedule D
> instructions.
If I'm reading your response correctly, you indicate that
capital losses in a 401k can be used to offset capital gains
($3,000 in first year and carry over to the next and future
years).
This is not correct. There are no captial gains or losses
for tax purposes from a 401k. You don't pay capital gains
tax on gains, nor do you get the benefits of captial losses.
All distributions are taxed as ordinary income. If you now
have $19,000 less than you had last year and now take a full
cash distribution, you tax "benefit" is that you will owe
income tax on a smaller balance -- a $19,000 smaller
balance.
Sorry if I didn't understand your response correctly.
Dan
>> Subject says it all I guess. I elected a cash distibution
>> from the 401k this week. The cashout amount is ~$18,000. My
>> capital losses from stock this year total at ~$19,000. I
>> have been out of the country most of the year and so have no
>> taxable income for this year.
>>
>> Am I correct in assuming that the capital gains losses will
>> offset any tax penalties from the 401k cashout?
> No! Only $3000 of the loss can be used against the $18,000
> in income caused by the cashout.
>
> And that's just in determining the income tax. the 10%
> penalty is *over and above* that.
So, if I may tweak Dave's scenario to mine; I had $7700 of a
401k account rolled into a traditional IRA a few years ago,
and it's worth $2500 today (tech stocks, ouch). If I close
the account this month and take the distribution, I'll pay
income tax on the $2500, plus 10% penalty ($250). I can then
take a capital loss for $3000 this year, which would offset
the $2250 (net) distribution and $750 would go against
earned income, right? The balance of the loss ($2450) would
go against capital gains in 2002, or against earned income
in 2003.
Thanks for your time,
Dan
Phil Marti
> I had $7700 of a
> 401k account rolled into a traditional IRA a few years ago,
> and it's worth $2500 today (tech stocks, ouch). If I close
> the account this month and take the distribution, I'll pay
> income tax on the $2500, plus 10% penalty ($250). I can then
> take a capital loss for $3000 this year, which would offset
> the $2250 (net) distribution and $750 would go against
> earned income, right?
Wrong. Ignore the scenario you quoted. Someone's
misinterpreting something.
You've never paid tax on the $7700 that you started with.
For investment purposes, you've lost $5200 of it, but for
tax purposes there is no capital loss (or gain) within an
IRA. I'm ignoring after-tax contributions to IRAs since
that's not an issue here.
If you withdraw your $2500, you'll owe income tax on the
$2500 and the 10% premature distirbution penalty. There
will be no capital loss to report.
Phil Marti
Topeka, KS
William P. Brown
> So, if I may tweak Dave's scenario to mine; I had $7700 of a
> 401k account rolled into a traditional IRA a few years ago,
> and it's worth $2500 today (tech stocks, ouch). If I close
> the account this month and take the distribution, I'll pay
> income tax on the $2500, plus 10% penalty ($250). I can then
> take a capital loss for $3000 this year, which would offset
No. You'll just pay tax (and penalty, most likely) on the
$2,500. You have to have basis in a retirement plan to have
a loss deduction when closing it. Unless you funded the
original IRA with post-tax dollars you have no basis.
Regards,
Bill
~~~~
Associate Professor of Accounting
Longwood University
Department of Accounting, Economics & Finance
http://www.longwood.edu/staff/wpbrown/
Opinions expressed by me are mine, not my employer's.
<< -------------------------------------------------- >>
Herb Smith
>> Withdrawals from your 401k plan are NOT capital gains,
>> therefore cannot offset capital losses - except for the
>> first $3,000 of such net losses. The remainder of your
>> capital loss is carried over to the next and future years.
>> See the Loss Carryover Worksheet in the Schedule D
>> instructions.
> If I'm reading your response correctly, you indicate that
> capital losses in a 401k can be used to offset capital gains
> ($3,000 in first year and carry over to the next and future
> years).
>
> This is not correct. There are no captial gains or losses
> for tax purposes from a 401k. You don't pay capital gains
> tax on gains, nor do you get the benefits of captial losses.
> All distributions are taxed as ordinary income. If you now
> have $19,000 less than you had last year and now take a full
> cash distribution, you tax "benefit" is that you will owe
> income tax on a smaller balance -- a $19,000 smaller
> balance.
>
> Sorry if I didn't understand your response correctly.
I agree fully with your "correction". I blew it!
Herb
Dan
401K distribution _and_ stock losses, not losses _in_ the
401K.
Learned something new about the value of the Roth, though
(of course, you never plan to lose money, but...).
Ouch. So I'm just SOL unless the holdings in the IRA come
back. Not a chance.
Thanks a lot for the info,
Dan
james...@ilegra.com
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