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How To Withdraw From Virtapay?

401k tax withdraw question......is this loop hole real?

  • I would never withdraw from my 401k but i was watching the movie The ShawShank redemption the other day and it made me think. Typically when you withdraw from your 401k you just pay a 10% penalty up front and then at the end of the year your taxed on it accordingly correct? you not subject to pay the taxes on it immediately when you withdraw? In the movie the main character was portrayed as a very intelligent banker. He makes a comment in the movie that the IRS grants you a 1 time gift to your spouse of up to 50,000 tax free. This was said in response to a character in the movie inheriting 30,000 and that he could give the money to his wife so he would not have to pay taxes on it. Is this law even legitimate and has it changed in the last 20 years since the movie was made? if so you could withdraw 55,000 from your 401lk receive approximately 49,500 give the money to your wife and you just got off on only paying into a 10% income bracket?

  • Answer:

    You are confusing a whole bunch of topics here. 1. When someone under the age of 59.5 years cashes out their own 401K, they will owe both income tax and a 10% penalty. (After 59.5 years, the penalty doesn't apply.) The custodian will withhold 20%--10% penalty and 10% for the tax, but the taxpayer is usually in a much higher tax bracket and will owe when they file. 2. You cannot gift a 401K to someone. From the IRS's point of view, you withdrew the money and gave it to them. the withdrawal triggers the tax and penalty. 3. If you inherit a 401K (either directly or through an estate), the taxes (but not the penalty) still apply. That's not because there is an estate tax, but because the income tax has never been paid. 4. As for gift tax. Gifts and bequests have never been deductible. The only gift tax restriction on giving money to a spouse is if the spouse is a NOT a US citizen. That is currently limited to $134,000. Somehow I doubt the money was using that particular case. Even if it was, it still wouldn't stop the 401K from being taxed first. Tax advice in movies and tv is often wrong.

.....asd... at Yahoo! Answers Visit the source

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First, there is no $50,000 spousal gift - the gift is $13,000 and can be given to anybody. However, the flaw is that the gift is not a tax deduction, merely an exemption from the gift tax, so no, it doesn't work. Even if you could use the gift as a deduction, you would still pay the 10% penalty for early withdrawal. Also, most administrators withhold 20% of any early withdrawal. Finally, inheritance and early withdrawal are very different things - an inheritance is not income and any tax is paid by the donor through the estate tax.

No. You CAN gift up to $13,000 per person tax free per year, which would be tax free to the RECEIVER. That would NOT however stop you from owing on the 401(K) withdrawal. The person would never have paid tax on a $30K inheritance anyway. Taxes would have been paid by the estate before disbursement.

1. The amount paid when you receive it is 20%, not 10%. 2. Even if you give the money to your wife, your still have to pay tax on it at the end of the year (even though you no longer have it). 3. I do not recall exactly what the situation was in the movie. Currently, you do not pay taxes to the IRS on money that you inherit, so avoiding IRS taxes on the inherited money would not be a reason to give it to his wife. He might have be trying to avoid taxes on the interest that the money would earn in the future.

the point is when you take a distribution of the 401(K) that is what it is, a distribution, what you do with the money has no bearing on the taxability of it and the gift limitation 20yrs ago was $10000, currently at $13000

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