think twice before taking out a loan from your 401k (irs.gov)

 Know the consequences of 401(k) plan hardship distributions 

Your 401(k) plan may allow you to withdraw money before you actually retire for certain events that cause you to suffer a financial hardship. For example, your plan may allow a hardship distribution to pay for you, your spouse, your dependent or your primary plan beneficiary’s:
• medical expenses,
• funeral expenses or
• tuition and related educational expenses.
 However, you should know the following consequences before taking a hardship distribution:
 • The amount of the hardship distribution will permanently reduce the amount you will have in the plan when you retire.
• You must pay income tax on any previously untaxed amount of the hardship distribution.
• You may also have to pay an additional 10 percent tax, unless you are 59½ or older, or qualify for another exception.
• You may not be able to contribute to the plan for six months after you receive the hardship distribution. Your 401(k) plan helps you save money for your retirement while you’re working. So, carefully consider the consequences and all your alternatives before taking a hardship distribution. Date: 06/01/2016 _________________________________________________________________more information on IRS.gov.
 • Retirement Topics – Hardship Distributions – information on the circumstances under which a 401(k) plan may allow a hardship distribution.
 • Retirement Plans FAQs Regarding Hardship Distributions – questions and answers on the types of hardships that qualify for these distributions and the maximum amount of these distributions.
 • Publication 575, Pension and Annuity Income – explains how retirement plan distributions are taxed.
• Retirement Topics – Exceptions to Tax on Early Distributions – information on when you don’t have to pay an additional 10% tax on early distributions.

2016 Tax Changes (Wall Street Journal)

By 

LAURA SAUNDERS

January 8, 2016

A new year usually brings tax changes, and 2016 is no exception.

The good news is that last month, in the nick of time, Congress enacted permanent extensions of several popular provisions, including the American Opportunity tax credit, a higher-education benefit; the IRA charitable transfer provision for people 70 1/2 and older; certain mass-transit benefits; a child tax credit; and the ability to deduct state sales taxes instead of income tax on the federal return.

No longer will people using these benefits have to bite their nails waiting for lawmakers to re-enact them—especially if a provision has already expired, as happened several times over the past decade.

Here are other changes to be aware of:

Affordable Care Act penalty tax. For people who don’t have ACA-approved health insurance, the payment is rising steeply once again. Such taxpayers often owe a “shared responsibility payment” that is either a flat assessment or a percentage of income, whichever is higher. Roberton Williams, a tax specialist with the Tax Policy Center in Washington, says the percentage method will apply to virtually all higher-income households and even many single filers earning above $40,000.

In 2016, the flat assessment more than doubles. It is now $695 per individual, up from $325 last year, with a maximum of $2,085 per household. The percentage-of-income payment rises to 2.5% of income from 2% last year, with a projected maximum of about $13,400 per household.

Members of some groups aren’t subject to the payment, including certain religious groups and people covered by Medicare or Medicaid. The Tax Policy Center has posted anACA penalty calculator on its website.

Tax rates haven’t changed for 2016, but brackets have reset upward because of inflation indexing. 

Tax brackets. Because the U.S. tax code is progressive, higher income is taxed at higher rates—after deductions, exclusions and other adjustments. Tax rates haven’t changed for 2016, but brackets have reset upward due to inflation indexing. The top statutory rate of 39.6% now kicks in above $466,950 of taxable income for married couples filing jointly and $415,050 for singles.

“It’s good to know your top bracket, because it lets you estimate the value of a deduction,” says Greg Rosica, a partner with the accounting firm EY. In other words, $100 of a write-off could save as much as $28 of tax for someone in the 28% bracket.

A glance at the tax tables also serves as a reminder of the code’s unequal treatment of married couples versus single people who are above the 15% bracket. This anomaly raises tax bills substantially for some couples, especially if both partners have similar incomes, and lowers them for others. To find out if you are affected, see the Tax Policy Center’s marriage tax calculator.

Investments. The favorable rates on long-term capital gains (for investments held longer than a year) and certain dividends also haven’t changed for 2016, but inflation adjustments have lifted the brackets.

This year the 0% rate, which applies to both types of income, ends at $37,650 of taxable income for single filers and $75,300 for couples. Meanwhile, the top rate of 20% kicks in at $415,051 for single filers and $466,951 for couples.

In addition, some investors owe a 3.8% surtax on their net investment income. The threshold is $250,000 of adjusted gross income for married couples and $200,000 for singles.

This levy can cast a wider net than it appears to at first glance. That is because a taxpayer’s adjusted gross income is often much larger than taxable income, as it excludes Schedule A write-offs such as for mortgage interest, state taxes and charitable gifts. In addition, the thresholds aren’t indexed for inflation, so more investors could owe this surtax in 2016.

Mileage deductions. Lower gas prices are a boon, but they translate to lower mileage deductions on tax returns. For 2016, the business rate is 54 cents per mile driven versus 57.5 cents per mile last year.

The write-off per mile driven in the service of a charitable group is 14 cents this year, and the rate per mile driven for moving or medical purposes is 19 cents. Be sure to keep records to document these deductions.

Estate and gift tax. For 2016, the estate and gift tax exemption rises to $5.45 million per individual, up slightly from the 2015 level. This means the exemption per couple is now nearly $11 million, and only some 4,400 people will owe this tax for 2015, according to estimates by the Tax Policy Center.

The annual gift exclusion of $14,000 isn’t changing for 2016. This provision allows a giver to make tax-free transfers of up to $14,000 a year to each recipient, and one partner of a married couple can transfer up to $28,000 per recipient if the other spouse doesn’t use the break.

Corrections & Amplifications: 
The 28% tax bracket for single filers begins at $91,151. An earlier version of the chart accompanying this article incorrectly gave the figure as $90,151. (Jan. 8)

Write to Laura Saunders at laura.saunders@wsj.com

Don't make these retirement account mistakes (Forbes)

Retirement Account Mistakes--Not For Dummies
Janet Novack

a guide to some of the traps created by the insanely complicated rules surrounding IRAs, 401(k)s and other retirement accounts


No, this is not another story lecturing you to save more, diversify, control your investment costs, or ignore the hot stock tip from your brother in law who did time for securities fraud. You’re no dummy.

What this is, instead, is a guide to some of the traps created by the insanely complicated rules surrounding IRAs, 401(k)s and other retirement accounts —traps that can snare not only smart investors, but also financial advisors, lawyers, accountants, and yes, even the Internal Revenue Service itself.

Lest you think that’s hyperbole, consider this: a U.S. Tax Court judge  ruled last year that a tax lawyer couldn’t use an IRS publication in his defense, because the IRS itself  had misinterpreted a provision of the law relating to IRA rollovers. “Even the IRS is confused,’’ marvels CPA Ed Slott, who makes a nice living training other financial pros about IRA rules and fixing the mistakes they and their clients make.

The sad fact is a normal human being not in Slott’s business can’t know all the rules. But taking a few minutes to acquaint yourself with the more common mistakes can help keep you safe and out of the IRS’ penalty zone. At the least, you’ll have a sense of when you need to consult IRS publications (which, despite that court ruling, you can usually rely on) or speak to a retirement account specialist at the financial institution where your IRA or 401(k) is held, or maybe even pay an expert for help.  Two key IRS Publications are  590a on IRA contributions and 590b on IRA distributions.  (There used to be just one publication 590, but it was so long, what with all the rules, that the IRS split it into two.) Note that part of what makes this all so complicated is that there are more than a dozen different types of retirement accounts, each with its own sometimes differing rules. So to be fair, Congress, not the IRS, deserves most of the blame for this mess.

To assemble my list of  25 Retirement Account Mistakes Smart People Make, I  consulted Slott and Robert Keebler, another CPA/IRA expert, and reviewed court cases, private letter rulings and government reports. Most of the mistakes  relate to early withdrawals, inherited IRAs, required minimum distributions and account rollovers. But  you can also get yourself in trouble putting the wrong thing in an IRA. (Tempted to hold gold in your IRA? The gold must be of a certain type and must  be kept with your IRA custodian, not under your bed.) Of course, this list of 25 mistakes is by no means exhaustive. Here’s a bonus tip that’s not on it: never ever, ever put a master limited partnership in a retirement account.

The discussion below offers some extra background on two areas where mistakes are particularly common.

Early withdrawals woes

Withdrawals taken from a traditional IRA or 401(k) before age 59 ½ are generally subject to not only ordinary income taxes, but also a 10% penalty  on the taxable amount. Fortunately, there are 11 separate exceptions, detailed here, that can get you out of the 10% extra hit. On their 2013 tax returns, 1.7 million taxpayers reported that they took early distributions, but only 1.2 million indicated they were subject to the additional 10% tax penalty, the IRS estimates.

The problem is that some of those 500,000 folks who reported themselves exempt from the penalty will get audited by the IRS and then hit with the 10% early withdrawal penalty and possibly an additional penalty for negligence.  That’s because they got the exceptions wrong. One common mistake: thinking you can take an early penalty free withdrawal from a 401(k) to pay college or graduate school bills, or to buy a first home, when in fact these penalty exceptions only apply to IRA withdrawals.

In one classic case, an accountant who had left Deloitte to earn his PhD  got hit with the 10% penalty for using $30,000 from his 401(k) to finance his graduate studies and buy a first home. The tax court rejected his argument that since he could have transferred the 401(k) money to an IRA first, and then used it penalty free for those very purposes, he shouldn’t have to take the extra 10% hit. The judge said he sympathized with the accountant’s confusion, and agreed that the law is “highly technical,’’ but concluded that, well,  the law is the law.

Another common misconception Slott flags: that you can get out of the 10% penalty because you took the money out to deal with a general financial hardship. The widespread confusion may stem from the fact that some employers allow early “hardship” withdrawals from 401(k)s. But that doesn’t get the employee out of paying either tax or the 10% early withdrawal penalty.

If you have a financial hardship, there may be other ways to tap retirement early penalty free. For example, if you’re 55 or older and lose (or leave) your job, you can tap money from your 401(k) penalty free– so long as you don’t roll it into an IRA first. (Yet another trap.)


Death traps

With a growing share of families’ assets in retirement accounts, mistakes made while passing them on are a big deal.  One easy to understand and fix mistake:  failing to keep your beneficiary forms up to date. The form on file with your IRA custodian, not any other estate document, and not an unfiled form you’ve stuck in your desk drawer, determines who gets your IRA.  If you want to make sure your ex-spouse (or an ungrateful child) doesn’t get your IRA, take him or her off that form as well as out your will.

Another batch of inheritance mistakes has to do with “stretch” IRAs. You can roll over an inherited IRA into your own name only if you inherit it from a spouse. (Although you should usually wait until you’re  older than 59 ½ to roll over your late spouse’s IRA  because withdrawals from an inherited IRA can be taken at any age without paying the 10% early withdrawal penalty. Once you roll an account over into your own name, you lose that early withdrawal flexibility.) But any individual beneficiary can retitle an IRA as an “inherited IRA” and stretch out withdrawals over his or her own life expectancy, thus gaining decades of tax deferred, or (in the case of a Roth IRA tax free) growth.

Although some in Washington, including the Obama Administration, would like to eliminate the stretch IRA,  this valuable tax break is available for now. Available, that is, so long as you (the IRA owner) or your heirs don’t make any mistakes.  One huge no-no is rolling an IRA inherited from someone other than a spouse into your own name. If you do that, the whole amount is immediately taxable. Instead, as a nonspousal heir, you must  retitle the IRA, including the original owner’s name and that it is inherited, e.g., “John X. Smith II,  deceased, inherited IRA for the benefit of John X Smith III.”  Similarly, if a trust is named as an IRA beneficiary, you can’t actually transfer the IRA into the trust. Instead, you retitle the IRA and deposit the yearly payouts in the trust. (Note that if you want to change the financial service company holding an inherited IRA,  you must do it in a trustee to trustee transfer.)

What about the mistakes IRA owners make that limit their heirs’ ability to stretch out the account’s life? A common one is naming your estate as your beneficiary on an IRA form. In many cases, that will force the IRA to be distributed within five years, cutting short the potential tax deferral or tax free growth. (The exact rule is this: funds in a Roth IRA left to an estate must be withdrawn within five years. Period. For a  traditional IRA left to an estate, if the deceased turned 70 1/2—the age at which a traditional IRA owner must start taking required minimum distributions–before his death, payments can be stretched out for what would have been his remaining life expectancy, according to IRS tables. That is usually more than five years, but it is probably less than the life expectancy of individual heirs, had they been named as individual beneficiaries.)

A related mistake is neglecting to name a contingent beneficiary. The problem? Should your primary beneficiary die before you, the IRA will likely go to your estate, again cutting short tax deferral. Moreover, if you name a primary beneficiary (say your child) and a contingent beneficiary (say your grandchild), then your child has the option of  ”disclaiming” the IRA in favor of your grandchild.

Still other mistakes have to do with not taking the proper required minimum distributions from inherited IRAs. If you’ve just inherited an account, read William Baldwin’s 11 Step Instruction Guide To Inherited IRAs, Inherited Roth Accounts And RMDs. And for in-depth advice on the best way to pass on a retirement account, spring for a copy of  Estate Planning Smarts by lawyer and former Forbes Senior Editor Deborah L. Jacobs.

New Law makes it Easier to Withdraw from Government Retirement Accounts (Lord Abbet)

New Exception to Early-Distribution Penalty

July 31, 2015 9:10 AM

By Brian Dobbis

54 Views

New law extends the exceptions on early-distribution penalties to federal employees and includes all governmental retirement plans.

THE ROAD TO RETIREMENT with BRIAN DOBBIS 

On June 29, 2015, President Barack Obama signed a law that expands the universe of retirement plans that will not be subject to the 10% early-distribution penalty. The "Defending Public Safety Employees’ Retirement Act" broadens both the number of workers and the types of plans eligible for the exception.

Generally, early distributions from retirement accounts are subject to both income tax and penalties when the account holder is younger than 59½. However, a number of exceptions apply that allow participants to avoid the penalty when making early withdrawals from employer workplace plans and/or IRAs.

The Pension Protection Act of 2006 made special allowances for “qualified public safety employees,” allowing state and local workers who separated from service after reaching age 50 to take penalty-free early withdrawals from governmental defined-benefit plans. The rationale was that these workers, who included police and firefighters, are able and required to retire earlier than the general public, and, therefore, should have earlier access to their retirement funds.

The act did not, however, extend to federal workers performing the same public safety jobs as state and municipal workers, nor did it apply to withdrawals from IRAs or other employer-sponsored plans. (It should be noted that distributions from governmental 457(b) deferred-compensation plans are not subject to the 10% distribution penalty, regardless of the participant’s age at distribution.)

The new law expands the definition of “qualified public safety employees” to include federal workers, and extends the exception to governmental defined-contribution plans as well.

By expanding the definition of “qualified public safety employees” to include federal workers, the law opened the door to thousands of customs workers, border-protection officers, and air-traffic controllers, as well as law-enforcement officers and firefighters, all of whom now have the potential to make early withdrawals from their retirement plans without incurring penalties. Of course, they still will be expected to pay regular income tax.

Similarly, by allowing qualified penalty-free withdrawals from any governmental plan as defined by Code Section 4149(d), including defined-contribution plans, the government significantly enlarged the pool of potential participants who may be eligible for penalty-free early withdrawals.

The new legislation becomes effective on January 1, 2016, and will apply to distributions made after December 31, 2015. Sponsors of governmental defined-contribution plans are advised to review their administrative procedures to accommodate this expanded exception to the 10% penalty tax on early distributions.

No Penalty Withdrawals from Your IRA (WSJ)

How to Tap an IRA Early 

Without a Tax Penalty

If You Must Withdraw Cash Before Age 59½, 

There Are Ways to Avoid a 10% Penalty

By 

GEORGETTE JASEN

July 6, 2014 4:47 p.m. ET

Make an early withdrawal from an IRA and you may be hit with a 10% tax penalty.

But that's a bigger "may" than you might think.

Financial advisers generally warn against tapping an individual retirement account early, and not just because of the potential tax penalty. There's also the loss of any investment gains that could have been racked up by the money that's withdrawn. "If you have other assets, use them" instead, says Maria Bruno, senior investment analyst at Vanguard Group.

But if you must tap an IRA early, the good news is that there are several exceptions to the tax penalty.

Here's what you need to know.

First, what are the basic rules on the taxation of IRA withdrawals?

If all your contributions to your traditional IRA were tax-deductible, all your withdrawals will be taxable as ordinary income. If you made some after-tax contributions as well, a part of each withdrawal may be tax-free. (We'll talk about Roth IRAs, which are funded only with after-tax dollars, separately below.)

Taking a distribution from an IRA before age 59½ generally incurs a penalty—an additional 10% of the taxable amount.

There are several specific exceptions to that penalty, though. And if you don't qualify for one of those, you may be able to avoid the penalty by taking a series of payments from the IRA over several years.

What are the specific exceptions to the 10% penalty?

If you have lost your job and collected 12 consecutive weeks of state or federal unemployment compensation, you can use money from an IRA at any age, without penalty, to pay health-insurance premiums. There also is no penalty if an early distribution goes for qualified higher-education expenses, such as college or vocational-school tuition for yourself, your spouse, your children or grandchildren, or your spouse's children or grandchildren.

You can withdraw up to $10,000—$20,000 for a couple—penalty-free to buy, build or rebuild a first home, and that, too, applies for children and grandchildren. There also is an exception if the money goes to pay for unreimbursed medical expenses greater than 10% of your adjusted gross income (7.5% if you or your spouse was born before 1949). You also would be exempt from the penalty if you become disabled before you are 59½.

There are some additional exceptions and in some cases conditions to qualify for an exception. For more information see Internal Revenue ServicePublication 590.

How do the periodic payments work?

You can avoid the 10% penalty by taking a series of roughly equal payments over five years or until you are 59½, whichever is longer, making at least one withdrawal annually. But calculating how much you can take is complicated. Even the IRS says you may want to consult a financial professional.

The amount depends on which of the three IRS-approved calculation methods you choose, all based on life expectancy—either yours alone or yours and your beneficiary's. The simplest calculation method is known as required minimum distribution, or RMD—something of a misnomer because it results in the exact amount that must be withdrawn, not a minimum. The amount must be recalculated every year, changing with your age and any fluctuations in the account balance.

You generally can get a larger annual amount using one of the other methods—fixed amortization or fixed annuitization—which require only a one-time calculation. Because those calculations are "complex and generally require professional assistance," the IRS doesn't provide details in Publication 590. It does, however, answer some frequently asked questions, with examples of the calculations, elsewhere on its website, irs.gov, which you can find by searching "substantially equal periodic payments" either on the site or through a search engine. Vanguard has a brochure that may be helpful, which is available on its website, vanguard.com, using the same search term or its acronym,SEPP. (To view the entire brochure, scroll down from the first page.)

You can switch from one of the fixed-payment calculation methods to RMD, but only once, and you may have to wait until a new calendar year. You can't switch from RMD to one of the other methods.

What if my IRA is a Roth IRA?

With a Roth IRA, contributions are made with after-tax money, and for those over 59½ who have had the account for at least five years, withdrawals aren't taxable. Before the five-year period is over, the earnings portion of a withdrawal is subject to income tax.

But if you're younger than 59½, even if you pass the five-year test, the earnings portion of a withdrawal may be subject to taxation, plus a 10% penalty if you don't qualify for an exception. The exceptions are the same as those for a traditional IRA, including withdrawals used for qualified higher education or a first-time home purchase, for health-insurance premiums if you are unemployed, or if you become disabled before age 59½.

One good thing to know is that money withdrawn from a Roth is treated as coming from contributions first, so you won't owe any tax—or the penalty—as long as you take out less than you've put in. It's important to keep good records.

What documentation do I need to report an early withdrawal to the IRS?

As with all IRA distributions, the mutual-fund company or other financial institution holding your IRA will send you a Form 1099-R early in the year listing your withdrawals for the previous year, and the information also is sent to the IRS. These forms generally are coded to indicate an early withdrawal if that's the case.

For the distribution to be penalty-free, you generally must file Form 5329 with your federal income-tax return indicating which exception you are claiming. In some cases you may be asked to provide documentation of your eligibility.

Ms. Jasen is a writer in New York. Email her at reports@wsj.com.

Money for College - Dos and Don'ts (Morningstar)

Dos and Don'ts of College Savings

Knowing financial aid rules is key given the rising cost of higher education.

Morningstar, 04/27/2012


Investor Question: I'm worried about how we're ever going to afford college for our children. What can we do to increase their odds of getting financial aid in case we can't save enough?

Answer: For many families, the cost of college has become daunting. Tuition, fees, room, and board at a public four-year school currently run $17,131 per year on average (in-state), and $38,589 per year for a private four-year school, according to the College Board. During the past decade, in-state tuition and fees at public universities have increased on average 5.6 percentage points per year beyond the rate of inflation. No wonder, then, that many parents are losing sleep worrying about how they will be able to pay for their children's college education and how much help they can expect from financial aid.

But whether college is just around the corner or years down the road for the student, there are many steps parents can take to improve their odds of making it affordable, including qualifying for financial aid. Below are some ideas to help get them started. Keep in mind that some financial aid is need-based while some is not and that aid includes not just grants and scholarships, but also work-study programs and loans.

Do: Start Saving as Soon as Possible
Some parents worry that saving for college will negatively affect their student's chances for financial aid. But that's misguided, says college planning expert Mark Kantrowitz, publisher of FinAid, an online guide to college funding. "There's this perception that you'd be better off not saving anything," Kantrowitz says, "but the reality is most of the financial aid you're likely to get is going to be in the form of loans, which you're better off not having to pay."

Kantrowitz estimates that every dollar saved for college potentially reduces a student's borrowing costs by two. He suggests parents and students start saving for college as early as possible, noting that he started saving for his children to go to college before they were even born.

Kantrowitz likes 529 accounts as college-savings vehicles in part because of their tax deductibility (in some states), which he likens to "getting a discount on college costs." (You can visit Morningstar.com's 529 Plan Center here.)

Do: Apply for Any Scholarships for Which the Student Might Be Eligible

Applying for scholarships costs nothing but time, and the payoff could make a big difference in reducing out-of-pocket college costs. An obvious place for parents to start is by filling out the Free Application for Federal Student Aid, or FAFSA, the federal government's form for need-based grants, loans (both need-based and non-need-based), and work-study opportunities. Good online resources for scholarship searches include Fastweb and Scholarships.com. Kantrowitz says about one out of eight incoming freshmen at four-year colleges are on some kind of scholarship, with the average amount around $2,800 per student. "The students who win a lot of money are the ones who apply for every scholarship for which they are eligible," he says. One important tip when applying for scholarships: The more optional information provided, the better the odds of matching. For example, if a student or parent has had cancer, including that in the student's profile helps improve his or her chances of matching one of the many scholarships related to the disease.

Do: Have Kids Close Together in Age

Financial aid formulas are weighted heavily on parental income, and having multiple kids in college at the same time actually improves financial aid eligibility because it reduces the amount parents are expected to pay for each. This helps ease the burden on families having to pay two or more tuitions simultaneously. "Someone who has twins is going to get more aid than someone who has single children separated by four years," Kantrowitz says. Of course, it may be a little late to put this plan into action for most parents, but it also works if, say, a parent attends college at the same time as their child or children. Having an older child delay college to attend at the same time as a younger sibling also works.

Don't: Put Assets in the Student's Name

In financial aid calculations, assets belonging to parents have less of a negative impact than those belonging to students. So money in a 529 plan, which is considered the parents' property, counts less against financial aid than, say, money held in a custodial account such as a UGMA/UTMA, which is legally considered the student's property. One way around this problem is to spend down the student's assets before applying for aid. UGMA/UTMA funds can be used for a wide variety of qualifying expenses, so long as they are for the minor's benefit. Incidentally, money in a 529 opened by a grandparent on behalf of a student does not count against financial aid.

Don't: Count on the Student Getting a Full-Ride Scholarship

Expecting a child's academic or athletic brilliance to bail the parents out from having to pay for college? Think again. Fewer than 0.3% of students win full-ride scholarships or need-based full-ride grants, says Kantrowitz, whereas about two thirds of all undergraduates receive some kind of financial aid, including student loans.

Don't: Sell Assets the Year Before Applying for Aid

A common mistake parents make, Kantrowitz says, is to sell a large chunk of taxable investments to help pay for college the year before applying for aid. This might trigger capital gains that add to parental income and thus reduce financial aid eligibility. (Converting traditional IRA assets to a Roth can also add to taxable income, thereby hurting financial aid eligibility.) Keep in mind that students usually must reapply for financial aid each year, so holding off and waiting a year to sell might not help. It's best to plan ahead if possible by putting funds for college in a 529, where their impact on financial aid is reduced.


Other Financing Methods, With Caveats

Some parents opt to use their retirement accounts to help fund college costs. This has its advantages and disadvantages. The biggest advantage to this approach is that the 10% penalty for early withdrawals is waived if the money is used for qualified college expenses. Also, Roth IRA contributions might be withdrawn tax-free, though any earnings on those contributions are subject to regular income tax rates. All withdrawals from traditional IRAs are subject to regular income tax rates. The problem with this approach is that all IRA withdrawals, whether taxed or not, count as total parental income in financial aid calculations. So even though parents might save on taxes or penalties by doing this, they might also make it more difficult for the student to obtain need-based financial aid.

Borrowing from work-based retirement accounts, such as a 401(k) or 403(b) plan, is another option and does not affect need-based financial aid. However, the loan must be repaid within five years, and possibly immediately in the case of job loss. Parents might be eligible for hardship withdrawals, but those are subject to income taxes and penalties.

What to Do if You Need More Time to File Your Taxes (IRS.gov)

Seven Things about Getting More Time to File your Tax Return

Can’t make the April 18 tax filing deadline and need more time to file your tax return? You can get an automatic six month extension of time to file from the IRS.
Here are seven important things you need to know about filing an extension:

1. File on time even if you can’t pay If your return is completed but you are unable to pay the full amount of tax due, do not request an extension. File your return on time and pay as much as you can. The IRS will send you a bill or notice for the balance due. To apply online for a payment agreement, go to the IRS website at http://www.irs.gov and click “Apply for an Online Payment Agreement (OPA)” at the left side of the home page under Online Services. If you are unable to make payments, call the IRS at 800-829-1040 to discuss your options.

2. Extra time to file An extension will give you extra time to get your paperwork to the IRS, but it does not extend the time you have to pay any tax due. You will owe interest on any amount not paid by the April 18 deadline, plus you may owe penalties.

3. Form to file Request an extension to file by submitting Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, to the IRS by April 18, 2011, or make an extension-related electronic credit card payment. For more information about extension-related credit card payments, see Form 4868.

4. E-file extension You can e-file an extension request using tax preparation software with your own computer or by going to a tax preparer who has the software. The IRS will acknowledge receipt of the extension request if you file by computer.

5. Traditional Free File and Free File Fillable Forms You can use both Free File options to file an extension. Access the Free File page at http://www.irs.gov.

6. Electronic funds withdrawal If you ask for an extension via computer, you can also choose to pay any expected balance due by authorizing an electronic funds withdrawal from a checking or savings account. You will need the appropriate bank routing and account numbers. For information about these and other methods of payment, visit the IRS website at http://www.irs.gov or call 800-TAX-1040 (800-829-1040).

7. How to get forms Form 4868 is available for download from the IRS website or may be ordered by calling 800-TAX-FORM (800-829-3676).You can also obtain the form at your local IRS office. Telephone requests normally take 7 - 15 days to process and ship.

Links:
• Form 4868, Application for Extension of Time to File U.S. Individual Income Tax Return (PDF 165K)
• Form 9465, Installment Agreement Request (PDF 100K)
• Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad (PDF 1.46MB)
• Publication 3, Armed Forces' Tax Guide (PDF 1.17MB)
• Official Payments Corporation
• Link2 Gov Corporation
• PayUSATax

taking money out of your IRA or your 401k (IRS.gov)

Did you Take an Early Distribution from Your Retirement Plan?

IRS Tax Tip 2011-42, March 1, 2011

Some taxpayers may have needed to take an early distribution from their retirement plan last year. The IRS wants individuals who took an early distribution to know that there can be a tax impact to tapping your retirement fund. Here are ten facts about early distributions.

Payments you receive from your Individual Retirement Arrangement before you reach age 59 ½ are generally considered early or premature distributions.


Early distributions are usually subject to an additional 10 percent tax.


Early distributions must also be reported to the IRS.


Distributions you rollover to another IRA or qualified retirement plan are not subject to the additional 10 percent tax. You must complete the rollover within 60 days after the day you received the distribution.


The amount you roll over is generally taxed when the new plan makes a distribution to you or your beneficiary.


If you made nondeductible contributions to an IRA and later take early distributions from your IRA, the portion of the distribution attributable to those nondeductible contributions is not taxed.


If you received an early distribution from a Roth IRA, the distribution attributable to your prior contributions is not taxed.


If you received a distribution from any other qualified retirement plan, generally the entire distribution is taxable unless you made after-tax employee contributions to the plan.


There are several exceptions to the additional 10 percent early distribution tax, such as when the distributions are used for the purchase of a first home, for certain medical or educational expenses, or if you are disabled.


For more information about early distributions from retirement plans, the additional 10 percent tax and all the exceptions see IRS Publication 575, Pension and Annuity Income and Publication 590, Individual Retirement Arrangements (IRAs). Both publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Links:

Publication 575, Pensions and Annuities (PDF 227K)
Publication 590, Individual Retirement Arrangements (IRAs) (PDF 449K)
Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax Favored Accounts (PDF 72K)
Form 5329 Instructions (PDF 40K)