Tax Deferred Annuity

If you are under the age of 59 1/2, there may be significant tax consequences from withdrawing.  Specifically, you are likely subject to a 10% IRS penalty for early withdrawal of both a Simplified Employee Pension (SEP-IRA) & a Tax Deferred Annuity.  This 10% penalty is in addition to the ordinary income tax rate you would normally pay.

Medical Insurance – for payment of your medical insurance or your spouse & dependents medical insurance. The withdrawal must occur during these scenarios: a) if they lost their job, b) have received unemployment for 12 weeks straight, c) receives the unemployment on the following year or d) receives distributions no later than 60 days after re-employment.

Another option instead of withdrawing funds from either of these two accounts, is rolling them into another retirement plan tax-free such as a traditional IRA or other qualified retirement plan. Other plans, such as a Roth IRA, may provide additional tax benefits to you.

For instance, if, of the total $10,000 value of the two plans, $2,000 is taxable, you would be subject to ordinary income tax (i.e.35%) of the $2,000 or $700 and an ADDITIONAL IRS Penalty of 10% of $2,000 or $200, bringing your total taxes to $900.

In 2010, Traditional IRA conversions into a Roth IRA are allowed for everyone, even if you don’t currently qualify for the conversion. Remember, Roth IRA’s are funded with After-Tax Dollars BUT Grow Tax Free and are NOT subject to tax following withdrawal after the age of 59 1/2. Please note that the additional income taxes due to the conversion, can be spread over two years (i.e. 2011 and 2012 returns).

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