Retirement Plans

 If we cash in a pension plan while in our thirties, when do we pay the taxes and penalties? 

Because our tax system is a pay-as-you-go system, you may need to make an estimated tax payment by the due date for the quarter in which you received the distribution. When calculating your tax liability to determine whether you need to make an estimated tax payment, your total tax for the year should include the amount of the 10 percent additional tax on early distributions from qualified retirement plans unless any exception applies. 

If I retire or am laid off before I am 59 1/2, can I withdraw the funds accumulated in a qualified employee profit sharing plan, 401(k), without having to pay a 10% penalty? 

In most cases, if you withdraw funds from your 401(k) before you are 59 1/2, you must pay the 10 percent additional tax on early distributions from qualified retirement plans on any amounts that are not rolled into an IRA. However, there are some exceptions listed in Publication 560, Retirement Plans for Small Business and Publication 575, Pension and Annuity Income.

I want to establish a traditional individual retirement arrangement (IRA) for my spouse, and I need additional information. What is the most I can contribute to a spousal IRA during the tax year? 

If both you and your spouse work and both have taxable compensation, each of you can contribute up to $5,000 in 2011 and 2012 (or the amount of each IRA owner's compensation, if less) to a separate traditional IRA. Even if one spouse has little or no compensation, up to $5,000 in 2011 and 2012 can be contributed to each IRA if combined compensation is at least equal to the amount contributed to both IRAs and you file a joint return. You can contribute $5,000 in 2011 and 2012 to a separate IRA for your nonworking spouse if you file a joint return. Your total contribution to both your IRA and the spousal IRA for 2011 and 2012 is limited to the smaller of $10,000 or your taxable compensation. You cannot contribute more than $5,000 in 2011 and 2012 to either IRA for the year. For 2011 and 2012, if you are 50 or older, the most that can be contributed to your traditional IRA is the lesser of:

  • $6,000, or
  • Your compensation that you must include in income.

For additional information, refer to Tax Topic 451, Individual Retirement Arrangements (IRAs), or Publication 590 (PDF), Individual Retirement Arrangements (IRAs).

If I am covered by a employer sponsored retirement plan for part of the year, but work the rest of the year for an employer without a retirement plan, how much of my earnings may I deduct for a traditional IRA? 

The amount you can deduct will be determined by your modified Adjusted Gross Income (AGI) and filing status. For specific information refer to Publication 590 (PDF), Individual Retirement Accounts (IRAs).