You shouldn’t have to pay a penalty to use your own money.
I read an article in The Wall Street Journal over the weekend that described the “rules” for accessing your money in an IRA.[1]
“The Internal Revenue Service does let you withdraw money from your individual retirement account, as long as you replace it within 60 days. But if you miss the deadline, you have to pay income tax on the amount you took out. (For folks under the age 59 ½, there is also a 10% penalty.)”
What’s wrong with this picture?
Here’s what: this system assumes that the government has a right to your money before you do.
When you save money for the future you are buying yourself time, a living when you figure you will either be incapable of or won’t want to earn that living anymore.
So you decrease consumption now and save for later.
But if something (life for instance) happens and you need to access your money before you turn 59 ½, what right does the United States government have to lay a 10% penalty on you, as if they had been doing you a favor by “allowing” you to save your own money for retirement?
I’m not saying you shouldn’t have to pay income tax on the money if you take it out early: the taxes were deferred initially and need to be paid.
But it is your money and if you need it, the government should not be in the position of playing a financial needs judge and jury: when you need it, you need it, and it’s none of their business why.
The government exists to serve you, not the other way around.
You take it out, pay your income tax, and that’s it.
But a 10% penalty?
By what right?
Well apparently the IRS believes it has a 1st-claim on the fruits of your labor and hence, if you don’t follow their rules, they get to “penalize” you.
However, if you’re below 59 ½ you’re “allowed” take out up to $10,000 “penalty free” to make a down payment on the purchase of a first home or to pay for “qualified” higher education expenses.
How thoughtful of them.
[1] Kelly Greene (August 9-10, 2008). “Borrowing From Your IRA Is Allowed but Is Risky.” The Wall Street Journal, p. B2.
Comments
12 Responses to “You shouldn’t have to pay a penalty to use your own money.”
Leave a Reply
You couldn’t be more wrong on this. By using a tax-deferred account like an IRA you are taking advantage of a government sponsored opportunity to put off your tax debt into the future under conditions you agree to. When you choose to violate those terms you are subject to the rules you agreed to.
If there wasn’t such a penalty then using an IRA or other tax deferred account would be a loophole that would allow you to defer paying your taxes with no consequences.
If the government charged the normal interest and penalties on the tax debt, which is being paid late because the income declaration has been deferred, the extra amount owed would easily exceed 10%. So in reality the government is giving you a break by only assessing an extra 10%.
Don’t put the money in an IRA. Put it in a regular non-qualified account and you can access it anytime you want.
Here is how it works: you make an agreement and then you try to live up to it. You don’t like the IRA restrictions, then don’t put money in an IRA. Stop whining about how you made a contract and now don’t like the contract.
What happens if you withdraw your money overseas?
Let’s say you’re out of the country for a year or more; doesn’t the “income” from your IRA fall below the ~$80k minimum non-taxable level?
“Government sponsored opportunity” to save my own money! As if I came into the world with a debt to the IRS. Give me a break. You guys are all missing the point. This post is not about what the rules are; it is about what the rules ought to be and why. With respect to this idea of “agreeing to the rules” or a “contract” in place, you really don’t have a choice. Either you do it their way or you don’t get to keep your money or defer taxes. My point: the whole system assumes the IRS has a right to your money before you do. Now, do you believe that underlying assumption is valid or not?
No, you did not come into this world with a debt to the American people (who the IRS is collecting on behalf of), but as you decided to continue living in this country, you are enjoying various benefits and taxes are how those benefits are paid for.
Yes and those benefits (America is the greatest country in the world as far as I am concerned) are amply paid for with my tax money, not to mention the claim on my future labor represented by our deficit. But the principle in question is: who owns the fruit of an individual’s labor? The individual or the state? Prior to WWII there was not a with-holding system, people received their pay, and then sent their taxes in. That is the appropriate way to do it. The reason living in America has benefits is because our political and economic systems, more than others, value the individual over the state. If we lose that, we lose our advantage over other nations.
Re: anontrol
If you take any kind of withdrawal from a tax-deferred account and have the proceeds sent overseas the financial institution is required to withhold a significant amount (I believe it’s 30%) and send that directly to the IRS. You could try to have the money sent to a domestic bank and then transferred overseas but this may be viewed as money laundering so you better not be planning on coming back to the USA without having to deal with a lot of trouble.
You guys talk about this like the govt has any right to take your money at all period.
Taxes=Slavery
Arguing against that just makes you a good little slave.
I agree that this is one of the silliest tax rules on the book–right in line with, oh, all of the other income tax rules. It’s your money. The government has no right to tell you how you may or may not spend it. Forcing those who are “too young” to pay an extra 10% penalty is just plain stupid.
PS~Agree with Jeffrey that taxes=slavery.
Coralie,
WTF do you mean you think I’m wrong, it is…….
Oh wait, you agree?
How refreshing