Complete IRA Warns Of Tax Bill Trauma As Florida Law Puts 401k Loans at Risk
A unique Florida law, mixed with IRS legislation, means 401k loan borrowers could be sitting on tax time-bombs even though they didnít do anything wrong warns CompleteIRA.com.
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White Salmon, WA - November 4, 2014 (FPRC) -- People borrow from their 401k for all sorts of reasons. Paying off credit-card debt, medical bills, helping ends meet during a move to a new job, starting a new business, and more. Whatever the reason, no one borrows the money thinking theyíre creating a tax liability that starts out at 30%+ and could swell past the total amount they borrowed in the first place. CompleteIRA.com offers people advice and guidance on 401ks and IRAs, and is highlighting the problem to try and ensure more people arenít caught in the tax trap.
ďItís a problem. This will cause millions of dollars worth of damage in Florida according to our current estimates,Ē says Joshua Sharp a specialist with CompleteIRA.
On CompleteIRA.com , Sharp explained the situation formed when state and federal law came together in an unanticipated way. Lenders in Florida must pay tax on new debt in order for debt to be enforceable. 401k loans must be enforceable to be valid, else they are counted as distribution instead of a loan. Because most people arenít aware and do not pay the tax, the 401k loan comes under different legislation.
The IRS sees this loan that the borrowers made all their payments on, and can hit them with a tax bill plus interest, as well as an early distribution penalty in most cases. Paying the tax later canít fix the issue because the damage has already been done. The loan in the eyes of the law wasnít enforceable, and thus the funds were really a distribution.
On a $50,000 loan the tax totals $175 - but not paying it can create a tax bill of $17,500 on average, and the damage just keeps growing because the taxpayer doesnít know thereís a problem. By the time itís found the bill could exceed the original loan.
In a statement, Mr. Sharp condemned the Florida department of Revenue for exacerbating the situation, ďClearly this tax was never intended to do this damage, but instead of exempting loans from retirement accounts and solving the issue, the Florida Dept. of Revenue made it worse by stating pension and 401k loans are subject to the tax. If youíre in Florida, be sure to check with your Plan Administrator that they pay the Documentary Stamp Tax on all plan loans, and if you have your own Solo 401k, be sure and work with a provider who will work with you and your advisors to stay abreast of possible issues. The self directed 401k folks I talk to are intelligent, hard working, people. They donít deserve to be bushwhacked with a tax bill on money they were using to improve their lives when they thought they were following all the rules.Ē
About Complete IRA: Complete IRA is run and edited by Mr. Sharp, a gentleman and expert that has been helping individuals and small businesses create checkbook controlled 401k and IRA accounts for the past decade. He provides guidance nationally on the differences between real estate inside of IRAs and 401ks, and specific advice on local issues such as the department of revenue laws in Florida. For more information please visit: http://completeira.com/
Florida Dept. of Revenue reference:
Send an email to Grace Walker of Complete IRA
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