My wife got laid off a few months ago and is working for another company and we can either roll it over to her new plan or take the distribution. ( I know the smart thing is to roll it over because shes not 59.5 and will be taxed 10%. Is it based on salary and what tax bracket you are in? How can I figure out exactly how much she will be taxed. The amount is only 1400 bucks because she wasn’t there for a full year.
Does it matter if we filed married? Together we are in 82-171k bracket.. If single, she is in the 34-82 bracket.. So I found this chart could someone calculate how much will be taxed on the 1400;
Your only filing status choices are Married Filing Jointly and Married Filing Separately. You can’t file as Single, unless of course you get a divorce before the end of the year. Generally you’ll pay the least total tax filing MFJ.
You appear to be in a 25% bracket if you file jointly so you’d owe $350 in tax on the distribution plus a $140 penalty if she’s under age 59 1/2 at the time of the distribution. She’d still be in a 25% bracket if you filed MFS so the tax would be the same, however you’d probably be in a 28% bracket yourself, so MFS won’t likely work in your favor.
The better plan of attack is to simply roll it over into a Traditional IRA. Do a direct rollover and you have no tax issues at all. If you are in your 20s now, that $1,400 could grow to over $80,000 by the time you are ready to retire even if you never add another dime to it. Another option would be to roll it over into a Roth IRA. You’ll pay the $350 in taxes now but no penalty. The growth after that would be entirely tax FREE forevermore. With the uncertainty of future taxes — increases are virtually a given, especially at higher incomes such as yours — paying a known tax now and keeping growth tax-free would make much more sense than just blowing the money today.