Answer to question about rolling over IRA into a New World Women Distributorship

Answer to question about rolling over IRA into a New World Women Distributorship

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I think there is a good option for this prospective distributor. If he is eligible to roll over his entire qualified plan balance to an IRA, there are no federal taxes or penalties associated with such a move. Once he has the money in an IRA, he could take a partial distribution from the IRA. As with a distribution from the qualified retirement plan, money distributed from an IRA before a person turns 59-1/2 (55 is the age for qualified retirement plans) is usually subject to a 10 percent early distribution penalty and must be included in income tax. However, if he can pre-sell his inventory before he takes a distribution from the IRA, he should be able to roll back the entire amount of the distribution within 60 days and avoid both the penalty and the taxes on the distribution.

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Let’s, for the sake of argument, and to give you an idea of the worst case scenario, say he isn’t able to sell any inventory within 60 days (highly unlikely given my experience in a very small shop in Podunk Minnesota). This is what it would cost him:
$10,000 distribution
$1,000 early distribution penalty
$2,800 taxes (assuming a 28% tax rate, which is fairly high)
In other words, it would cost him $13,800 to buy his inventory when taxes and penalties are figured in. However, he would still have $10,000 worth of inventory at distributor pricing.
But rollovers are not an all or nothing deal. If he only sold $5,000 worth of inventory, he could roll over $5,000 within 60 days and he’d only have to pay $1,900 in taxes and penalties on the $5,000 he wasn’t able to roll back.
Given the pent up demand for the jewelry, I’d be very surprised if he didn’t make back his $10,000 investment within 60 days. If he does, he would be able to roll back the entire amount and avoid all taxes and non-bank related penalties (he shouldn’t have any bank-related penalties either if he makes sure not to invest the money he plans to withdraw right away in something that will incur a penalty and he checks the fee schedule at his bank to be sure it doesn’t charge for distributions). He can only do one IRA to IRA rollover per year (the rollover from the qualified plan to the IRA would not count against this), but after a year passes, he could go through the process again.
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