I have an LLC for a non-REI business. This LLC is a going concern. Let’s say my Net Operating Loss for '06 was 15K and it was 30K for '07=total 45K carried forward to 2008. If I withdraw my 401(k), as of today let’s say it’s at 150K. If I take a lump sum early distribution, the plan administrator will withhold 20% for taxes, and there will be a 10% penalty=30K plus 15K=total 45K. The question is, will my NOL of 45K offset the tax and penalty of 45K when I file my 2008 tax return so that I may actually get a refund of approximately 45K because of my NOL? Or would I only get a refund of 30K because the penalty is non-refundable?
I’m trying to decide whether to take the plunge and do a lump sum distribution of my 401(k). I need the cash to fund my non-REI business and to have the leverage for my REI business (I’m a newbie REI). :help
I am not a tax professional but I see a problem with your scenario. The $45k in net operating loss carryforward is NOT a dollar-for-dollar tax credit. The tax effect must first be calculated by applying your marginal rate to this loss. Say you are in the 25% bracket then this loss will only save you $11,200 in taxes versus the $45,000 in tax and penalty you will pay for early withdrawal of your IRA. my 2-cents.
The early withdrawal penalty can not be offset by other losses or tax credits. You will still pay the early withdrawal penalty even if you had no other taxable income.
"carry forward"of loss implies corporate tax. S-corp, partnership and disregarded entities do not carryfoward losses, but use them in the current year to offset other income (subject to some basis limitations that I won’t get into here).
so, the first thing you need to do is tell us how the LLC is being taxed.
if you are carrying losses forward, it’s C-corp and what you do personally with your 401(k) is irrelevant since the two don’t mix.
if you are not C-corp, you are not carrying losses forward and your math doesn’t work. And 71tr is correct, you are confusing loss (income) with tax.