A family member HAS to take his IRA money out and use it to buy a house (long story as to WHY… so don’t harp on ’ don’t do it, he’s a fool) - My question is… are there ways to get around getting reamed with taxes?
He’s 72 - I’ve heard that he and his wife can use 10K each to use for a house (but I think it has to be a first time home buyer situation, and he’s not).
Then I heard that since he’s got his own little side business (internet mostly…not very much income) - that he could borrow it for a self employed 401K but then use it for the house but… if he does that will he have to make payments on that ‘loan’? And, he plans on doing a rollover with that money as soon as this other house sells. If you need more detail please ask. This is urgent.
Well, if he’s 72, then he’s not getting hit with penalties for early withdrawl (in fact, you have to start withdrawing by 70 1/2.). He just has to pay ordinary (income) taxes on it.
Zev Steinhardt
Thank you for your reply -
He swears that when he withdraws it that there will be an automatic 10% taken out immediately.
In your opinion -is he going to get hammered with income taxes - like I said he’s 72, they have SS & small pension as their only other income - roughly what percentage will he be taxed?
No. Once you reach 59 1/2, you can withdraw from your 401(k) with no penalties. The only taxes he should see are normal income taxes. Since he deposited the money into the 401(k) tax free, it is taxable (at the normal rate) when he withdraws it.
As zev_steinhardt noted, the only taxes your family member will incur are normal income taxes. The 10 percent penalty only applies to early withdrawals from an IRA or 401(k). Early is defined as “before 59 1/2.” Anytime after that, you can take out as much as you want, as long as you report it for income tax purposes.
If he “loans” the IRA money to his 401(k) (and I have no idea if this is feasible) and then takes money from his 401(k) – he has to pay that money back, or be subject to additional penalties. Loans from 401(k) plans are just that – loans. They have to be paid back to avoid penalties.
He’s probably better off just taking money from his IRA. As noted earlier, withdrawals have to be made beginning at age 70 1/2.
He says that they take it out automatically (texans, where his IRA is) - and send it to the IRS just in case he can’t come up with the taxes he has to pay on it next year. Does this make sense or seem feasible to you?
Also, I’ve been doing some research to figure out a way to avoid being hit hard on them. I’ve read that he can ‘borrow’ from it to start a self employed 401K - but if he uses it to buy a house (which he is) then he has to pay it back within 10 years. Now, it’s not going to take that long because as soon as his other house is sold he’ll be putting it back. Is this possible for someone to do that is 72? And, does he have to pay it back monthly or can he do it in one lump sum?
The only reason to “borrow” from your 401(k) is when you can’t actually get the money (such as before you are of withdrawing age) but still need it. Since your relative is already 72, he can simply withdraw it and never need to pay it back. It’s his money.
Zev is right. The 10% that they are taking out is regulary withholding, which will be credited toward the income tax he owes for the year. He has to pay regular income tax becuase the money was saved tax-free.
If his income situation is such that he would owe less than 10% in taxes, he’ll get a refund when he files his return.
If it helps, think of the amount they are taking out as similar to W-2 withholding that they would take out of a salary.
IF he can prove that he will owe no income tax – not necessarily an easy thing to do – the 401(k) plan may allow him to get the money without any withholding. However, this is up to them, since they have potential tax liability if he cheats. I’ve seen it allowed when the recipient is a non-U.S. resident and the international tax treaties say that he owes no U.S. taxes.