How JustAnswer Works:

  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.

Ask DanielleCPA Your Own Question

DanielleCPA
DanielleCPA, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 727
Experience:  CPA experienced in tax and financial planning
50747609
Type Your Finance Question Here...
DanielleCPA is online now
A new question is answered every 9 seconds

Hello, Im 56yrs old as is my wife and I want to quit my job

Resolved Question:

Hello, I'm 56yrs old as is my wife and I want to quit my job and buy a buisness that i know a lot about and that's in a town thats close to my grandkids. I have 207k in my 401k I'm so done with this job! I have a small window of time to buy this business,the owner wants 50k, I will need 12k for startup money, I owe 55k on my house thats 4.5 hrs away from this buisness. I also owe 20k on my wifes 2010 car and 12k in credit card dept. I AM GOING TO QUIT MY JOB! Whats the most riskesty way to make this happen!?
Submitted: 3 years ago.
Category: Finance
Expert:  DanielleCPA replied 3 years ago.

DMC :

Hi and welcome to Just Answer! I'm happy to help answer your Finance questions. Feel free to interject at any time if you need clarification.

DMC :

You could take out money from your 401K, but keep in mind that 401k distributions are taxable at ordinary income rates assuming your contributions were made pre-tax. You are also under age 59 1/2, so there would be a 10% penalty tax on top of the regular tax.

DMC :

Because of the taxes involved, especially at your age, taking money from your 401k to purchase the business may not be the most viable option.

DMC :

Do you have equity in your home? I know it would take time to sell it and today's market isn't good, but would it be possible to either a) take out a home equity loan which could then be paid off at the sale of your home or b) take out a personal line of credit or term loan for the funds needed to purchase the business.

DMC :

If you are going to go the loan route, you may want to consider an SBA (Small Business Administration) loan, offered through many major lenders. These loans typically are easier to obtain but with slightly higher interest rates and stricter terms.

DMC :

Two things concern about this deal. The first is your debt level. Running a business is risky. Are you going to be able to continue to make your debt payments if you leave your job and start running this business?

DMC :

The second is the financial health of the company. I know you said you are familiar with the business, but have you done your due diligence? What's the financial health of the business - is it profitable? Is there a big customer or knowledge base tied to the current owner that wouldn't necessarily come over to you?

Customer:

I don't think you grasp what i'm asking!.... I need to know the total taxes that will be deducted on 207k.

DMC :

Sorry for misunderstanding your question. It seemed like you were asking about your options in purchasing the business. If you are not rolling over any portion of the 401K, it is standard to withhold 20% on distributions from a 401K plan. How much tax you ultimately owe will likely be more than that depending on your other income. Depending on your other income and deductions, a 207K distribution will place you in at least the 28% tax bracket, if not the 33% tax bracket plus 10%.

DMC :

So you are looking at about 41K in withholding at the time of the distribution and an actual tax liability of at least 65K related to the 207K.

DMC :

Did you have any follow-up questions?

Customer:

Dear DMC, i thought there is no penalty for early withdrawal after you turn 55 and this business will be my retirement.

DMC :

The age limit for the early withdrawal penalty is age 59 1/2, not 55. Sorry.

DMC :

Based on the the facts you have given me, the only exception to the early withdrawal penalty that you may qualify for would be the exception for substantially equal payments throughout your lifetime, but this would require to take out the 401k money a little each year instead of all at once.

DMC :

I apologize. I mixed up the IRA rules. Since you are leaving your job, it is age 55. Sorry for the confusion.

DMC :

So, since you would NOT be subject to the 10% penalty, you should figure a minimum of 45K in tax, subject to your other income and deductions.

Customer:

Well... I've waited 15yrs for a business like this to come to be and i can't let this oppituinty slip by! I need numbers? I've got 207k...minus 20%...minus...40%? My other income will be the buisness im buying witch ive been waiting for.

DMC :

Wouldn't there also be wages from your job this year until you quit?

DMC :

Sorry if I confused you, let me explain more clearly.

DMC :

When you take the distribution from the plan, the 401k company will withhold federal income taxes of 20%. So, 207 * 20% = 41,400.

DMC :

However, just because they withhold 20% does not mean that is the actual amount of tax you will owe come April 15th.

DMC :

The 28% tax bracket is taxable income up to 212,300. 33% is 212,300 up to 379,150. Your actual taxable income will fall somewhere within these two guidelines.

DMC :

Assuming your taxable income, including 401K will be at least 212,300, the 401K distribution will generate about 47,500 in tax. If 41,400 is withheld, that means you will owe an additional 6,100 in tax when you file your return.

Customer:

OK.... got it... no problem! My earnings to date are 36,380.67

DMC :

Great. The 47,500 in tax (exclusively from the 401k) should be pretty accurate if your year-to-date earnings are about 37K. It might be a little more, but not a big swing.

Customer:

10-4... I think you answered what i needed to know! Thanks, XXXXX XXXXX

DMC :

You're welcome. Please hit the green accept button so I can get credit for my work. If you have any follow-up questions, you can always come back to this thread.

DMC :

Thanks

DanielleCPA, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 727
Experience: CPA experienced in tax and financial planning
DanielleCPA and other Finance Specialists are ready to help you

JustAnswer in the News:

 
 
 
Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.
 
 
 

What Customers are Saying:

 
 
 
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
< Last | Next >
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
  • I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight. Bonnie Chesnee, SC
  • Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation. John Minneapolis, MN
  • Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with. Orville Hesperia, California
  • Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C. Freshfield, Liverpool, UK
  • This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!! Alex Los Angeles, CA
  • Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult. GP Hesperia, CA
 
 
 

Meet The Experts:

 
 
 
  • Rakhi Vasavada

    Financial and Legal Consultant

    Satisfied Customers:

    2073
    Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
< Last | Next >
  • http://ww2.justanswer.com/uploads/RA/rakhi.v/2012-7-3_14374_RakhiVasavadaL.64x64.jpeg Rakhi Vasavada's Avatar

    Rakhi Vasavada

    Financial and Legal Consultant

    Satisfied Customers:

    2073
    Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
  • http://ww2.justanswer.com/uploads/BU/BusinessTutor/2012-2-2_115741_Kouki2.64x64.jpg Manal Elkhoshkhany's Avatar

    Manal Elkhoshkhany

    Tutor

    Satisfied Customers:

    1890
    More than 5000 online tutoring sessions.
  • http://ww2.justanswer.com/uploads/MY/MyVirtualCPA/2012-7-5_44024_cookmegan1.64x64.jpg Megan C's Avatar

    Megan C

    Certified Public Accountant (CPA)

    Satisfied Customers:

    1755
    Licensed CPA, CFE, CMA who teaches accounting courses at Master's Level
  • http://ww2.justanswer.com/uploads/JK/jkcpa/2011-1-16_182614_jkcpa.64x64.jpg JKCPA's Avatar

    JKCPA

    CPA

    Satisfied Customers:

    838
    Bachelors degree and CPA with Accounting experience.
  • http://ww2.justanswer.com/uploads/starside8/2010-2-16_55433_DSCN1175.JPG Eric's Avatar

    Eric

    Financial Manager

    Satisfied Customers:

    558
    Loan servicing, counseling and real estate expert. Foreclosure Expert and Financial Planner.
  • http://ww2.justanswer.com/uploads/FA/fastfile/2011-12-15_23139_Klein2011small.64x64.jpg R. Klein, EA's Avatar

    R. Klein, EA

    Accountant

    Satisfied Customers:

    397
    Intuit Ask a Tax Expert. QuickBooks Certified Pro Advisor (all editions)
  • http://ww2.justanswer.com/uploads/dkaplun/2009-05-17_173121_headshot_1_2.jpg Dimitry K., Esq.'s Avatar

    Dimitry K., Esq.

    Attorney

    Satisfied Customers:

    324
    NASD Licensed Rep, 1997-2001, Business Attorney
 
 
 

Related Finance Questions

Chat Now With A Financial Professional
DanielleCPA
DanielleCPA
Financial Professional
727 Satisfied Customers
CPA experienced in tax and financial planning