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.
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.
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.
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.
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.
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?
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?
I don't think you grasp what i'm asking!.... I need to know the total taxes that will be deducted on 207k.
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%.
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.
Did you have any follow-up questions?
Dear DMC, i thought there is no penalty for early withdrawal after you turn 55 and this business will be my retirement.
The age limit for the early withdrawal penalty is age 59 1/2, not 55. Sorry.
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.
I apologize. I mixed up the IRA rules. Since you are leaving your job, it is age 55. Sorry for the confusion.
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.
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.
Wouldn't there also be wages from your job this year until you quit?
Sorry if I confused you, let me explain more clearly.
When you take the distribution from the plan, the 401k company will withhold federal income taxes of 20%. So, 207 * 20% = 41,400.
However, just because they withhold 20% does not mean that is the actual amount of tax you will owe come April 15th.
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.
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.
OK.... got it... no problem! My earnings to date are 36,380.67
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.
10-4... I think you answered what i needed to know! Thanks, XXXXX XXXXX
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.