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DanielleCPA
DanielleCPA, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 727
Experience:  CPA experienced in tax and financial planning
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A sibling has offered to give me 50k to buy a home from one

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A sibling has offered to give me 50k to buy a home from one of his personal bank accounts. He has a very large sum of money available to him but not until he reaches 59 next year. I actually need 100k and would rather not use his immediate liquid asset money as he might need it for medical emergencies and such. He told me if he tried to touch his investment (401k?) there is 40% penalty. I wondered is there any way around this or any way to incur a lesser penalty as I would rather ask for 100k and pay the penalty myself but understand 40% makes that ridiculous. I was just wondering if there was any other option. I know he too would rather have access to his long term assets but said they are simply inaccessible.
Submitted: 1 year ago.
Category: Finance
Expert:  DanielleCPA replied 1 year ago.

DanielleCPA :

Welcome and thanks for your question!

DanielleCPA :

There is a 10% penalty on 401k distributions made before age 59 1/2.

DanielleCPA :

However, 401k distributions are also taxed at a taxpayer's ordinary income tax rate. If your brother's tax rate is around 28% or 33%, this would make the 40% he give you reasonable.

DanielleCPA :

To withdraw 100K, he would have to pay the 10% plus his ordinary income tax rate, so the 40% makes sense.

DanielleCPA :

The tax on the distributions applies regardless, but there are a limited amount of exceptions to the 10% penalty.

DanielleCPA :

These are:

Customer:

is the tax rate based on which state he is in?

Customer:

it is illinois.

DanielleCPA :

Distributions upon the death or disability of the plan participant.


You were age 55 or over and you retired or left your job.
You received the distribution as part of "substantially equal payments" over your lifetime.
You paid for medical expenses exceeding 7.5% of your adjusted gross income.**
The distributions were required by a divorce decree or separation agreement ("qualified domestic relations court order"),

DanielleCPA :

Those are the exceptions above.

DanielleCPA :

The rates are gave you are federal rates. It does not matter what state you are in.

Customer:

i am pretty sure it is his 401k might it be something else from his stocks and investments with the corporation he was with all his life?

DanielleCPA :

Illinois does not tax distributions from 401k plans, so he will not have to worry about owing additional state tax.,

DanielleCPA :

Certain investments have penalties attached to early withdrawals, but most do not. If he sold any investments, he would be subject to tax on the gain, but only at a maximum of 15%.

DanielleCPA :

Plus he would have to pay IL tax of 5% on his gains.

Customer:

okay so perhaps if any of those exemptions apply he might be able to access 100 and i would pay the 10% penalty?

DanielleCPA :

Based on what you say about age 59, I am led to believe it is a 401k plan as well, because the penalties apply before age 59 1/2.

DanielleCPA :

If the exceptions apply, no one will have to pay the 10% penalty. But, your brother will still be taxed based on his ordinary federal income tax rate. In 2013, that could be as high as 39.6% based on his income level.

DanielleCPA :

Withdrawing from his 401k funds does not seem like a particularly viable option because of the tax consequences involved.

Customer:

he had to leave his job a bit before 55 due to very poor health so number one is out right? i dont really understand two but three might apply because he has been in an out of hospital and a nursing home due to terrible declining health.

Customer:

i appreciate your candor it does not sound at all feasible you are correct.

Customer:

if this was the case: You paid for medical expenses exceeding 7.5% of your adjusted gross income.**

Customer:

would that make it feasible? or would there still be that 40% tax?

Customer:

that might be the only one that applies.

DanielleCPA :

There would still be the tax. There is no way of getting around him paying tax on the distribution. The only thing you can possibly get out of is the penalty.

Customer:

okee dokee thanks for your help! bummer!

DanielleCPA, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 727
Experience: CPA experienced in tax and financial planning
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