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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4503
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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I divorced this year and got 145,000 in a retirement account.

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I divorced this year and got 145,000 in a retirement account. I would like to withdraw $40,000 for a home purchase. I only work part time so cannot get a mortgage, but have cash on hand and with the $40K could buy a home. If I am making 24,000 part time, and withdraw $40K early, what would I net after the penalty and 20% withheld? I don't understand if I would be in the 25% tax bracket or if the taxable amount is 10% or based on my income.
Submitted: 2 years ago.
Category: Tax
Expert:  Lane replied 2 years ago.

Hi,

I can help you with this this evening.

The amount you pull is simply added to your income for the year.

For someone who files single the tax brackets are as follows:

10% $0 through $8750
15% $8,750 through $35,500
25% $35,500 through $86,000

So, normally you would be in the 15% bracket.

But, when adding the extra 40,000 (by pulling the 40,000 from the IRA) you'll be in the 25% for just that year ... because your total income will be 24,000 + 40,000 64,000.

And, yes, if you are under age 59 and 1/2 there will be an additional 10% penalty tax on the 40,000.

So your additional tax (over and above what you would have paid) will be 40,000 x 25% = 10,000 Plus 40,000 x 10% = 4000 for a total of 14,000.

Now, I don't know how much you already have withheld against your 24,000 but If you get a refund, then that will cover SOME of this additional tax that you will have to pay because of the withdrawal.

What you might consider doing is pulling 52,000 and having 12,000 withheld from the distribution (which will be an option on the distribution form).

That will net you $40,000 from the IRA and cover most, if not all of the additional taxes , when you file nest April.

Make sense?

Let me know

lane

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4503
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 2 other Tax Specialists are ready to help you
Expert:  Lane replied 2 years ago.

Thanks for the feedback!

One last piece Suzanne,

If you qualify as a first time home buyer, you can have the 10% waived on 10,000 of that distribution.


Here's an excerpt from an excellent article on the 1st time home buyer waiver on the 10% penalty:

"
First-home exemption

... Uncle Sam offers various tax breaks for homeowners. He'll even bend the IRA rules a bit to help you get into your house in the first place.

You can use up to $10,000 in IRA funds toward the purchase of your first home. If you're married, and you and your spouse are both first-time buyers, you each can pull from retirement accounts, giving you $20,000 in residential cash.

Even better is the IRS definition of first-time homebuyer. Technically, you don't have to be purchasing your very first abode. You qualify under the tax rules as long as you, or your spouse, didn't own a principal residence at any time during the previous two years. In fact, you can even share your IRA wealth. The IRS says the first-time homebuyer using your IRA funds for a down payment can be you, your spouse, one of your children, a grandchild or a parent.

Be careful not to take out your money too soon. You must use the IRA funds within 120 days of withdrawal to pay qualified acquisition costs. This includes the costs of buying, building or rebuilding a home, along with any usual settlement, financing or closing costs."

Here's the link to the article:

http://www.bankrate.com/finance/money-guides/irs-rules-for-early-ira-withdrawals-1.aspx


Lane

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Lane
Lane
JD, MBA, CFP, CRPS
3638 Satisfied Customers
Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986