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Ask Lane Your Own Question
Category: Tax
Satisfied Customers: 12000
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I am using a big chunk of one of my retirement funds (100K)

Customer Question

I am using a big chunk of one of my retirement funds (100K) to build my dream home.
What can I do to minimize the tax bite
Submitted: 2 years ago.
Category: Tax
Expert:  Lane replied 2 years ago.
Up to $10,000 of IRA dollars can be used toward the purchase of your "first home."
And if you're married, and you and your spouse are first-time buyers, you each can pull from retirement accounts, giving you $20,000 in residential cash.
THis waives this waives the 10% penalty but the distribution is still taxable
Now, the IRS definition of "first-time homebuyer." is important. 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.
Also the IRS says the first-time homebuyer using your IRA funds for a "first time home" can be you, your spouse, one of your children, a grandchild or a parent.
If this is a 401(k) the rules don't apply, so you'd need to roll (transfer is the better way) those dollars to an IRA first.
ALSO, a 401(k) plan CAN allow for a loan for residence and THAT TYPE loan can be repaid over a longer period than the 5 year payback period on any other 401(k) loan.
Let me know what questions you have...
Customer: replied 2 years ago.

So 20% or more is unavoidable?

What about the various taxes, costs, energy related stuff ?

Expert:  Lane replied 2 years ago.
Depends on your tax bracket ... any distribution (lets forget about the waiver of the 10% penalty for a moment) is simply added to the other household income for the tax year it's distributed. (Which DOES brong up one issue - If you can distribute across two different yax years, say pull out 50,000 on Dec31st then pull out 50,000 on Jan 1st of the following the following year, you'll likely keep more of the distribution in a lowder tax bracket. Lets say you're married filing jointly Here are the tax brackets ... and again, don't know your income situation, but the IRA will be taxed at the top beacket(s) becasue it's comiong in on top of the other iincome for the year:
Expert:  Lane replied 2 years ago.
2015 Ordinary Tax Rates for Married Filing Jointly and Qualifying Widow or Widower Filing Status[Tax Rate Schedule Y-1, Internal Revenue Code section 1(a)]If taxable income isabcdefgoverbut not overTaxable incomeMinusSubtract (b) from (a)Multiplication amountMultiply (c) by (d)Additional AmountAdd (e) and (f)$0$18,450 $0 × 10% $0 18,45074,900 18,450 × 15% 1,845.00 74,900151,200 74,900 × 25% 10,312.50 151,200230,450 151,200 × 28% 29,387.50 230,450411,500 230,450 × 33% 51,577.50 411,500464,850 411,500 × 35% 111,324.00 464,850 -- 464,850 × 39.6% 129,996.50
Expert:  Lane replied 2 years ago.
SO lets say you made 74,900 in income ... the 100,000 distribution wouldd be on top of that so taxed at 25% AND the last 25,000 would be taxed at the 28% bracket
Expert:  Lane replied 2 years ago.
There ARE tax credit for enery related purcgase such as Hot water heaters, certain window, solar panels, etcFrom an EXCELLENT article at intuit, here are 10 eligible purchases you can make to reduce the transmission of heat and cold, thereby using less energy in your home:InsulationEnergy Star exterior doors and windows, including skylightsNew metal or asphalt roof with appropriate pigmented coatings or cooling granulesElectric heat pumpsElectric heat pump water heatersApproved central air-conditioningApproved natural gas, propane or oil water heatersApproved natural gas, propane or oil furnace or hot water boilersAdvanced main air circulating fansBiomass stoves using “plant-derived” fuel such as agricultural crops, wood pellets, grasses, etc
Expert:  Lane replied 2 years ago.
You can find a nice list of qualifying home improvement equipment from the EnergyStarweb site.
Expert:  Lane replied 2 years ago.
Other questions?
Expert:  Lane replied 2 years ago.
In terms of ongoing deductiions, of course your property taxes are deductibleMortgage interest as well.And that brings me to something that the Financial Analyst in me can't let go unsaid; Taking out a mortgage at 3.5% AND getting a tax deduction for the interest, and LEAVING the money in the 401(k)/IRA that's not only going to (1) cost you as much as 30 to 40% in federal, state and penalty taxes PLUS (2) forgo the ongoing growth over the next X number of years ... is a MUCH better move, from a purely financial/economic perspective. Let's say that your moderately conservative in the IRA and do 7% on average.If the mortgage costs you 3% after the tax deduction (FORGETTING about the amount that goes out the window for taxes and penalties on the distribution when you pull somuch out all in one or two tax years) you're still 4% to the better by letting the money grow and borrowing.
Expert:  Lane replied 2 years ago.
OK, I still don’t see you coming into the chat here … I’ll move us to “Question and Answer” mode … (We can still continue our discussion there, just not in real-time chat) … This way JustAnswer won’t charge you for for additional chat time and we can continue the dialogue. If this HAS helped, I would appreciate a positive rating (using the stars or smiley faces on your screen)… That’s the ONLY WAY I'm credited for the work here I’ll be waiting for you in the Q&A mode, in case you have other questions …..Please let me know if you have any questions at all …..Lane
Expert:  Lane replied 2 years ago.
Hi Joseph,
I’ve moved us to the Q&A mode so JustAnswer won’t charge you for more Chat time.
Please let me know if you need more here.
Customer: replied 2 years ago.

Don't qualify for 1st time.
Looks like I'll pay the IRS >20K
What can I deduct as construction costs?

Expert:  Lane replied 2 years ago.

Nothing, the costs of building the home adds to your basis.

When you SELL, that is when those costs will come into play, by lowering your capital gain.

Sales price minus basis = capital gain

And BASIS is your original cost to build or buy PLUS any capital improvements.

So sorry, pleas don't shoot the messenger here.