401K withdrawal to pay debts

Forum|Forum|6 years ago
November 27, 2019
3 replies
24 views

1) Age: 58.5 years old
2) On Disability Income
3) Own 1 house
4) In debts about 75K
5) Need to cashout (early withdraw) 100K to pay off debts (at the end of 2019?) and to fix my home for rental (rent out 3/5 house)
6) 1 child in college (3 more years to go)

Plan to rent 3/5 of my house to get rental income and get out of my debts. I hope to have some rental income (the year 2020). Please help me understand:
A) When is the best time for me to take 100K from 401K? Now (end of 2019) or 2020? Given my disability income, the only other income would be my future rents (if I'm lucky). Maybe I should take it out in 2019 instead of 2020.

B) Since I need to fix my house for rental. I shall spend a sizeable amount to replace or fix my old appliances. Can I deduct the expenses that I spent now (2019) in the 2020's tax return since my rental income won't be coming in until the year of 2020?

Thank you very much...

NCperson

Level 15

when do you turn 59.5? there is a 10% penalty on withdrawals until that time.

dmertz

Level 15

Distributions made before age 59½ are subject to a 10% early-distribution penalty unless an exception applies. Depending on the nature of your disability, you might be able to claim the disability exception, but the tax code as implemented by the IRS has its own definition of "disabled."and requires separate justification from whatever was required to get your disability income.

Another exception applies if with regard to the employer providing the 401(k) plan you separated from service in or after the year you reached age 55 (age 50 for public safety employees).

Regardless, avoiding the early-distribution penalty is easiest if you just wait until you reach age 59½ (a full 6 months after your 59th birthday).

Keep in mind that 401(k) assets are protected in bankruptcy. Money that you take out of a 401(k) is no longer protected in that way.

Critter

Level 15

Also to consider would be if or how it will affect your disability income ... ask the payer of the disability if taking a retirement distribution will stop the disability payments or change them.

Also to reduce your tax exposure consider splitting the distribution into more than one tax year. Seek local professional guidance in this matter to tax plan wisely.