I'm a 62 year old Alabama resident and I would like to know how to avoid paying high taxes on a 401k withdrawal used to buy land.

[xmasbaby0]

You are older than 59 1/2 so you will not have an early withdrawal penalty for taking money out of your retirement account.    But you will pay tax on the withdrawal.   You will get a 1099R that you have to enter on your tax return.  Using the money to buy land does not make it tax-free.   Are you confusing the rule about avoiding an early withdrawal penalty for making a down payment on a home from an IRA account before you are 59 1/2, perhaps?   

To enter your retirement income, Go to  Federal> Wages and Income>Retirement Plans and Social Security>IRA  401 k) Pension Plan Withdrawals to enter your 1099R.

[fanfare]

Once you take a 401k distribution, the toothpaste is out of the tube.

There's nothing you can do to avoid the tax.

[shadow8ski]

Thanks for the excellent answer. I just wanted to be sure there wasn't a trick I was missing. Got it. 

[shadow8ski]

I appreciate the answer. Thanks. 

[Opus 17]

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@shadow8ski wrote:

Thanks for the excellent answer. I just wanted to be sure there wasn't a trick I was missing. Got it. 

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The only trick is to spread the money out over time, but whether that makes sense depends on many circumstances, and if you really want help, you may need to see a financial advisor.

For example, if you are married filing jointly, your taxable income is taxed at 12% under $83,550, and 22% over that, a 10% jump.  

The first important thing to remember is that having income more than $84,000 does not make all your income taxable at 22%, just the amount over $84,000.  Second, you also get a standard deduction of $25,900, which means that your gross income can be up to $110,000 and you will still be in the 12% tax bracket.

So let's assume you want to buy property for $150,000, your wage income is $75,000 and you are not drawing social security yet.   

• You need to withdraw an additional $180,000 for the property all at once.  $60,000 will be taxed at 12% and $120,000 will be taxed at 22%, for a total tax of $33,600 on top of your normal taxes.  You pay the taxes and have "about" $150,000 left for the property. 
• Or, you could withdraw $56,000 in 2022, you would pay $6700 in taxes and $50,000 downpayment.  Then take a short-term mortgage for the rest, let's say 5% APR.  In 2023, you withdraw $56,000 and pay $6,700 in taxes, and the rest on the mortgage, and in 2024 you withdraw $56,000 and pay $6,700 in taxes and pay off the mortgage.  

At the end of 3 years, you have paid $20,100 in taxes plus $7500 in mortgage interest, for a total of $27,600.  Compared to the all at once plan where you pay no interest but $33,600 in taxes.

It's not a big difference but it is something.  Under the 3 year plan, you also withdraw slightly less from your 401k meaning the remaining balance can grow (depending on your investments.). (If you expect your investments to lose money, that may be a reason to withdraw the money now and pay the tax.)

It's complicated and no answer is right for everyone, but stretching out the withdrawals is the only way I know of to reduce the income tax.