IRA and 401K withdrawls

[NMTall]

We are looking at moving to a senior living community which will require an up-front payment of $400K to $500K. How can I withdraw funds from a 401K or IRA to do this without a huge tax payment? I am 70 now. 

[Holly W1]

Hello @NMTall 

Thank you for joining us today, we are so happy you are here!

Great question!  When you (and or your spouse) were contributing to your 401k, it was contributed with pre-taxed dollars, so typically when you make the withdrawals,  they are taxable. 

As for the IRA, is it a Traditional or Roth?  If it is a traditional, then you pay taxes on the distributions, if it is a Roth, then you your distributions are tax free.

You may be able to take a temporary loan on your accounts, but you will have to check on each Plan if that is an option.  Here is alink for more information:  https://www.investopedia.com/ask/answers/081815/can-i-take-my-401k-buy-house.asp   

One way to soften the tax burden is to have taxes withheld from your distributions, and only withdrawal what you absolutely have to withdrawal.  Try to use other sources that may be available, such as loans mentioned above.  Do you have stocks that you might be able to sell?  Stock gains, depending if it's long term or short term, may be taxed at lower rate.

I hope this is helpful, and please let me know if you have further questions!

Cheers, 
Holly W

 

[Katherine S 63]

What a great question!!

When you take money out of a retirement account, it will be subject to taxes.  The only account that would not be subject to taxes would be a Roth 401K or Roth IRA.  If you have Roths, then it might be best to take the money out of these accounts.  If you own a home, it might be best to sell that home and use the proceeds to pay for the retirement community.

Having exhausted all of those other possibilities, when taking the money out of your 401k or IRA, that are not ROTH, you might consider taking half in 2023 and half in 2023 so that you spread it over two years.  This way you would maybe stay in a lower tax bracket.

Tax Rate	Single filers	Married filing jointly or qualifying surviving spouse	Married filing separately	Head of household
10%	$0 to $10,275	$0 to $20,550	$0 to $10,275	$0 to $14,650
12%	$10,276 to $41,775	$20,551 to $83,550	$10,276 to $41,775	$14,651 to $55,900
22%	$41,776 to $89,075	$83,551 to $178,150	$41,776 to $89,075	$55,901 to $89,050
24%	$89,076 to $170,050	$178,151 to $340,100	$89,076 to $170,050	$89,051 to $170,050
32%	$170,051 to $215,950	$340,101 to $431,900	$170,051 to $215,950	$170,051 to $215,950
35%	$215,951 to $539,900	$431,901 to $647,850	$215,951 to $323,925	$215,951 to $539,900
37%	$539,901 or more	$647,851 or more	$323,926 or more	$539,901 or more

Hopefully this graph looks okay when I click reply but if it does not, you can get it at this link:  https://turbotax.intuit.com/tax-tools/calculators/tax-bracket/

You can click on it or copy and paste it into a browser.

Let me know if you need more assistance,

Katie S.

[NateTheGrEAt]

In addition to Holly's terrific answer, let me add a tax planning consideration. I don't know what timeframe you are planning to move, nor what other income you may have, but spreading a large withdrawal over two tax years could potentially reduce your taxes somewhat by keeping you in a lower tax bracket. 

For example, if you need a total of $400K, you could look at withdrawing $200K this fall and $200K in January 2024. 

Here's a great TurboTax article about tax brackets that you could use to assist in this type of planning.

Hope this is helpful. Good luck on the move!

[TaxLadySusan]

Tapping your retirement funds will have a tax affect.  I would look at different ways to finance that move if possible.  You may want to visit with a CPA or financial advisor who can do a tax projection since taking such a large amount of your retirement savings will cost you.  Weighing the tax consequences of the distribution against financing the money needed could provide you with insight needed for future costs/needs.  I'd hate for you to deplete your life savings to make this happen.  If you believe you have enough income to offset living expenses for the next decade and have the liquidity to take such a large distribution then go for it!  Stay informed each step of the way!