Originally Posted by capt2036
My mother is retiring this month and is trying to find a way to avoid any taxes on a 401K disbursement. She wants to purchase a second home for me ( her son) and pay cash rather than financing it but is afraid she will be hit with a high tax on the money she withdraws ? Is there any way she can do this to avoid a huge tax bill ?
Make it a rental ?
Her home residence is in California, I live and the 2nd house would be in Wisconsin. She'll be 62 this year and with a retired pension from her employer
any suggestions ?
My mother is retiring this month and is trying to find a way to avoid any taxes on a 401K disbursement. She wants to purchase a second home for me ( her son) and pay cash rather than financing it but is afraid she will be hit with a high tax on the money she withdraws ? =========>>Generally, she has to pay income tax on 401(k) withdrawals and, in some instances, she may also has to pay tax penalties. If her 401(k) plan has a provision for a Roth 401(k) , then, your mother can potentially avoid both income tax and tax penalties on her withdrawals. Employer contributions to 401(k) plans are always made with pretax money, and employee contributions generally are pretax as well. She has to pay her state and federal income tax on both the original contributions and the account earnings at the time of withdrawal.Most other types of withdrawals are nonqualified and subject to a 10 percent federal tax penalty in addition to regular income tax. there are a couple of ways to tap the funds in her 401(k) well before retirement without incurring taxes and penalties; Once she reaches 59 1/2 years old,she has an option. she can cash out entirely and pay ordinary tax on the investment income. At some point, your mother will pay taxes to withdraw that money, but she won't right away. If she tries to take money out of her 401(k) before she turn 59 1/2, the funds are taxed as regular income plus, she'll get hit with a 10% early withdrawal penalty. One way to tap the cash in her 401(k) is to take out a loan. Most 401(k) plans allow you to borrow up to 50 % of your balance or $50K ,the IRS maximum, at competitive interest rates. The loan has a fixed 5 year term with payments deducted directly from her paycheck. Even better, 401(k) loans don't count as a taxable event as long as she pays them back on time. The chief drawback of a 401(k) loan is that the money your mother borrows could've been accruing interest for those 5years. The only other way to withdraw money early from a 401(k) without paying the 10 % penalty is through IRS rule , which allows her to deduct a fixed amount annually based on her age. The closer you are to 59 1/2, the more you receive each year, and you have to make the deductions for a minimum of five years As always, there's a catch: The money is taxed as income.
Is there any way she can do this to avoid a huge tax bill ?=========>>As mentioned above