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URL:  http://boards.fool.com/foolishmiser-on-option-1-capital-gains-do-not-29456705.aspx

Subject:  Re: Use 401K as collateral? Date:  8/4/2011  12:29 PM
Author:  gdett2 Number:  271 of 294

FoolishMiser,

On option 1, capital gains do not apply. All withdrawals are ordinary income.

Although I have never heard of what you propose in option 2, I believe you will still be paying taxes on the withdrawal.

Remember, an IRA, 401K and other qualified plans are somewhat like separate people for taxes. When they pay you, any withdrawal, it is taxable as standard income. The exception is the post-tax contributions. These cannot be targeted for withdrawal and a portion of them are mixed with the taxable withdrawals each year until only taxable remains.

Also, once you reach 70 1/2, RMD's will kick in and you will be forced to withdraw a certain percentage of the balance each year.

Of course, Roth IRA's do not have any of this tax/RMD business.

You can rollover the 401K account to a Traditional IRA without paying tax, but the same basic rules apply to withdrawals. IRS Pub 590 is for IRA's.

You may want to talk with a fee-only planner to get a complete picture about how to best manage this. $300 or $500 spent now can save a lot of problems in the future.

Another thing to consider is the annual expenses and how accurate your number is. I started planning for retirement using almost double what we ended up paying in reality.

Gene
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