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Author: artist66 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 19483  
Subject: tax on the 401K Date: 8/7/2001 2:09 PM
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When I retire at 62 I plan to buy a house (I have never owned a home before) At that time I plan to take reduced social security and will not get a pension until I am 65year old. I plan to either pay for the house in full or put a large down payment to keep down monthly payments. I will take this money out of my 401K. After this withdrawal for my home there is not much left, as far as savings or earning potential. Tax is the question--how much or what would the taxes on the 401K money be based on. Are there any breaks for a first time house buyer?
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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7230 of 19483
Subject: Re: tax on the 401K Date: 8/7/2001 2:42 PM
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Greetings, Artist66, and welcome. You asked:

When I retire at 62 I plan to buy a house (I have never owned a home before) At that time I plan to take reduced social security and will not get a pension until I am 65year old. I plan to either pay for the house in full or put a large down payment to keep down monthly payments. I will take this money out of my 401K. After this withdrawal for my home there is not much left, as far as savings or earning potential. Tax is the question--how much or what would the taxes on the 401K money be based on. Are there any breaks for a first time house buyer?

Assuming you have made no after-tax contributions to your plan, then any amount you take from your 401k will be taxed at ordinary income tax rates in effect in the year you receive that distribution. Therefore, the income taxes you must pay in that year will depend on where that added income places you in the income tax rate tables in effect at that time. You will get no special treatment based on your home purchase.

Regards..Pixy

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Author: rjm1 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7231 of 19483
Subject: Re: tax on the 401K Date: 8/7/2001 4:38 PM
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When I retire at 62 I plan to buy a house (I have never owned a home before) At that time I plan to take reduced social security and will not get a pension until I am 65year old. I plan to either pay for the house in full or put a large down payment to keep down monthly payments. I will take this money out of my 401K. After this withdrawal for my home there is not much left, as far as savings or earning potential. Tax is the question--how much or what would the taxes on the 401K money be based on. Are there any breaks for a first time house buyer?

You have to run the numbers but it might be cheaper to borrow most of the money and take the mortgage payments from the 401k each year.

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Author: mawhinney Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7233 of 19483
Subject: Re: tax on the 401K Date: 8/8/2001 9:04 AM
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When I retire at 62 I plan to buy a house (I have never owned a home before) At that time I plan to take reduced social
security and will not get a pension until I am 65year old. I plan to either pay for the house in full or put a large down
payment to keep down monthly payments. I will take this money out of my 401K. After this withdrawal for my home
there is not much left, as far as savings or earning potential. Tax is the question--how much or what would the taxes
on the 401K money be based on. Are there any breaks for a first time house buyer?

You have to run the numbers but it might be cheaper to borrow most of the money and take the mortgage payments from the
401k each year.

For us "non'accountant types" how does one run the numbers on the above scenario?
Mawhinney

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Author: mldorsey1 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7234 of 19483
Subject: Re: tax on the 401K Date: 8/8/2001 10:41 AM
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I am not an accountant. But "run the numbers" would be comparing the after tax income and expense of paying cash or using a mortgage. Leaving your 401K intact except for payments and being in a lower tax bracket possibly are two of the factors.

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Author: saml72933 Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7235 of 19483
Subject: Re: tax on the 401K Date: 8/8/2001 10:59 AM
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"run the numbers" would not be as simple as one might think.

Factors needed, in addition to mortgage interest rate and taxes on the withdrawal, would be what the earnings would be in the investment vehicle if the funds were left there instead of being used to purchase the home. This you do not know. You would have to estimate this factor, therefore your "numbers" could be off the mark by a considerable amount.

Sam

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Author: rjm1 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7237 of 19483
Subject: Re: tax on the 401K Date: 8/8/2001 12:17 PM
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For us "non'accountant types" how does one run the numbers on the above scenario?
Mawhinney

This can get pretty detail and one may want to have a CPA help then if they are not sure.

But to give you a simple example with numbers pulled out of the air.

Take 100,000 from 401k. Pay state and federal taxes of 35,000. Leaves 65,000 for the house.

Lets say mortgage payments are 6000 a year. Now you combined tax rate might be 20% or 1200 a year.

The point is the tax rate is a lot lower on the small withdrawls and the tax saving (never paying at the 35% rate), growth of assets in the 401k etc maybe a better deal than paying 401k cash for the house.

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Author: gurdison Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7243 of 19483
Subject: Re: tax on the 401K Date: 8/8/2001 2:07 PM
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<The point is the tax rate is a lot lower on the small withdrawls and the tax saving (never paying at the 35% rate), growth of assets in the 401k etc maybe a better deal than paying 401k cash for the house.>


Another factor is that you are considering the 100k as all of the persons income for the year. If they retire late in the year they may have significant wages and/or investment income which could place them into an even higher tax bracket. Also if they happen to live in the Peoples Republic of California, they will be paying another 9% in state taxes.

The one part of the question that I find interesting is why the poster is buying their first house AFTER retiring. Most people want to simplify their lives in retirement. One point that many retirees look forward to is having lower living expenses. Another thing to consider is being prepared to deal with the hassle of getting a mortgage at age 62. It may very well depend on how you plan to structure it and how much you will use for a down payment.


BRG

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Author: mawhinney Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7244 of 19483
Subject: Re: tax on the 401K Date: 8/9/2001 4:58 PM
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The one part of the question that I find interesting is why the poster is buying their first house AFTER retiring. Most people
want to simplify their lives in retirement. One point that many retirees look forward to is having lower living expenses. Another
thing to consider is being prepared to deal with the hassle of getting a mortgage at age 62. It may very well depend on how you
plan to structure it and how much you will use for a down payment.

The poster did not mean to infer that they were buying their first home.
The future retiree plans to move to a new location and buy a home there.

What would make it more difficult to get a mortgage after age 62? If the retiree has sufficient colateral and good credit ratings, why would it be more difficult?

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Author: mawhinney Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7246 of 19483
Subject: Re: tax on the 401K Date: 8/10/2001 8:37 AM
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The one part of the question that I find interesting is why the poster is buying their first house AFTER retiring. Most people
want to simplify their lives in retirement.

Opps! My apologies as I thought your statement referred to a statement I had made. In the middle of the night I realized you were referring to someone else. Blame my lack of clear thought on the sweltering heat and no A/C.
Mawhinney

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Author: rollinstone Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7250 of 19483
Subject: Re: tax on the 401K Date: 8/11/2001 12:09 AM
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My advice?...don't pay for the house in full. As a matter of fact, consider not even buying a house! Rent instead. At 62 and older, you might want to have the felxibility to pick up and travel at the drop of a hat. Not having a house sure makes it easy to get around. If you just gotta have a mortgage, consider a condo...again, flexibility. But each to his/her own. Houses are nice and it's great to have a a place of your own. But, again, don't recommend paying for the house in full. Basic rule of money...use other people's money, i.e. the bank's, to finance your investments.

r.s.

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