I'm new to this so thanks for your patience, I recently rolled a 401k into an IRA after a job change. I now would like to withdraw $8k for home repairs and misc. expenses. My questions are: What percent of this amount is needed for taxes? I hear it's 20%, is this accurate? Are the taxes automatically withheld from the $8k? Or do I need to take 20% over the $8k? Is this going to be considered additional income for tax purposes in 2007? What about state taxes(Illinois)? Thanks in advance.
Taking the money from a tax qualified account should be your last resort for discretionary spending needs. You will pay ordinary income taxes on all of the money and an additional 10% penalty for early withdrawal if you are under 59 1/2. Your ordinary income tax bracket could be anywhere from 10% to 35%
Off the top of my head, you would need to withdraw about $13k from your IRA just to walk away with $8K if you are in the 28 to 33% tax brackets. You should consider a short-term loan from a banking institution or a home equity line (if available). If the loan term is fairly short you would pay less in interest than you would lose in taxes and penalties. Check an online loan calculator to confirm.
I am sure there are other other means of financing the project that I have overlooked, but your recommended avenue is ordinarily considered a last resort.
It's gonna be painful. You'll have to pay income tax on all that money plus, in most cases, a 10% penalty on top of that. The total percentage of course depends on your tax bracket and all that jazz.
Generally it's considered a humongous mistake to take an early distribution from your IRA.
Assumably, if you're repairing it, this work is for a home you own? If so, a home equity line of credit (HELOC) is usually a much better way to finance these things. The interest rates are generally variable, but the good news is that in most cases, the interest you pay will be tax deductible. Banks and credit unions have these, as do mortgage companies and they're very handy tools to have. They generally come with their own checkbook and drawing on the line is as simple as writing a check. It's a line of credit that is secured against the equity in your home, so the interest rate is generally quite a bit lower than unsecured debt such as credit cards since the risk to the lender is a lot lower.
BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here.
All logos and trade names are the property of their respective owners.