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
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
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.