401K Withdrawal rollover tax liability

Well before I make the big plunge I am in need of some help and second opinions are always handy. I am buying a home and must pay 20K in prepayment penalties and another 17K in closing costs. To get the montlhy payment I can afford on a

440K loan I will need to withdraw from my previous employers 401K plan. My plan is to pull out the minimum amount to cover the closing and to pay off car/visa debt that I am inheriting. If I pull out $40K (only 8K after tax) from my 401K how much will I need in mortgage interest & points to completely offset what is withdrawn from the 401K for the purposes to determine adjusted . The goal here is to NOT owe any fed/state tax. BTW I live in California. If I don't make this withdrawl for 1, I won't be able to afford the mortgage and secondtly I'll continue to pay up to 10% interest on the debt I've inherited. So if anyone has any brilliant ideas I'm all ears. Moderator: Please explain the nature of the inherited debt.

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Reply to
oregon747
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We interrupt with an important bulletin. Whatever you wind up doing, do a DIRECT rollover from the 401(k) to a traditional IRA first. Then take the money from the IRA. This will exempt $10,000 from the premature distribution penalty, thus saving you $1,000 in taxes. This exemption applies to distributions from IRAs, but not from 401(k)'s. See IRS Publications 575 and 590.

Can you restate this? I'm having trouble figuring out exactly what you're asking. If you take more than $10,000 you're going to owe a premature distribution penalty regardless of what else happens on your return.

-- Phil Marti Clarksburg, MD

Reply to
Phil Marti

OP,

Please further explain the situation. Your original post is filled with early withdrawal penalties, ordinary income taxes, points on mortgages, massive prepayment penalties, high closing costs, etc, etc. These things always make me nervous. Your 401(k) is with a previous employer, roll it over immediately. Have you taken advantage of the $10k for qualified closing costs on a house from an IRA in the past? What do you have available in the form of tax deductable HELOCs and such once you own the home? Do you have a current

401(k) available that may have low interest loan provisions? It sounds like your going to end up spending $50k to get into a new house and almost none of it will go towards equity. Is it imperative that you move? I don't understand how $40k is going to only be worth $8k after taxes (even 10% penalty and high tax brackets don't amount to $32k). Please explain the reasoning. Your goal should NOT be "to not pay any taxes." Your goal SHOULD be to make evey dollar you have work as efficiently as it possibly can. Spending $10 to avoid $9 in taxes will only do yourself harm. Also, contrary to popular belief, paying off debt is not always your best answer. 10% is not that high of a rate (especially for a short term situation). It doesn't sound like the debt is that large. Once again spending $10 in penalties/taxes to avoid $9 of interest expense is unwise. You may want to completely lay out your situation (with alot of detail) and get a better analysis from the groups before proceeding although I get the feeling you may not like what they have to say. This sort of situation has also been discussed at length on misc.invest.financial-planning good luck

Reply to
kastnna

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