Avoiding a higher tax bracket when withdrawing a 401k when retired.. How? (Real estate buyer)

[EngineerThis]

Avoiding a higher tax bracket when withdrawing a 401k when retired.. How?
We got a problem boys..
Long story short, my wife, new baby daughter, and I need a place to live.. Nowhere to rent, decided we should buy. Just we would ride the line of paycheck to paycheck.. My amazing mother (retired) and I came up with a deal. She would buy us a house with cash from her 401k. Amazing right?

She wants all her money out of the bank and into something in her control, such as gold, real estate etc. REGARDLESS.

We just found out today, that withdrawing the money counts as income.. Withdrawing the lump sum would mean it would push her into a higher tax bracket, meaning she'd have to pay almost 40% of that to taxes!!!!! The banker told her she would have to withdraw $700k to get $400k in cash essentially. OUCH!!!!

I understand paying taxes on the 401k, but it pushing her into a higher tax bracket seems absurd.

Tell me there is a way around this, like sending the money to an offshore account, an LLC.. Or something. She's very very angry, and it's disgusting. She's worked 40 years as a nurse, to find out her money isn't even in her control. WTF.

 

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[Kak]

Talk to an accountant. It's currently untaxed income sitting in an account. You have to look at those retirement accounts as worth about 60 percent of their stated value unless you dispurse very slowly.

Essentially, she doesn't have as much money as she thinks she does. Which is unfortunate, because she did earn every one of those dollars.

This is very generous of her. An amazing blessing.

The only two things I think I would look into is:

1. A self directed 401k (if there is such a thing) or seeing if you could convert it to a self directed IRA. With that IRA, MAYBE, she could buy a rental property that you can live in and you'd have control of a property and a differed tax situation. Again, ask an accountant if it's feasible.

2. She could also gift you money annually to pay the mortgage on a house with if the lower dispersion kept her in a lower tax bracket. You could then Form 709 it. Essentially paying for the home slower.

 

[biophase]

Avoiding a higher tax bracket when withdrawing a 401k when retired.. How?
We got a problem boys..
Long story short, my wife, new baby daughter, and I need a place to live.. Nowhere to rent, decided we should buy. Just we would ride the line of paycheck to paycheck.. My amazing mother (retired) and I came up with a deal. She would buy us a house with cash from her 401k. Amazing right?

She wants all her money out of the bank and into something in her control, such as gold, real estate etc. REGARDLESS.

We just found out today, that withdrawing the money counts as income.. Withdrawing the lump sum would mean it would push her into a higher tax bracket, meaning she'd have to pay almost 40% of that to taxes!!!!! The banker told her she would have to withdraw $700k to get $400k in cash essentially. OUCH!!!!

I understand paying taxes on the 401k, but it pushing her into a higher tax bracket seems absurd.

Tell me there is a way around this, like sending the money to an offshore account, an LLC.. Or something. She's very very angry, and it's disgusting. She's worked 40 years as a nurse, to find out her money isn't even in her control. WTF.

Well it is income. She deferred taxes up until now.

As @Kak mentioned, I would move it from a 401k into a self directed IRA/401k and then buy the home inside of it. This way the money doesn’t leave the retirement account and isn’t taxed. Of course, check with a cpa first.

Also, most people don’t withdraw their entire retirement lump sum at one time. They withdraw a little bit at a time which keeps them in a lower income bracket. That is how retirement accounts are supposed to work.

 

[EngineerThis]

A self directed 401k (if there is such a thing) or seeing if you could convert it to a self directed IRA. With that IRA, MAYBE, she could buy a rental property that you c

Well it is income. She deferred taxes up until now.

As @Kak mentioned, I would move it from a 401k into a self directed IRA/401k and then buy the home inside of it. This way the money doesn’t leave the retirement account and isn’t taxed. Of course, check with a cpa first.

Also, most people don’t withdraw their entire retirement lump sum at one time. They withdraw a little bit at a time which keeps them in a lower income bracket. That is how retirement accounts are supposed to work.

I will find a CPA and ask them this, thanks! And trust me, my Mom was never financially savvy, she's had a pretty big awakening in recent years and unfortunately, this wasn't the first big realization that she's not as protected as she thought and what she thought was hers.. Isn't. Appreciate it

 

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[biophase]

this wasn't the first big realization that she's not as protected as she thought and what she thought was hers.. Isn't.

What do you mean by this? A 401k is way more protected than money outside of it. It is protected from most lawsuits. An IRA is not.

 

[Kak]

And trust me, my Mom was never financially savvy, she's had a pretty big awakening in recent years and unfortunately, this wasn't the first big realization that she's not as protected as she thought and what she thought was hers

Careful with the pride about her lack of financial prowess when she's the one with the checkbook IMO.

Best of luck making it work.

 

[Antifragile]

Avoiding and Tax should never be in one sentence. Lest you wish a complimentary IRS probe up your …

Remember the saying, only two things in life are certain: death and taxes.

And all that was already said above. Good luck.

 

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[Kevin88660]

Avoiding a higher tax bracket when withdrawing a 401k when retired.. How?
We got a problem boys..
Long story short, my wife, new baby daughter, and I need a place to live.. Nowhere to rent, decided we should buy. Just we would ride the line of paycheck to paycheck.. My amazing mother (retired) and I came up with a deal. She would buy us a house with cash from her 401k. Amazing right?

She wants all her money out of the bank and into something in her control, such as gold, real estate etc. REGARDLESS.

We just found out today, that withdrawing the money counts as income.. Withdrawing the lump sum would mean it would push her into a higher tax bracket, meaning she'd have to pay almost 40% of that to taxes!!!!! The banker told her she would have to withdraw $700k to get $400k in cash essentially. OUCH!!!!

I understand paying taxes on the 401k, but it pushing her into a higher tax bracket seems absurd.

Tell me there is a way around this, like sending the money to an offshore account, an LLC.. Or something. She's very very angry, and it's disgusting. She's worked 40 years as a nurse, to find out her money isn't even in her control. WTF.

Seems like a workable solution is you and your wife taking up a loan while your mom can help to finance the downpayment.

I don't think you and your mom can get any workaround other than taking out the money slowly.

Any sort of paper engineering to game the system is too much risk and Uncle Sam doesn't take it lightly.

 

[EngineerThis]

Careful with the pride about her lack of financial prowess when she's the one with the checkbook IMO.

Best of luck making it work.

Just meant to say she's learned a lot now, and is wide awake

Just learned something. Fact-check me on this.. It's only the income that pushes you into the next tax bracket that gets taxed at that higher rate, not ALL of your income?
So your income up to $383k gets taxed at 24%.. And anything over that would be taxed at 32%.. Right? But this doesn't mean ALL your income will now be taxed at 32%.. Because of Margin brackets.
If true, this means her situation is not as bad as she was led to believe...

 

[Kak]

Just meant to say she's learned a lot now, and is wide awake

Just learned something. Fact-check me on this.. It's only the income that pushes you into the next tax bracket that gets taxed at that higher rate, not ALL of your income?
So your income up to $383k gets taxed at 24%.. And anything over that would be taxed at 32%.. Right? But this doesn't mean ALL your income will now be taxed at 32%.. Because of Margin brackets.
If true, this means her situation is not as bad as she was led to believe...

Yes the first however much is taxed at each rung. Then your next dollar is taxed at the new rate.

 

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[EngineerThis]

Yes the first however much is taxed at each rung. Then your next dollar is taxed at the new rate.

That is great news, that makes a huge difference! 401k guy apparently didn't communicate that part well to her yesterday.

 

[biophase]

Just meant to say she's learned a lot now, and is wide awake

Just learned something. Fact-check me on this.. It's only the income that pushes you into the next tax bracket that gets taxed at that higher rate, not ALL of your income?
So your income up to $383k gets taxed at 24%.. And anything over that would be taxed at 32%.. Right? But this doesn't mean ALL your income will now be taxed at 32%.. Because of Margin brackets.
If true, this means her situation is not as bad as she was led to believe...

And you have to add state taxes depending on the state she is in. And the bracket you mentioned is if she is filing married jointly. And over $487k is 35%.

 

[Bounce Back]

Please please please pay a cpa a couple hundred bucks to tell you the best way to do this. Pref get two CPA opinions and one wealth advisor from a reputable firm. When you are playing with hundreds of thousands you don't want to wing it based on internet advice.

 

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[MJ DeMarco]

Just meant to say she's learned a lot now, and is wide awake

Just learned something. Fact-check me on this.. It's only the income that pushes you into the next tax bracket that gets taxed at that higher rate, not ALL of your income?
So your income up to $383k gets taxed at 24%.. And anything over that would be taxed at 32%.. Right? But this doesn't mean ALL your income will now be taxed at 32%.. Because of Margin brackets.
If true, this means her situation is not as bad as she was led to believe...

Correct. They are marginal rates... first X at X%, next X at Y%, and so forth.

Altogether, your effective rate is the total amount paid / income.

Also you might want to find out if there are early distribution penalties. I think that is with IRAs, not sure with 401ks.

 

[Boogie]

Aside from your mom doing this for you, can you get a first time home buyer loan with a lower down payment so she doesn't have to take a financial loss by doing this in some sort of lump withdrawal?

Generally, as I understand it, you try to keep the amount you withdraw low to avoid the tax bracket jump and also to avoid having too much income and thus decreasing the social security benefit for the year. If you take too much as income the government decreases the amount it pays you. I think you effectively burn through your money faster instead of through theirs.

Your finance guy can help. I'm not one.

Some links that might be useful:

FHA loan requirements

FHA Loan Requirements in 2024

www.fha.com

For rural homes - and they don't have to be that rural - use the search tool there to help you.
Single Family Housing Programs

Also, can you widen your rental search area?