I recently received the following email –
“I moved to Georgia with my wife and daughter and we recently purchased a home! I am planning on rolling over some money from a 401(k) account to my government retirement account. When I do this, I wanted to withdraw some to go into some home projects. I know when I had to do this before you suggested I withhold certain percentages for tax purposes. How much should I have them withhold?”
Here is my response -
“Good luck in your new home in Georgia.
A premature withdrawal/distribution from an employer pension plan is the most expensive, and probably the worst, source of funds. I do not recommend doing this.
1. You will pay a 10% premature withdrawal penalty.
2. You will pay 22%-24% in federal income tax, depending on your level of income. {based on my knowledge of the taxpayers' level of income}
3. You will most likely also pay Georgia state income tax (I have absolutely no knowledge of GA state income tax).
You will pay up to at least 40% of the amount withdrawn in tax and penalties. Only 60% of what you take will remain in your pocket.
It is “more better” to take a loan from an employer account, if the plan allows for loans, than to take an actual withdrawal.
It is also better to use home equity debt if available, which may be deductible if the money is used to “substantially improve” your home. This is perhaps the cheapest alternative.
Personal loan interest is higher than home equity debt, and not deductible, but it is still cheaper than taking money from an employer pension plan like a 401(k).
If you MUST use a distribution from your employer plan I would have at least 30% withheld for federal income tax and an appropriate amount withheld for GA state income tax, based on your GA marginal tax rate.”
Hey, fellow tax pros – do you agree with my answer?
TTFN
No comments:
Post a Comment