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Because the money in your 401(k) has never been subject to income tax, all withdrawals for any reason will be taxed as ordinary income. Furthermore, if you take a premature (generally, under age 59 1/2) distribution from your 401(k) to purchase a home, the distribution will additionally be subject to a 10% penalty tax. You make take an early distribution of up to $10,000 from an IRA to pay qualified acquisition costs to purchase, build, or rebuild a first home without incurring the 10% penalty tax. The distribution will still be subject to income tax. http://www.irs.gov/publications/p590/ch01.html#d0e8323 First Time Home Buyer Tax Credit If you purchased a home for your principal residence after April 8, 2008 and before July 1, 2009, you may be eligible for a First Time Home Buyer Tax Credit of up to $7,500 for your 2008 tax return. To be eligible for the credit, you must not have owned a home as a principal residence in the previous 3 years. http://www.efile.com/tax-deduction/income-deduction/home-deductions.asp
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Is it best to put money into 401K and pay taxes at earned income rates or pay taxes up front and pay capital gains and dividend rates?
There are a few different ways to answer this question. * First, it matters whether or not your employer matches any of your 401(k) contributions. Ninety percent of employers …do; if yours does too, you'll want to begin by putting at least as much money into the 401(k) that your company will match. For example, let's say your company will match 25 cents for every dollar you contribute up to 6% of your income. You make $100000 per year; 6% of your income is $6000. So, you contribute $6000 to your 401(k) and your company kicks in $1500 (25 cents for every dollar you put in, up to 6% of your income). You can certainly contribute more than 6% of your income (although no more than 35% of your income or, for 2007, $15500), but you want to give enough to get the company match; otherwise, you're leaving free money on the table. * Second, regardless of whether or not your company matches your 401(k) contributions, you should consider opening a Roth IRA (individual retirement account). Unlike the 401(k), in which your contributions are pre-tax (meaning that you make your contributions out of your salary and then pay taxes on the amount that's left; that leads to fewer taxes now, but then you pay taxes when you withdraw the money in retirement), Roth IRA contributions are after-tax: you pay taxes now but then you can withdraw the money for free in retirement. This is wonderful for several reasons: 1) Tax rates are at historic lows right now, so the odds are good that we'll all pay significantly more taxes in the future; that makes both the 401(k) option and your idea of investing in the market outside of a retirement account not quite so good. You don't know what the future tax rates will be, and the odds are that they'll be higher; the Roth IRA takes away that problem. Pay (relatively low) taxes now, and take the money out for free later. 2) Since you can't save a significant sum per year in Roth IRAs ($4000 in 2007 if you're under 50), you'll still need to save for retirement in your 401(k) plan (or elsewhere), and so having a 401(k) where you will pay taxes and a Roth IRA where you won't pay taxes gives you what the experts like to call "tax diversification." When you retire, you'll then have some options about which account to pull money from so that, depending on several factors (such as what your income bracket is that year, whether you sold your house or stocks, etc.), you'll be able to decide whether you want to take out money from an account where you'll owe taxes or where you won't. 3) Lastly, since you contribute to a Roth IRA with after-tax dollars, those dollars count for more: you get to keep every single dollar you pull out in retirement. In a 401(k), you'll have to use some of those dollars to pay taxes, so not all of those dollars that you put in the 401(k) are really for you--you're putting away some of them for the IRS. So--long answer short--your best bet is to invest in your 401(k) first if there is any company match. Don't leave free money on the table--it's like you're forfeiting part of your salary. Invest only up to the match, and then put the rest of your money in a Roth IRA (such as a Vanguard Total Stock Market index fund). Contribute the full $4000/year to a Roth IRA. If you have money leftover you could consider investing it in the market, as the long-term capital gains and dividend rates are likely lower than your tax rate--but that's not a good plan if you're investing this money for retirement, as these rates expire in 2010 and there's no guarantee they'll stay low. So a safer strategy would be to invest the extra money (after you've made a full $4000 contribution to your Roth IRA) back into your 401(k). While I was typing my contribution someone else submitted one, which actually points out some different takes I hope I address. This is certainly a question that every financial type has an opinion on. I find it is frequently shaded by where they earn their fees, and which items they weigh more heavily than others. I believe they all would agree that your personal financial situation, age, expected needs, and more, etc., all enter the equation. Unquestionably, the comparison is really more in line with deciding on contributing to a before tax IRA or an after tax one, called a Roth IRA. I believe that in a 401(k) situation, the fact that there is normally a matching of at least some part of the contribution, by the employer, (frequently 50% of the first 6% of your salary) contribution, would mean virtually everybody would agree that is a "must" take advantage of at least. (You contribute 6% and get credit for 9%). Contributions above that (to the allowed 15% of salary) would be the question. First most planners would say you need to have some after tax money as an emergency fund…3 to 6 months needs is the amount you commonly hear. Again, more or less depending on your personal situation. But that seems logical and indisputable. So, once you've done the basic "musts", got an emergency account, taken advantage of matching benefits, paid off credit cards, etc., should you IRA or Roth (or 401k or not) with the additional funds you are saving for long term or retirement? Personally, I go with some steadfast ideas: Especially as Tax rates are now historically decreasing, the main new tax revenue ideas revolve around making a National sales tax and changing what income is taxable or expenses dedcutible (like eliminating home mortgage interest deduction) or such.. all these things would still effect you if you paid income tax on the current investment funds, yet get you no benefit. I am a tax expert...(more degrees than a thermometer as the saying goes)…and a tax planning ruke that is virtually ALWAYS true says: …Don't pay taxes now that you can otherwise pay later… I vote for the before tax investment. (And consider, it isn't just held to retirement, however many years that may be, but may well be finally withdrawn and taxed 20 -30 or more years after retirement). Some thoughts on that same line: What if the tax ideas we're seeing actually eliminate (or really start to replace) the income tax….do you think the Feds will give you a refund? Unlikely. You'll have paid a tax you don't have to. (Rates, while low , are political suicide to increase, is considered economically regressive, and again, holding rates but increasing the tax base works fine....or going to a new program altogether). What if your life takes a change....you end up in Europe...or someplace. US ain't sending you a refund. Pay today means pay the State today. Then retire to Florida ot Nevada, etc. So I would pay NJ (or NY, or Calif, etc.) 9+% now, and like so many, retire where there is no income tax? Bad investment. Paying with future dollars are deflated dollars. The more assets you have, the better. Taxes paid are not an asset. Investment accounts are. Something many seem to ignore: The money in IRA/401k is generally treated specially in many life situations; exempt from bankruptcy/seizure; lawsuit, etc. Your other assets are just an attraction to the vultures. Very Importantly -- Inherited without tax - giving a new stepped up basis to your beneficiaries (so if you die and paid tax on your invested funds, that is money your family won't get. If you didn't pay the tax, that money will pass to them and essentially NEVER be taxed). And unless you spend all your returement funds (which is uncommon), this may well become a big part of your estate. While intended for long term and retirement, (a real and big need), it is still available under many programs for housing/education, etc. Presumably, when your withdrawing from the account your no longer working (even true if a hardship period). Your income is low, your income tax rate is lower. (Your other expenses may be too). What you withdraw is rateably taxable. In a taxed account, the gains and dividend taxes really cut into what your realizing on the investments as you go along..agreeably you MAY have to pay them in the future. However, if you expect to lose money on your investments, do it in a taxable account. (Losses in a taxable account may well be used to offset current income…but not in a non taxable one.) Finally - Just the idea that the governments solution to fears of social security, economy, etc., and people wanting to save more for retirement is to override years of promoting tax deferring plans, and say essentially, the way to do it is to pay them more taxes now...seems fishy and I'm sort of leary about!
Distributions from a 401k are taxed like any other income. So, it depends on how much you are receiving each year. If you receive $30,000 a year from your 401k, you will… be taxed the same as any person who makes $30,000 per year.
NO. The taxable amount of any distributions from your 401K will be added to all of your worldwide gross income and be subject to the federal income tax at your marginal tax ra…te. It will not make any difference what you use the funds for because the contributions amount to the 401K were NEVER subject to income tax in the year that they were made as a part of your deferred compensation plan.
NEWS ALERT: YOUR IN BANKRUPTCY...YOU HAVE TROUBLE HANDLING FINANCES, You have more debt than you can handle...COMMON SENSE: BORROWING MORE TO GET OUT OF DEBT DOESN'T WOR…K! Don't do it, don't do it, don't do it! Your 401k is exempt from seizure under virtually all circumstances...including bankruptcy. (Example...OJ Simpson, owed a lot to the Browns after they won the wrongful death suit....they could take his Heisman trophy, his cars, his future income from autograph signings, etc, etc....and did and continue to. As a judgement, he can't even escape it through BK. But, they can not touch his multi million dollar 401k/IRA.) If you take a loan against the 401k, the money is no longer protected...it can and will be taken by creditors...given the opportunity....and since your already in serious financial problems now... it's highly possible that can come about. Then your left with a new debt to pay off, that uses up your 401k....and nothing else. Well, something else - you'll have a big new tax bill and debt, because not paying back the loan of the 401k is the same as withdrawing it...so you pay a penalty and everything becomes income! (Rule of thumb, depends on State, but when it becomes a withdrawal, which happens many, many ways, you should consider tax and penalty to be @40% of what you took out). Don't do it, Don't do it, Don't do it! Read the News Alert Again: Making a new debt can only make your problems worse. Now...as maybe a more direct answer: There probably isn't a law against your borrowing from the plan. However, depending on your BK, especially in a C13 though, you agreed to only make financial changes with the approval of the trustee. Failing to do so is almost always responded to first by the BK protection being ceased, and sometimes by fraud charges because not keeping your promises to the court falls under that. Finally, the trustee has a right to the funds when taken out and would want them to pay the creditors in the order required by law/the plan. That may or may not include the IRS. Your paying the IRS would be considered a preferential payment by the other creditors, and they would likely succeed in having the money returned to them.
59 1/2 years of age normally, but I think there is a hardship clause that will allow distributions at 55.
I would say yes. You are taking a distribution of monies you never paid taxes on.
Yes. But, in each case you would pay the penalty and tax on the withdrawal as income that year.
Generally, your contributions aren't taxed (put in before taxes), and your withdrawals are taxed.
You can take money out of a 401k if you leave the company, your employer dissolves the plan, you qualify for a limited number of hardship exceptions, or you reach the "retirem…ent age" specified in your employer's 401k plan. You will have to ask your employer or check the plan documents to find the age. To avoid the 10% excise tax ("penalty") on early distributions, you must be age 59 1/2 or you must have left your employer in the year you reached 55 or later.
Do I ay taxes on.my 401k at age 62
Distributions from your 401K after you reach your retirement age the taxable amount will be subject to federal income tax at your marginal tax rate and may be subject to some …state income tax.
By withholding I will guess that you mean the amounts that you are contributing to your 401K BEFORE income taxes (deferred compensation amount) that will not be subject to the… income taxes during the year and will reduce the amount of your taxable gross wage amount that is reported in box 1 of your W-2 form at the end of the tax year. The deferred contribution amounts will be subject to income tax in future years when you retire and start receiving distribution the taxable distribution amounts from your 401K plan and at that time the taxable amounts will added to all of your other gross worldwide income on your 1040 income tax return and subject to the federal income tax at your marginal tax rate.
There is a tax on the amount of profit you make on the sale of a home - sale price less the original purchase price. However there are some exemption rules if the home is your… primary residence. Definitely consult with a tax professional to make sure you are taking advantage of all of the exemptions. ans It is a fairly broad rule, with fairly easy to meet qualifications (lived in for the last several years, etc) that make the sale exempt.
Would you ever recommend someone to take money out of their 401k and use it to pay down their mortgage and if so is this allowable as a hardship and what tax implications would apply?
You should make an appointment with your tax accountant or a financial advisor who can review your economic status and then apply expert advice. You should make an appointmen…t with your tax accountant or a financial advisor who can review your economic status and then apply expert advice. You should make an appointment with your tax accountant or a financial advisor who can review your economic status and then apply expert advice. You should make an appointment with your tax accountant or a financial advisor who can review your economic status and then apply expert advice.