Lee from Atlanta, Georgia.
Lee says this: "I have a question.
Thinking of rolling my 401(k) into the purchase of a home.
I am 59 and a half.
So my question is, will there be any taxes on that move?
Could that money be transferred from the 401(k) office right into the loan?
This will be a purchase of a new home, if that is helpful."
Lee from Atlanta, appreciate the email.
I think he's confused a little bit.
He's like, there's a rollover, where you can roll over a 401(k) into an IRA.
He's saying, "hey, I wanna buy a house.
Can I just roll my 401(k) into a loan?" Right.
And the answer, Lee, is no.
I'll just tell you that, because it's a different kind of thing.
Notice how I looked in the camera just for a little. Anyway. (laughs)
So you're right, Joe.
You can you can roll over 401(k) to an IRA and not pay taxes.
You can roll, if you will, we call it a 1031 exchange when you have a rental property and
roll that gain in to another property via 1031 exchange.
But this is two different things.
You can't take a 401(k) and roll it into your home and avoid tax.
So what happens is that the entire distribution is taxable.
And we see people make this mistake, they think maybe because they rolled it to different
investment they don't have to pay tax. Right. It's,
"OK, well, I'm buying a house.
I have mutual funds, now I want to buy a home.
I'm not spending it.
I'm not taking it to the casino or the bar or taking the kids to Disneyland.
I'm actually buying an asset."
Yeah. So why should I have to pay tax?
Sure. First, it's a personal use asset.
And sometimes people think, "yeah I'll pay a little bit of tax, I'm in the 15 - er, now
let's just say I'm in the 12% tax bracket.
I'm going to take a $200,000 distribution from my retirement account, and then put a
down payment on this house."
Then they're calculating the tax - "well 12% on $200,000, that's not too bad."
But it doesn't work that way.
No, because you get thrown into a higher tax bracket.
And so not all of it is taxed at 12%, and then you got state taxes on top of that.
Right.
And guess what happens the next year?
When they take that money out, they're not automatically taxed.
So Lee, don't do this.
So you're taking the money out.
You're going to buy your house.
And you're moved in and you're loving it.
You're like, "Oh honey, we got our primary residence!
Isn't this great?"
And then April 15th of next year, you do your taxes.
Yeah, you do Turbo Tax and you're thinking, "there's something wrong with this program,
because it says I owe $80,000 of tax."
Exactly. And it's like, "well, how do we owe so much tax?"
Well because there was a 1099-R as a full distribution from your retirement account
as income.
And then that gets plugged in the situation.
Now you owe $80,000, $100,000, $200,000, whatever it is.
However much money you're pulling out of your retirement account.
And then where are you going to go to pay that tax?
Yeah, because you already used your 401(k).
You're selling your home! (laughs)
(laughs) Yeah I hope you had a good year!
Right, or you're in default.
I mean, really bad things can happen, because the numbers you see on your 401(k) statement
is not all yours.
It's not all your money.
Yeah you've got a partner.
And part of the confusion here is he's thinking, "I waited until 59 and a half so there's no penalty."
Right, there's no 10% penalty, but you still have to pay taxes on what you pull out.
All right Lee. Don't do it.