Tax on IRA distribution

guatnutMarch 6, 2011

I'm over 60 and want to take a distribution from my traditional IRA in order to buy a vacation home with cash. My question is how do I pay income tax on the distribution if I am short of cash to do so? Is it a smart move to take the income tax also out of the IRA? Has anyone done anything like this? Any suggestions are welcome! Thanks

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feedingfrenzy

That wouldn't be smart financial move, IMHO, because taking a large lump-sum distribution from your traditional IRA will push you into a higher, and maybe even a much higher, income tax bracket than you would be otherwise. That's because IRA distributions are taxed as ordinary income. So if you take a large amount out in one year, your total income for that year will be very high.

Instead of doing that, you could take out a short-term mortgage (10 years, say), and withdraw just enough each year from your IRA to pay the mortgage. Withdrawing the much smaller yearly amount won't have much, if any effect, on your tax bracket so the tax bite will be much smaller. It's true you'll be paying some interest on the mortgage, but interest rates are low now, and that would be balanced by the earnings on the larger amount of money you would have left in your IRA becasue you're not taking it all out up front.

Whoever holds your IRA will let you have the option of directing them to withhold a portion of your distribution to help pay the income taxes. Or you can elect to take the entire sum and put some money aside for that purpose yourself.

    Bookmark   March 8, 2011 at 7:16PM
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