Personal Finance & Money Asked by Jason R on March 27, 2021
A friend of mine purchased a home last year after renting for a while. She is approximately 60 years of age. When considering how to finance the purchase, she considered two options:
She was hesitant to take the first option because of a less-than-ideal credit history and a desire not to be locked into another monthly payment in retirement (assuming the mortgage would have a 15+ year term). So, she went with the second option, and took a withdrawal from her retirement for approximately half of her total savings (I estimate around $60k was distributed).
Setting aside whether that in itself was a good decision, this spring she came to the unwelcome realization that she owes income tax on the large distribution, and hadn’t planned for it. Therefore, just coming up with the money to pay the income taxes she now owes for tax year 2019 will be a real hardship.
Does she have any good options here? If I had a time machine, I would go back and strongly encourage the standard home-mortgage option instead; she would be in a much better position now had she done so. Is there any means of “undoing” the distribution, for instance if she was able to mortgage the home now? I suspect that once the distribution is taken, the damage is done, but I wanted to ask the question here to see if she has any good paths forward.
Depending on her income level, she may be able to make a deductible contribution to a Traditional IRA for 2019. This may partially offset the large distribution taken.
Without knowing her full situation, it is impossible to know if this is a good idea.
Answered by Charles Fox on March 27, 2021
Another option to finance the tax payment could perhaps be to do a further 401k withdrawal; not ideal as it additionally accelerates the tax owed, but perhaps better than other options such as selling the house itself. Alternatively, it may be possible to reach out to the IRS to set up a payment plan for taxes owed that can be worked into a budget over the coming year(s).
Answered by Grade 'Eh' Bacon on March 27, 2021
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