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in need of help regarding taking out retirement as a widow
Old 09-26-2011, 06:23 PM   #1
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in need of help regarding taking out retirement as a widow

sorry if this is the wrong section..

to be brief..

my father passed away a couple months ago at 65, my mother, now 54 only makes 1000 a month, and the house payment is around 2k, with another 1500 in other expenses. so thats about 3500 we need minimum, monthly.

there is approx 490k in my fathers retirement. we have a mortgage of about 350k.

my mother wanted to pay off the house with my dads retirement, since we cannot make this big payment, she got an estimate that they would take something like 190k in taxes!!

this would completely ruin all of our plans for the future.

is there something we can do? how come she doesn't fall into a widow's tax break or something of the sort? We are blown away at this huge tax

does this sound right to you or have we been misled?
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Old 09-26-2011, 06:32 PM   #2
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you have been misled. What type of retirement account is it: IRA, 401k, etc?
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Old 09-26-2011, 06:34 PM   #3
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It is difficult to respond to your concerns without more detail. Are the funds in an IRA, a 401(k), an annuity, ?? Does your Mom have other sources of income beyond the $1,000 she makes monthly? I ask because even if she were able to pay off the mortgage, there seems to still be a significant shortfall. Can she sell the house?

Sorry for your loss.
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Old 09-26-2011, 06:34 PM   #4
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Originally Posted by GuideMe View Post

there is approx 490k in my fathers retirement. we have a mortgage of about 350k.

my mother wanted to pay off the house with my dads retirement, since we cannot make this big payment, she got an estimate that they would take something like 190k in taxes!!

Can you say this over again as it doesn't make any sense to me. Maybe I'm just reading it wrong.
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Old 09-26-2011, 06:42 PM   #5
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I'm sorry for your loss.

It sounds like your late father's retirement account is pre-tax dollars in perhaps a 401k, where taxes are paid when the money is taken out? I don't know how inherited 401k's work, but otherwise, $190,000 tax on previously untaxed $450,000 seems about right if it were taken out all at once. That would leave only $260,000 to go toward the mortgage.
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Old 09-26-2011, 06:44 PM   #6
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Originally Posted by GuideMe View Post
sorry if this is the wrong section..

to be brief..

my father passed away a couple months ago at 65, my mother, now 54 only makes 1000 a month, and the house payment is around 2k, with another 1500 in other expenses. so thats about 3500 we need minimum, monthly.

there is approx 490k in my fathers retirement. we have a mortgage of about 350k.

my mother wanted to pay off the house with my dads retirement, since we cannot make this big payment, she got an estimate that they would take something like 190k in taxes!!

this would completely ruin all of our plans for the future.

is there something we can do? how come she doesn't fall into a widow's tax break or something of the sort? We are blown away at this huge tax

does this sound right to you or have we been misled?
So, what you are saying is that your father left a retirement account - an IRA or 401(k) with $490K, and if you withdraw that money you would have to pay $190K in federal and state income tax. Is this correct? The tax sounds a bit high, but if the retirement fund is in a tax deferred account, income tax needs to be paid when it is withdrawn.

It is possible that the tax rate would be much lower if your mother withdrew just enough to pay the mortgage. Is your mother's income from a job or social security benefits?
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Old 09-26-2011, 06:52 PM   #7
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you have been misled. What type of retirement account is it: IRA, 401k, etc?
it is so confusing we aren't even sure. Its through TIAA, if that helps at all. I can find out for sure though later if TIAA means nothing.

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Originally Posted by Achiever51 View Post
It is difficult to respond to your concerns without more detail. Are the funds in an IRA, a 401(k), an annuity, ?? Does your Mom have other sources of income beyond the $1,000 she makes monthly? I ask because even if she were able to pay off the mortgage, there seems to still be a significant shortfall. Can she sell the house?

Sorry for your loss.
there is also about another 900 total coming in from two rentals that we have. we really don't want to sell the house. we have been here 25 years.

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Can you say this over again as it doesn't make any sense to me. Maybe I'm just reading it wrong.

basically, we were told if we took out the entire amount of 490k in the retirement to pay off the 350k we owe on the house and put the rest into another property, they would tax us somewhere around 190k.
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Old 09-26-2011, 06:56 PM   #8
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I'm sorry for your loss.

It sounds like your late father's retirement account is pre-tax dollars in perhaps a 401k, where taxes are paid when the money is taken out? I don't know how inherited 401k's work, but otherwise, $190,000 tax on previously untaxed $450,000 seems about right if it were taken out all at once. That would leave only $260,000 to go toward the mortgage.
\
yes, I think thats the case.. not 100% sure though

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So, what you are saying is that your father left a retirement account - an IRA or 401(k) with $490K, and if you withdraw that money you would have to pay $190K in federal and state income tax. Is this correct? The tax sounds a bit high, but if the retirement fund is in a tax deferred account, income tax needs to be paid when it is withdrawn.

It is possible that the tax rate would be much lower if your mother withdrew just enough to pay the mortgage. Is your mother's income from a job or social security benefits?
Yes that is correct. Her income is from her job and from a rental property. both of which only bring about $1900 a month total
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Old 09-26-2011, 06:59 PM   #9
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Consider selling the house, leaving the money where it is and letting your mother draw from it monthly to pay rent or mortgage payments on a much smaller property.

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Old 09-26-2011, 07:01 PM   #10
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basically, we were told if we took out the entire amount of 490k in the retirement to pay off the 350k we owe on the house and put the rest into another property, they would tax us somewhere around 190k.
If you take all the money out, it all gets taxed as current income. You will then have to pay "rich-man" taxes as if you earn $490k per year. Hence the $190k tax. There may also be some early withdrawal penalties included in that figure.

A better way may be to take money out every year to pay the mortgage - and let the rest stay in the account. When your mom turns 60 she may be eligible for a widows Social Security benefit that could help. Or when she is around 67 years old she'll be entitled to your fathers full Socila Security payment.

If something like that doesn't pan out, then perhaps the house needs to be sold. Some tough choices will need to be made.
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Old 09-26-2011, 07:04 PM   #11
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my mother wanted to pay off the house with my dads retirement, since we cannot make this big payment, she got an estimate that they would take something like 190k in taxes!!

this would completely ruin all of our plans for the future.
Do you live with your mom? If so, do you have an income to help with the mortgage payements?
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Old 09-26-2011, 07:05 PM   #12
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If you take all the money out, it all gets taxed as current income. You will then have to pay "rich-man" taxes as if you earn $490k per year. Hence the $190k tax. There may also be some early withdrawal penalties included in that figure.

A better way may be to take money out every year to pay the mortgage - and let the rest stay in the account.

From what little you have posted, it seems that there is not enough to support the family reliably for the rest of your lives. Something is going to have to give... perhaps, Mom needs to work, or perhaps the house need to be sold.

Some tough choices will need to be made.
thats what her tax lady told her.. anyone with 200k in their hand is considered a big timer.

so there really is no way around taking this money out and putting it straight into property is there? other than taking it out gradually, which we were told was something like, if we took out 2k a month, they would take 600 each time.

were boggled :/
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Old 09-26-2011, 07:08 PM   #13
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Do you live with your mom? If so, do you have an income to help with the mortgage payements?
yes i do, for now being the circumstances. and I am not working at the moment but have been up at 7am every morning checking job sites.

this area took a huge hit in the market, 3-4 years ago this house was upraised at 850k... now its about 4-450 if were lucky
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Old 09-26-2011, 07:19 PM   #14
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if we took out 2k a month, they would take 600 each time. /
If they take $600 out she'll get most of it back when she files her income taxes at the end of the year.

If you take $2k a month out of the account and your mom makes another $1k/month that gives her an annual taxable income of ~$36k. With a mortgage interest deduction of (perhaps) $22k/year her taxable income is only ~$10k after the personal exemption.

That would mean annual federal taxes of ~$100 a month. Add in maybe $30/month to the state (depending on where you live) and her taxes would be only ~$130 a month not $600 as you posted.

if she claims a hardship withdrwal to support the house their will be no early withdrwal penalties.
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Old 09-26-2011, 07:46 PM   #15
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I know OP didn't ask for an opinion about using up all of the savings to pay off the mortgage but that doesn't normally stop us!

Does anyone else agree it's probably a very bad idea for her mom to sink all of her savings into the house? There would be nothing left for emergencies, personal or home maintenance. What if the house needs something very expensive like a new roof? Or what if her mom gets sick and needs money for life-saving medical care?
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Old 09-26-2011, 08:27 PM   #16
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Given the real estate market in most places, how likely is a quick sale at a reasonable price?
At $450,000 you are talking about a sale at about double, maybe triple, the recent median sales price.

It probably seems crazy, but depending on the details, you might be able to swing a refi if that would help. What are the details of your current mortgage?
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Old 09-26-2011, 09:36 PM   #17
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I know OP didn't ask for an opinion about using up all of the savings to pay off the mortgage but that doesn't normally stop us!

Does anyone else agree it's probably a very bad idea for her mom to sink all of her savings into the house? There would be nothing left for emergencies, personal or home maintenance. What if the house needs something very expensive like a new roof? Or what if her mom gets sick and needs money for life-saving medical care?

Agreed... putting all the money into the house doesn't seem like a good idea. And perhaps in the short-term taking distributions to make the mortgage payment could work. But looking further ahead, it sure seems that the house needs to be sold. Even without a mortgage payment, a big house means big property taxes, maintenance and utilities. Renting would be best, but downsizing to a small home is much better. Very tough decisions ahead...
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Old 09-26-2011, 09:59 PM   #18
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Agreed... putting all the money into the house doesn't seem like a good idea. And perhaps in the short-term taking distributions to make the mortgage payment could work. But looking further ahead, it sure seems that the house needs to be sold. Even without a mortgage payment, a big house means big property taxes, maintenance and utilities. Renting would be best, but downsizing to a small home is much better. Very tough decisions ahead...
+1

A 4% withdrawl rate (which may be too aggressive given mom is only 54) would allow for only $19,600 to be withdrawn from the $490k each year. I think it's pretty clear she cannot afford to remain in this house unless one or both of you start working immediately. I'm sure this is not what you want to hear, but IMHO the longer you stay in the house without adequate financial resources, the more your mother's financial future is endangered.
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Old 09-26-2011, 10:05 PM   #19
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I know OP didn't ask for an opinion about using up all of the savings to pay off the mortgage but that doesn't normally stop us!

Does anyone else agree it's probably a very bad idea for her mom to sink all of her savings into the house? There would be nothing left for emergencies, personal or home maintenance. What if the house needs something very expensive like a new roof? Or what if her mom gets sick and needs money for life-saving medical care?
For sure. See my post #9 above.

His (her) Mom would likely qualify for senior housing; of course then junior would be on his own.

I am not sure we are not being trolled.

This is essentially no big problem, but he seems committed to the idea that it is and that there is only one way to proceed.

Ha
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Old 09-27-2011, 12:01 AM   #20
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Before U do "anything" U need to find out what restrictions & penalties there are on removing any money from the account. "Dont touch it till U know for sure". Dont touch it till U have a complete plan and understand all the nuances. If the guidelines are similar to an IRA she should look into something called a "STRETCH IRA" with very specific rules. See if this applies. See if she can redo the mortgage or sell the house. Maybe a roomate. But the LAST thing I would do would be to use the money to pay off the house!! Maybe she could go to the bank and see if she fits into one of the Obama Mortage redos!! REPEAT, I would nevewr use that money to pay off the house. Get educated and make a game plan
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