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Tax impact on LSD off my Pension
Old 05-12-2011, 08:03 AM   #1
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Tax impact on LSD off my Pension

I am planning to take a LSD on a small penion I have to pay cash on a new home in my retirement state. I have a Military pension that I am already drawing. I also plan to do consulting work for an additional 5 to 10 years.

Trying to figure out the tax impact of taking the LSD and if using oit to buy my first home provides any kind of tax break.

Thanks
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Old 05-12-2011, 08:25 AM   #2
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My first inclination was to warn against taking LSD but then I realized you were asking about a lump sum distribution...
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Old 05-12-2011, 08:26 AM   #3
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I don't think most people will take illegal drugs as payment for a home.
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Old 05-12-2011, 09:59 AM   #4
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I don't think most people will take illegal drugs as payment for a home.
I don't think they can be securitized but who knows.
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Old 05-12-2011, 10:19 AM   #5
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I dunno, the amounts some people are still asking for their over-priced, upside-down homes, I think more than a few of them might be taking LSD too.
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Old 05-12-2011, 10:55 AM   #6
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Originally Posted by neillarson View Post
I am planning to take a LSD on a small penion I have to pay cash on a new home in my retirement state. I have a Military pension that I am already drawing. I also plan to do consulting work for an additional 5 to 10 years.

Trying to figure out the tax impact of taking the LSD and if using oit to buy my first home provides any kind of tax break.

Thanks
I'm pretty sure that unless you roll over the lump sum into an IRA or other tax-deferred account, it immediately becomes taxable income, and it's possible that a big enough lump sum to pay cash for a house might also be big enough to put you into a higher tax bracket, resulting in an even bigger tax hit. I suggest you ask this question of whoever does your taxes (if you don't do them yourself) and/or the people who run the pension fund you are planning to take the lump sum from. One or both of those sources should be able to give you a more definite answer than "pretty sure".
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Old 05-12-2011, 11:11 AM   #7
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I'm pretty sure that unless you roll over the lump sum into an IRA or other tax-deferred account, it immediately becomes taxable income, and it's possible that a big enough lump sum to pay cash for a house might also be big enough to put you into a higher tax bracket, resulting in an even bigger tax hit. I suggest you ask this question of whoever does your taxes (if you don't do them yourself) and/or the people who run the pension fund you are planning to take the lump sum from. One or both of those sources should be able to give you a more definite answer than "pretty sure".
You guys know the 401(k) rules better than I do, but in his introductory post he says he's planning to take the distribution when he retires at age 55.

I agree that the distribution is taxable as regular income, but IIRC there wouldn't be any penalty.
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Old 05-12-2011, 12:41 PM   #8
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You guys know the 401(k) rules better than I do, but in his introductory post he says he's planning to take the distribution when he retires at age 55.

I agree that the distribution is taxable as regular income, but IIRC there wouldn't be any penalty.
You are correct: 401(k) Resource Guide - Plan Sponsors - General Distribution Rules

Quote:
Exceptions. The 10% tax will not apply if distributions before age 59 are made in any of the following circumstances:
  • Made to a participant after separation from service if the separation occurred during or after the calendar year in which the participant reached age 55.
DD
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Old 05-13-2011, 12:48 AM   #9
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I'm pretty sure that unless you roll over the lump sum into an IRA or other tax-deferred account, it immediately becomes taxable income, and it's possible that a big enough lump sum to pay cash for a house might also be big enough to put you into a higher tax bracket, resulting in an even bigger tax hit. (snip)
You guys know the 401(k) rules better than I do, but in his introductory post he says he's planning to take the distribution when he retires at age 55.

I agree that the distribution is taxable as regular income, but IIRC there wouldn't be any penalty.
Whoops! I completely missed the age issue. I believe you are right, and the lump sum would not be subject to the 10% penalty for under-age distributions. What I meant by a "bigger tax hit" was that adding a few hundred thousand dollars of taxable income in one year (which is what it would cost to pay cash for a house where I come from) might result in a higher tax rate on part or all of the lump sum than OP is expecting based on the tax rate he pays on his ordinary salary. Enough money to pay cash for a house would be several times my usual annual earnings, and I think the tax consequences would be quite significant. Your mileage (and OP's) may vary.

I also just noticed OP says this would be a first home. That might change the whole picture. There are some special rules about IRA withdrawals and first time home purchase but I don't know the details.
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Old 05-13-2011, 01:42 AM   #10
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I also just noticed OP says this would be a first home. That might change the whole picture. There are some special rules about IRA withdrawals and first time home purchase but I don't know the details.

Home purchases are treated as hardship purposes for withdrawal purpose. So I think he can avoid the 10% penalty in either case 55 or first home purchase but it is still treated as taxable income.
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Old 05-13-2011, 06:16 AM   #11
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Maybe you have decided to do the LSD because of certain circumstances. But...

This is a planning exercise. You will need to compare your other options on a monetary basis and on other considerations.

You should probably at least consider all your alternatives. Can you get a low interest mortgage (right now), let the pension pay the portion of the payment that the LSD would pay. How do those numbers work? The Interest on the mortgage would be tax deductible. Plus if you outlived the mortgage you would get the residual payments on the back end. How do the numbers compare on a PV basis (using best case, likely, worst case scenarios)? Can a pension payment cover the mortgage adequately?

During any planning, make sure you have covered all the angles... You did not mention if you have a spouse. If you have a spouse will they be able to keep the pension if you pass away so they could continue to pay the mortgage.
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Old 05-13-2011, 07:14 AM   #12
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Neil, what if take out a loan against the 401k and use that money to buy/build the house? You would really be borrowing from yourself and paying the interest and principal back to yourself. Instead of an LSD, take the pension a portion at a time, just enough to keep you in a lower(er) tax bracket and use it to pay back the 401k loan. Once the loan is paid off you can start to draw on the 401k
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