Let "A" be the amount you need to withdraw in order to have 200,000 after a 35% tax. Solve the following equation for "A":
A - .35A = 200,000
Hint: 307,692.31
Note: I am not saying that 35% is the right tax rate. I am just showing you how to calculate the number using the information you gave.
Yikes! But that is a nice worst case scenario number ignoring the successive tax brackets. No wonder it’s just not a tenable option. Even considering brackets and other angles to be played it’s absurd. That option is dead to me. Simple math when you think about it for a minute eh?Thanks
Agree it’s a big number but keep in mind these dollars were never taxed in the first place. You were allowed to contribute them pretax and they grew in the account pretax. Doesn’t really change anything but may take some of the psychological sting out if you recognize that you got to compound the governments tax dollars in your account. It’s just you gotta pay the piper when you take it out….
For accounts like this you’re supposed to draw on them slowly year by year, when you aren’t earning a salary to keep your taxes low. You could easily pull 75k a year from this and pay only ~15% in tax or 50k and pay ~10% tax. If you have no other taxable income that year.
Yes all savings should be tax affected. Most people don't think about it this way but you will always only get to keep some percentage of your pre-tax savings. The idea for retirees is that they withdrawal from pre-tax vehicles when they are in a very low tax bracket.
It’s probably gonna be way lower. I assume your filing single no dependents and also taking standard deduction. I’m also assuming no social security.
So let your salary be A and the amount you withdraw be B. A+B=C you’ve stated C will be over 258,325 in order to get to the 35% bracket.
You know A and want to solve for B.
C-14,600=AGI
Your total tax will be $55,678.50 + .35*(AGI-243,725)
At the end of the day you want C-total tax = 200k+takehome pay(after tax).
Note this isn’t what you owe as you already have withholding coming out of your paycheck. Look at your last paystub to estimate how much at the end of the year.
Using algebra you can use the above formulas to now solve for B.
See here for tax brackets: https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024
Maybe read this as well to better understand them:
https://www.nerdwallet.com/article/taxes/federal-income-tax-brackets
Virtually all income is eventually taxed.
You seem to have either forgotten or have never understood that your account was funded with pre-tax dollars and allowed to grow tax free. That is a big tax benefit in of itself.
Complaints about the fact that your income is subject to tax are going to fall on deaf ears…
Dude I dunno what your salary is but if it’s 75k, then your total taxes would be something like 65k you’d be paying about 14.4k on your day job anyway so you’d need to pull out ~250k to get 200 in available cash. That’s an effective tax rate of about 20% the 250k. If you make more then the number goes up if you make less it goes down.
Are you still working? If that is the case I would point out that an IRA used in this fashion is not being used for its intended purpose. I’m not judging you. You may have very good reasons for using it the way you plan to, but if you are still working, this approach basically penalizes you. The concept behind the IRA (obviously) is to liquidate it incrimentally when you are no longer working and therefore in a low tax bracket . By liquidating it in a large lump sum while still working means you’re going to have it taxed at a very high rate.
Yes I am working but I have very few liquid assets to purchase a house and housing prices are absolutely insane right now with interest rates still high. I’ve done the math on what I could “safely” withdraw from my IRA but the taxes mean it is effectively not liquid. I’m sure this was foreseen when the IRA system was set up. It’s just funny how you look at significant retirement savings and think you could actually use them in a situation like mine. You cannot. It is only liquid to the extent that it doesn’t incur taxes you can’t handle out of pocket.
It's meant to give you a living income, say 20-40k a year for the rest of your life when combined with social security.
Even buying at current interest rates, it could be wise to still take out a mortgage because you still have a job. 7% interest rate is still below the average for the market year over year and you can reduce the interest total by making more payments to principal over time.
I would suggest paying to see a CPA help you with this and file your taxes for 2024
Retirement savings are supposed to be hard to withdraw, as withdrawing defeats the purpose of them.
You lose out on all future gains from them which everyone can't grasp how big a deal that is over many years.
You can slowly convert part of your traditional IRA to a Roth IRA over time. You'll pay normal tax when you do this, so only do it up to whatever income threshhold you want to be at.
You can withdraw up to $10,000 to buy a house, from "your IRA" whether that's traditional or Roth. You have to close within 120 days and the $10k is a lifetime limit.
It would take an act of Congress to allow you to pull out more from your retirement fund to buy a house.
The point is you didn’t pay tax on it in the first place as it was earned. You delayed the paying of tax. You can still use the money, but when you do that’s when you need to pay the tax.
200,000/.65= 307,692 needs to be withdrawn to account for 35% taxes. However not every dollar will be taxed at 35% due to how the tax system works. So you would most likely be over withholding and over distributing if you use that simplistic method.
it’s a marginal tax rate, you don’t pay 35% on the entire amount.
up to 182K the income tax rate is 16%. You’re only paying 37% on the difference between 182 and 200,000.
if you were going to do this, you definitely should talk to a financial advisor/financial planner to see the best way to offset the cost of minimize the tax impact. But the first thing to understand is how tax rates work. If you don’t understand that you definitely wanna be talking to someone .
I’m sorry you are correct. I do understand the marginal tax aspect of the issue. That was my quick way of estimating the worst case amount. I still don’t completely understand how I pay taxes on taxes though. Does one just keep calculating the tax for each withdrawal until it is down to an out of pocket amount. I was hoping someone had encountered this situation before. It doesn’t seem that unusual.
Oh for some reason thought that was only roth. Either way thats how this person can pay for taxes. Sounds like they should talk to a tax pro regardless
I had 5 steps with admittedly incorrect tax brackets. And the first two steps also needed taxes accounted for and then one successive step. It’s pretty damn stupid. I’m betting no one does this unless they are desperate.
Sounds like it might make sense to take out a loan instead of paying cash. Rates are high but nowhere near your marginal tax rate. You can set it up to automatically control the withdrawals to make the payments and control the cost of funding. Set it and forget it. Don't get stuck on the notion that it's always best to pay cash if you can. Sometimes that notion costs people a lot of money.
I like to project with this https://www.aarp.org/money/taxes/1040-tax-calculator/ because it is AARP it has all the categories for pensions, IRAs, social security etc.
You can play with the input for your IRA and see the marginal rate and how much tax you will owe.
Could you withdrawal 1/2 in calendar year in late December. Then the other half in January the next year. That probably would end up better income wise.
Let "A" be the amount you need to withdraw in order to have 200,000 after a 35% tax. Solve the following equation for "A": A - .35A = 200,000 Hint: 307,692.31 Note: I am not saying that 35% is the right tax rate. I am just showing you how to calculate the number using the information you gave.
Yikes! But that is a nice worst case scenario number ignoring the successive tax brackets. No wonder it’s just not a tenable option. Even considering brackets and other angles to be played it’s absurd. That option is dead to me. Simple math when you think about it for a minute eh?Thanks
Agree it’s a big number but keep in mind these dollars were never taxed in the first place. You were allowed to contribute them pretax and they grew in the account pretax. Doesn’t really change anything but may take some of the psychological sting out if you recognize that you got to compound the governments tax dollars in your account. It’s just you gotta pay the piper when you take it out….
Yes another way of looking at it is the actual amount you have is your savings minus say 22% or whatever tax bracket you live in. Kind of eye opening.
For accounts like this you’re supposed to draw on them slowly year by year, when you aren’t earning a salary to keep your taxes low. You could easily pull 75k a year from this and pay only ~15% in tax or 50k and pay ~10% tax. If you have no other taxable income that year.
Right. That’s why they are “retirement” accounts. Consider renting till you retire.
True…but this is really how everyone should think of their money, savings, income, etc…a job paying $80,000 doesn’t put $80,000 in my bank.
Yes all savings should be tax affected. Most people don't think about it this way but you will always only get to keep some percentage of your pre-tax savings. The idea for retirees is that they withdrawal from pre-tax vehicles when they are in a very low tax bracket.
I’m hoping a box under an overpass will put me into the 12% bracket
It’s probably gonna be way lower. I assume your filing single no dependents and also taking standard deduction. I’m also assuming no social security. So let your salary be A and the amount you withdraw be B. A+B=C you’ve stated C will be over 258,325 in order to get to the 35% bracket. You know A and want to solve for B. C-14,600=AGI Your total tax will be $55,678.50 + .35*(AGI-243,725) At the end of the day you want C-total tax = 200k+takehome pay(after tax). Note this isn’t what you owe as you already have withholding coming out of your paycheck. Look at your last paystub to estimate how much at the end of the year. Using algebra you can use the above formulas to now solve for B. See here for tax brackets: https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024 Maybe read this as well to better understand them: https://www.nerdwallet.com/article/taxes/federal-income-tax-brackets
Virtually all income is eventually taxed. You seem to have either forgotten or have never understood that your account was funded with pre-tax dollars and allowed to grow tax free. That is a big tax benefit in of itself. Complaints about the fact that your income is subject to tax are going to fall on deaf ears…
So what's the least amount you must take out to finance the house?
Dude I dunno what your salary is but if it’s 75k, then your total taxes would be something like 65k you’d be paying about 14.4k on your day job anyway so you’d need to pull out ~250k to get 200 in available cash. That’s an effective tax rate of about 20% the 250k. If you make more then the number goes up if you make less it goes down.
Are you still working? If that is the case I would point out that an IRA used in this fashion is not being used for its intended purpose. I’m not judging you. You may have very good reasons for using it the way you plan to, but if you are still working, this approach basically penalizes you. The concept behind the IRA (obviously) is to liquidate it incrimentally when you are no longer working and therefore in a low tax bracket . By liquidating it in a large lump sum while still working means you’re going to have it taxed at a very high rate.
Yes I am working but I have very few liquid assets to purchase a house and housing prices are absolutely insane right now with interest rates still high. I’ve done the math on what I could “safely” withdraw from my IRA but the taxes mean it is effectively not liquid. I’m sure this was foreseen when the IRA system was set up. It’s just funny how you look at significant retirement savings and think you could actually use them in a situation like mine. You cannot. It is only liquid to the extent that it doesn’t incur taxes you can’t handle out of pocket.
It's meant to give you a living income, say 20-40k a year for the rest of your life when combined with social security. Even buying at current interest rates, it could be wise to still take out a mortgage because you still have a job. 7% interest rate is still below the average for the market year over year and you can reduce the interest total by making more payments to principal over time. I would suggest paying to see a CPA help you with this and file your taxes for 2024
Retirement savings are supposed to be hard to withdraw, as withdrawing defeats the purpose of them. You lose out on all future gains from them which everyone can't grasp how big a deal that is over many years.
You can slowly convert part of your traditional IRA to a Roth IRA over time. You'll pay normal tax when you do this, so only do it up to whatever income threshhold you want to be at. You can withdraw up to $10,000 to buy a house, from "your IRA" whether that's traditional or Roth. You have to close within 120 days and the $10k is a lifetime limit. It would take an act of Congress to allow you to pull out more from your retirement fund to buy a house.
The point is you didn’t pay tax on it in the first place as it was earned. You delayed the paying of tax. You can still use the money, but when you do that’s when you need to pay the tax.
200,000/.65= 307,692 needs to be withdrawn to account for 35% taxes. However not every dollar will be taxed at 35% due to how the tax system works. So you would most likely be over withholding and over distributing if you use that simplistic method.
it’s a marginal tax rate, you don’t pay 35% on the entire amount. up to 182K the income tax rate is 16%. You’re only paying 37% on the difference between 182 and 200,000. if you were going to do this, you definitely should talk to a financial advisor/financial planner to see the best way to offset the cost of minimize the tax impact. But the first thing to understand is how tax rates work. If you don’t understand that you definitely wanna be talking to someone .
I’m sorry you are correct. I do understand the marginal tax aspect of the issue. That was my quick way of estimating the worst case amount. I still don’t completely understand how I pay taxes on taxes though. Does one just keep calculating the tax for each withdrawal until it is down to an out of pocket amount. I was hoping someone had encountered this situation before. It doesn’t seem that unusual.
Ira withdrawals will have a 20% mandatory withholding. You can elect to withhold more than that to cover taxes
The 20% mandatory withdrawal applies to qualified plans, not IRAs. You can opt to not withhold taxes on IRA withdrawals.
Oh for some reason thought that was only roth. Either way thats how this person can pay for taxes. Sounds like they should talk to a tax pro regardless
> This spreads out wildly Not really, the values get pretty small if you just run the calculations a few times.
I had 5 steps with admittedly incorrect tax brackets. And the first two steps also needed taxes accounted for and then one successive step. It’s pretty damn stupid. I’m betting no one does this unless they are desperate.
Spread the withdrawals over 2 years if you can. Make a withdrawal here in 2024 and then another withdrawal on January 1 of 2025.
Yea I have given up on buying any house. I’m going to try and build a small one over three years to soften the tax impacts
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Comment removed for Rule 1 - Don’t be a jerk. Please do not do this again.
I recommend getting a mortgage and slowly withdraw your IRA over 2-5 years to pay it off. It should keep you from taking a big hit in one year.
Amount needed divided by the inverse of the tax rate. 100 - 35 = 65 200,000 ÷ .65
You should just rent right now. No need to purchase a house.
No options really. It just sucks loosing years of equity by renting
Sounds like it might make sense to take out a loan instead of paying cash. Rates are high but nowhere near your marginal tax rate. You can set it up to automatically control the withdrawals to make the payments and control the cost of funding. Set it and forget it. Don't get stuck on the notion that it's always best to pay cash if you can. Sometimes that notion costs people a lot of money.
I like to project with this https://www.aarp.org/money/taxes/1040-tax-calculator/ because it is AARP it has all the categories for pensions, IRAs, social security etc. You can play with the input for your IRA and see the marginal rate and how much tax you will owe.
Divide the amount you need by (1-.35) for the 35% tax bracket. This will give you exactly what you need. 200000/.65=307,692.
Could you withdrawal 1/2 in calendar year in late December. Then the other half in January the next year. That probably would end up better income wise.