Lump Sum Retirement Distribution

[tracyb]

A client is wanting to pay off their primary residence with a lump-sum (traditional IRA) retirement distribution, neither are age 70 but are retired.

Any feedback on the tax penalties/issues for this transaction or suggestions? Would there be any penalites since they are retired for the lump sum distribution?

Thanks,

Tracy

[DonPriebe]

Good news, bad news

A client is wanting to pay off their primary residence with a lump-sum (traditional IRA) retirement distribution, neither are age 70 but are retired.

Any feedback on the tax penalties/issues for this transaction or suggestions? Would there be any penalties since they are retired for the lump sum distribution?

If the taxpayer is over 59-1/2, there would be no penalty on the IRA distribution. But the tax advantages of taking a lump distribution do not apply to an IRA, even if he/she were old enough (born before January 2 1936) to use form 4972.

Side effects may include making more of their Social Security taxable, decreasing medical and miscellaneous deductions, phasing out of itemized deductions or personal exemptions, and a myriad of state related issues.

[Matt Sova]

Planning

What is their return on their IRA?

What is their mortgage interest rate after tax savings?

Are they making more than they are spending based on these numbers?

This is an opportunity for you to show them the reasons why they should or should not do this. If they need more income to make the house payment then take smaller distributions out annually to help make that payment.

[sea-tax]

Well stated Matt, you took the words right out of my mouth.

Often times clients try to make decisions based on their heart instead of their mind. What I mean is you need to try to take the emotional part out of it. It might feel good to have the mortgage paid off but it might not be the right financial decision.

[OtisMozzetti]

Spread it out

In all probability, the tax disadvantages would be less if the income from the IRA distribution were spread out over a few different years.

[tracyb]

Lump Sum Retirement Distribution

Thanks for all the responses!

Is there a particular tax planning software that one might utilize? The ability to run different scenarios and present to the client would be nice.


Tracy

[sea-tax]

Thanks for all the responses!

Is there a particular tax planning software that one might utilize? The ability to run different scenarios and present to the client would be nice.


Tracy

I use Lacerte and simply make a copy of the clients file return and call it test and then once I am done I delete it form the program. Works well for me.

[JoshinNC]

Drake has a tax planner built in

Thanks for all the responses!

Is there a particular tax planning software that one might utilize? The ability to run different scenarios and present to the client would be nice.


Tracy

It can simulate up to 7 years out.

I use it for tax planning, retirement planning, quarterly estimate updates. I love it.