Tax on Early iRA Withdrawal
August 26, 2012 9:14 AM Subscribe
Looking at cashing in a post-tax IRA for purchase of a second home. Realizing there are tax and penalties to be applied, this still may make sense. Because the IRA funds are post-tax, however, what exactly will be our total tax liability be?
We are looking at a somewhat unique opportunity to purchase a second home at a below-market price and in a market with which we are very familiar. However, we have been extremely diligent in our retirement savings (perhaps too diligent). In order to avoid PMI, we would need to come up with 20% down. One of several options is to take early distributions from two small post-tax IRAs we established. I understand that this is rarely a good idea, but we are way ahead of the curve on retirement savings (we're both in our 40s and have large 401(k) accounts to which we continue to fully fund) and these combined accounts represent less than 5% of our total retirement savings.
Now, YANML, YANMA and I am not soliciting advice on whether this is a wise financial move. However, if these two accounts total $40,000, and we contributed $23,500 in post-tax funds to these accounts over the years, do we only pay income tax on the $16,500 gain (which grew tax-free) or the entire distributed amount? Similarly, to what amount does the 10% penalty apply? IRS instructions and guides are a little vague and only seem to address Roth IRAs. These are simply IRAs to which we contributed, but did not get a tax break because of income caps and the fact that we were fully contributing to our employer-based plans.
Also, we will consult an accountant later next week, but would appreciate any guidance or hive experience in this area.