Your financial advisor is not a tax guy. Your banker is not a tax guy. Your insurance guy is not a tax guy. Talk to a tax guy or gal first! There are a LOT of rules about taking money out of tax advantaged accounts. These accounts include SEP's, SIMPLE's, IRA's 401K's TSP's, 457's, 403b's and more. There are some exceptions that get you out of taxes and penalties, but they are complicated.
I'm not even going to go into them in this post. Talk to your tax guy!
I will say that the withholding is not, "paying the taxes already." The withholding is rarely enough. Meeting an exception to the penalty does not prevent taxation, just the penalty. Some exceptions only count for IRA's, but not 401K's. Some count for 401K's, but not IRA's. Only your tax dude can give you the right advice.
Two examples of bad advice:
1. A client recently took $10,000 out of his 401K to purchase a home. His banker told him that was an exception to taxes. WRONG! It's an exception to penalties, not taxes, and, oops, that exception only applies to IRA's, not 401K's. Unhappy client!
2. Another client, age 59, left her job. She was going to use her 401K to buy a house. A big house. Her financial advisor told her to roll it over to an IRA to avoid taxes while looking for a house. She knew she would pay taxes, but thought she could avoid the penalty. Her financial advisor told her she could. WRONG! Having it in an IRA when buying the house avoids the penalty on the FIRST $10000. The other part of nearly $200,000 was fully penalized at 10%. To add insult to injury, because she was older than 55, she could have taken it out of the 401K without penalty, for ANY reason. Once it hit the IRA, she had to wait until 59 and a half, or meet an exception. That's right, even with the bad rollover, 6 months would have saved her THOUSANDS! Unhappy client!
Talk to the tax experts, not the banking/insurance/financial experts. I won't give you investment advice, don't take tax advice from the wrong guy.
If you like the blog, buy my book: Everyday Taxes only $5.99 for Kindle!
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