Question For CA Tax Gurus - 401K And Downpayment on Real Estate

[robert1050]

I'll try to keep my explanation simple - I currently live in SoCal and am looking at houses in the Phoenix area (to finally make my escape). I was considering (if possible) to use a small portion of my 401K for a down payment. I checked with my investment people and because I'm already 60 years of age, I can draw money out of my account without incurring any penalties from them. But...the 401K money is pre-tax, so I will owe federal taxes on whatever I draw out, but what about state taxes? Several people have told me that if I haven't bought a house in the past 3 years (no, it's been decades since I bought any real estate), CA will not be coming after me for taxes if I use the 401K money for a 1) down payment on a house, 2) medical expenses and 3) one of my kids college education (I don't have any kids, so that's a moot point).

Is this correct, or am I being lead astray by over-zealous real estate people?

Thanks in advance -
Robert

 

[Kahunajuice]

I'll try to keep my explanation simple - I currently live in SoCal and am looking at houses in the Phoenix area (to finally make my escape). I was considering (if possible) to use a small portion of my 401K for a down payment. I checked with my investment people and because I'm already 60 years of age, I can draw money out of my account without incurring any penalties from them. But...the 401K money is pre-tax, so I will owe federal taxes on whatever I draw out, but what about state taxes? Several people have told me that if I haven't bought a house in the past 3 years (no, it's been decades since I bought any real estate), CA will not be coming after me for taxes if I use the 401K money for a 1) down payment on a house, 2) medical expenses and 3) one of my kids college education (I don't have any kids, so that's a moot point).

Is this correct, or am I being lead astray by over-zealous real estate people?

Thanks in advance -
Robert

At the age of 60, you will only need to pay State and Federal taxes without any penalties from any 401k withdraw.

 

[RodnJen]

I believe this would be a regular distribution because you are over 59 1/2. It would also be subject to state and federal taxes. There is some language that references early withdrawals for first-time home ownership, but that's off the table here. I'm sure others on here will have some good answers.

 

[Kahunajuice]

One other thing, due to the fact that you are over 59 1/2, you have a small loop hole which is a 60 day window where you can withdraw any amount and use it without any issues as long as you return the money before the 60 days.

 

[boatpi]

I do not believe there is any way to use the money tax free. You will pay normal income tax based on your residence at the time (day of) distribution.

So if you are using this for a down payment in AZ, that has a lower tax rate than CA, you need to be residing in AZ on that date, and I would strongly suggest that it be distributed to an AZ account via wire transfer.

At the same time, if you receive a pension, or ANY distribution, have that firm change your address to reflect the new address. You can even get an address for two or so months, then move into the new house, but it needs to be in AZ. All distributions are 1099 coded to a state, so do the address change FIRST ,then get the $$ out.

Depending on your income, AZ has low rates for those under 40K or so per year, but I think it is about 5.7% above that as oppose to CA that is 10.5%.

Now if you reside in NV for 6 months plus 1 day, it is ZERO!!!

 

[fmo24]

Can you borrow from your account. My employer allows us to borrow for home purchase and then pay it back with automatic withdrawal from paycheck. The interest goes back into your account

 

[boatpi]

Make that under 5%, see this: http://www.tax-brackets.org/arizonataxtable