Tax blow can be lessened when paying off house with IRA
Q: My daughter purchased a little house for me to live in when I retire. I hope to retire within the next 24 months. The house is owner-financed at 5 percent with a balance of $35,000 due in July.
I want to liquidate my SEP (simplified employee pension plan) IRA and give the money to her to pay off the house. I will get my first Social Security check this month, but I have a good job and will continue to work.
Can I give the money to
Ilyce Glink and Samuel J. Tamkin
her and/or my grandchildren to avoid a large tax hit? Can you suggest a way for me to avoid the tax hit and get the money into her hands to pay off the mortgage?
A: There is no way we know of that will allow you to liquidate your SEP IRA and avoid paying taxes on that money. The money was tax-deductible and tax-deferred, meaning you got a break on taxes when you put it away and have avoided paying taxes on its growth while it has been locked away, hopefully increasing in value.
You can offset the taxes somewhat by making charitable contributions and taking the corresponding deductions. Unfortunately, your daughter wouldn’t qualify as a charity.
Your best bet is to pay the money out of either your current earnings or savings. Or you can take a smaller amount out of your IRA, which will decrease the taxes.
But let’s think about how much that $35,000 is going to cost you. You’re probably in the 25 percent tax bracket. The extra $35,000 in income might push you into the next bracket, plus you’ll have state tax to pay as well. In all, maybe 30 percent of the cash might be taxed, or about $10,000.
You might be able to lessen the tax hit by increasing your tax deductions at work so that you spread out the tax bite over a year, meaning you would have to come up with only about $5,000 (or less) next April 15.
You could consider taking some money out this year and during the next several years and, with good planning and knowledge of your income and tax situation, you could minimize the amount of federal income taxes on that money.
For more details, and possibly other suggestions, consult with your tax preparer.
Send questions to Real Estate Matters, 361 Park Ave., Suite 200, Glencoe, IL 60022, or contact author Ilyce Glink and lawyer Samuel Tamkin through her website, www.think glink.com.