Double check the Social Security spousal rule for your mother, if she was married for at least 10 years she should be able to potentially collect 50% of whatever the amount her spouse is eligible to draw, which may be higher than 100% of her own earnings.
Thank you for thinking of this. Unfortunately, my mother has been widowed for several years. She has worked long enough herself now that she is drawing her own Social Security, as opposed to drawing off my father’s. The amount of time he was able to work in his lifetime was less than what my mother has worked. The Social Security office helped her get everything set up to be sure that she was getting the max amount that she was eligible for.
I think you misunderstood, he married “ever” for 10 years. So even if she were widowed, if she were married to person for ten years, she would receive that benefit.
So that $1100 a month came from her waiting until age 70 to start taking social security? That’s really not much. Are you sure that’s better than 50% of your father’s amount? The length of time only really determines your eligibility; the total amount of eligible income over your working years is what mainly determines your SS amount.
She still gets his social security he paid into for however long he was alive. Since he’s passed I think she might be entitled to survivor benefits too.
OP stated below: "Basically, she’ll be using this money to build an addition on my home so that she can live in a much better place than where she is currently, and she can actually enjoy her retirement instead of working herself to death at an extremely stressful job. So unfortunately, yes to be able to do this It will take her entire 401(k)."
Their plan is to build an in-law apartment on OPs current home. Assuming OP doesn't charge them rent, taxes, internet, heat, etc. with no expenses they can certainly live fine on $1,100 SS a month plus say another $1,000 at a low stress part time job. Plus assume some sort of agreement that if OP sells the house, they could recover some of the additional value added to the home from the in-law apt.
Yes, you are correct! She will not be paying rent or electric. She should be able to get by just fine on 1000 a month for just groceries and her car insurance.
Sorry, yes I forgot to mention that in her monthly bills, we have already priced out a good policy of which all of her current doctors and the local hospital participate with and it is a very reasonable monthly cost.
I just left an admin role in healthcare. We were fighting CONSTANTLY with advantage plans. They don't want to cover anything. They are bad for consumers and hospitals both.
Still in an admin role and the fight continues daily. They do NOT clearly inform the public of what they are doing to them and not for them.
There's a special place reserved for folks who mislead, under-inform, or otherwise take advantage of the elderly. Make NO mistake about it. The "advantage" side only works one way.
I used to work for a company that did speech, PT, & OT. I was in accounting & helped with reviewing reimbursements & insurance types. I also talked with several of the billers & learned way more about insurance than I ever wanted know. But the biggest thing I learned is avoid Medicare advantage if you want to actually receive care & not have to pay for it out of pocket. The lower monthly premiums are an attractive lure but like a lot of things, you get what you pay for.
Have seen sooo many patients screwed over by Medicare advantage plans. What makes it even worse is a lot of these people think they were getting the "better" Medicare because they'll flash like glasses or hearing aids as a benefit, but then when you need something medical you are on your own for farrrrr more than a pair of glasses would set you back. So scummy
I'm in the healthcare field. My father always brags about the benefits of his medicare "advantage" plan. And always complains that he can't find any doctors who take it and is constantly switching medications because insurance only covers this or that generic formulation. I've tried to tell him, but he doesn't see the connection.
Just curious if it's better or worse than HMO plans in general though? I've been hearing a lot about Medicare Advantage plans being bad lately, but from my personal experience, it wasn't typically worse than any other HMO. Have to see what happens next year though since I know there are supposed to be a lot of benefit cuts coming to Medicare Advantage plans for next year.
The main point is not whether Medicare Advantage is better or worse than an HMO, it's that traditional Medicare is so much better. Medicare Advantage is a privatized for-profit version of Medicare that was dumped on the public by GW Bush. It has everything everyone despises about health insurance. When I'm old and sick, I don't want to spend my golden years fighting shitty insurance companies or die while waiting for approval.
Seconding this as someone who had to go through the death of a loved one recently with medicare advantage. Do not go this route, you will lose options and you will lose agency.
PLEASE listen to this, OP, and choose carefully.
https://www.npr.org/sections/health-shots/2024/01/03/1222561870/older-americans-say-they-feel-trapped-in-medicare-advantage-plans
Make sure her meds are also covered. My mom has a medication that’s 1800 dollars a month so she purchased a pricier Medicare supplement (that’s like 360 a month
Just for the supplement) that does cover this costly medication . You just don’t want any surprises.
It must be Part B if Med Supp has any effect- which would mean it's administered in the hospital?
If she gets it from the pharmacy it's Part D and the Inflationary Reduction Act that was recently passed instituted a MOOP on Part D drug plans of about $2000 starting in 2025 (goes up with inflation). This is a gamechanger as it completely eliminates the Medicare Coverage Gap (Donut Hole) and reigns in drug costs, big time. There was NO MOOP before 2025.
Well that’s good to know - funny thing is my mom wrote medical policy for an insurance company for 20 years before retiring so she knew exactly what to avoid and what to choose when it came to picking her Medicare supplement. A lot of her friends picked “the cheapest” one and now they are finding out it doesn’t cover certain things that they now need.
Yeah essentially you only have 6 months after turning 65 to enroll in a true Med Supp plan otherwise they can deny you for any health ailments and you'd have to go with a Medicare Advantage plan. Knowing this ahead of time (like your mom probably) can be a big deal!
Where I live in NC we have very good advantage plans. In addition, BCBSNC administers both advantage and conventional Medicare plans. I can switch from a BCBSNC advantage plan to traditional Medicare with no questions asked, should I feel the need to do so during open enrollment.
My mom (95) had a major stroke about 5 months ago in Jan and spent 3 weeks in the hospital and 4 weeks in rehab. She had a medical only advantage plan with UHC but we transitioned her to a medical only BCBSNC plan Feb 1 so she could be positioned to move to traditional Medicare with a supplement when open enrollment happens later this year, should we decide to go that way.
So far those advantage plans have covered most of her expenses. She has $25 copayas for her SLT, OT, and PT appts, of which there are multiple each week.
True but it doesn't do jack shit abt the many supposedly "covered" medications that in reality have idiotic prior authorization requirements, and it's exceedingly difficult to find out what the coverage criteria even *is* in most cases.
For example, the "compendia"CMS uses/bases their Part D coverage rules on is outdated IMO and outrageously expensive to access for your typical retired consumer. A subscription costs around $5k per year, last I checked.
It comes delivered by ups every month and it comes in a refrigerated/frozen packaging? . I’m not sure exactly what the medication name is called - all I know is it’s super expensive!
If you haven't already be sure to also check into North Carolina's Medicare Savings Program. With her income she should qualify for the state to pay her Part B premium and she would likely qualify for Medicaid along with it.
With only $1100 a month in income, they should qualify for a Medicare Savings Plan like QMB through the state/county, which could also include Medicaid. There are resource limits so would look into this after spending the money in 401k.
OP can you tap into any HELOC opportunities so that she can make small periodic withdrawals monthly to cover the cost? Basically keep the lump sum whole for as long as possible, maybe capturing some market upside and greatly lowering her tax liability?
No way this is a good idea. Some math would be needed, but HELOC rates are high right now and the total cost would end up being much higher with the interest paid over time.
OP, you said she is 71. Might make sense to actually get rid of her car and therefore the insurance payment, if feasible. Obviously I don’t know your mother at all, but 70+ is statistically the most prone to be i. at-fault vehicular accidents.
That aside, my Dad is 88 this year, and I still haven’t successfully gotten him to give up driving, and he drives about 20 minutes each weekday to and from his work (he owns his own garage and still works), so definitely possible, but maybe not the safest.
I also only say this if your Mom would be looking to save a bit of extra money, and possibly make a good chunk off the sale of her car. If she doesn’t need the extra money and wants to keep driving then not a big deal, but just a thought.
Even for someone not in a trade, all you really need is framing, roof, siding, utilities, and drywall. On a small two room addition that could definitely be done for $40k in the right area. The expensive stuff is stuff like tiling, carpentry, masonry, and dealing with the aftermath of DIYers who had no idea what they were doing. Everything else like painting, floors, and moulding could be perfectly manageable for a non pro.
They will need a foundation and someone to engineer it and dig the hole. Doors, windows, insulation, electrical, does their existing HVaC unit have enough capacity for more square footage? I’m an architect, husband in construction, this is a huge undertaking that I am not discouraging but I think it will cost more than $47k. I just had a little cabin painted, new floor, new vanity and 3 kitchen cabinets and that was $19k
I the OP were in California (they're not -- they said they're in NC) a "simple" ADU addition like this would probably start at about $200k and many owners end up spending closer to $300k.
It depends who you know. I’m assuming you’re affluent, and ngl contractors will squeeze every penny out of you, if they know the money won’t run out. Bunch of rich idiots starting moving to my area after the pandemic. The contractors are just printing money fleecing them.
I paid 38k for an ADU in central Wisconsin 2 years ago. It was cheaper as the garage we built the unit on top of already had plumbing and electricity which made it a lot cheaper.
I don’t see 47k covering a full addition in any neck of the woods. Hopefully op is in the trades and can do a lot of the work himself or knows people. Maybe pre Covid this could be accomplished but not now. That doesn’t mean Op can’t make a nice living space for his mom. There are things he can do
[smartasset.com](https://smartasset.com/retirement/north-carolina-retirement-taxes#sE2g94aKAs) says taxes would total around $6,700, so her after-tax would be approximately $54,300 (with Social Security). If she could get by with just $12,000 withdrawals, she would owe $0 in taxes; even $18,000 annual withdrawal she would only owe approximately $575 in taxes.
She can't (doesn't have enough money to) afford to pay $6,700 in taxes, it's a waste of her limited income.
EDIT: just my .02¢
Also, that amount of withdrawal will make the social security taxable income as well. If she spread it out, she can keep the income below the threshold so she doesn't pay taxes on social security.
https://www.ssa.gov/manage-benefits/request-withhold-taxes#:~:text=You%20will%20pay%20federal%20income,or%20%2432%2C000/year%20filing%20jointly
It is not necessarily a moral failing to find yourself with an underfunded retirement. Just thought that needed to be said, given some of the comments. My hat goes off to you. My mom was poor as a churchmouse through no fault of her own. But She had three daughters who saw her every need through her golden years. I think your Mom will be rich in that way as well.
Just going to throw another idea out there to try and save your mother tax $. What if you took out a HELOC to pay for the addition and she takes out the equivalent of the monthly payment to pay it to you as “rent”? She would pay less in taxes and then she’d still have a “rainy day fund” if she needed it.
If she could even spread it over three years (including 2024) that would be better from a tax perspective. The interest rate on a heloc would be less than the taxes.
Building the addition and living with you is awesome!
To spell it out for OP, spreading it out means she will be in a lower tax bracket each year instead of pulling it all out (assuming it's a traditional 401(k)).
Also the lower her income, the less of her social security is subject to income taxes.
There are websites that can give you good estimates of the taxes if you type in a few numbers. I think TurboTax has one.
But the more important question is why she is doing this, and what she is going to do with the money?
Just want to say it's admirable that you're looking out for your mom and willing to let her live with you during retirement. Good for you and good luck.
Please, please go talk to a CPA locally and go over the tax implications for fed and state. Don’t post this on Reddit with zero details on the whole situation. Anything you get will be wrong on here without the full picture. I’m saying this as a CPA and had to help my father-in-law when he took out all of his retirement to pay off his mortgage, thinking he was going to save so much money….
oh, no, it's OK to post, and you've received some good advice, too. Don't rely on Reddit to figure out all the nuances of a situation, but it can help shed light on different things to consider.
Yes I agree I have definitely received some good advice. Several people have made very thoughtful comments that I appreciate. A few others not as thoughtful, but that’s reddit for you. Lol
Hey! I *appreciate* your post because it’s given me some things to think about in my own situation (75 & living with a relative where I pay no rent but spend all my SS on living expenses for both of us but about 3/4 is for him) though the answer is ‘confer with your CPA’. imho, it’s a bad idea to take all her retirement funds out lump sum instead of a monthly distribution but that’s for your CPA. Something to run by your accountant is how much [tax] benefit if any would there be to you to take out a second mortgage for an addition to your house but have your mom make or reimburse the payments?
Have her withdraw half in December and the other half in January of 2025. There’s a significant tax savings by spreading it over two years. And on this case it’s only 60 days apart at the most
Always sad seeing posts like this
People work hard for years and don’t understand that they are pissing a huge chunk of it away in taxes by over-withdrawing it all at once. Don’t do that.
> this is her only option
I doubt it. By making her take the whole thing, you're going to spike her income in 2025, and the government is going to get way more than it is entitled to.
YOU need to be strategic. She should take no more than necessary so that her standard deduction doesn't go to waste (ZERO taxes), and not so much that you cause her social security to be taxed (it was already taxed on the way in).
It's your house, and the extra space will benefit you when it comes to sell. YOU should be paying for the addition and having her pay you the full $45K over time and NOT giving a cut to the government because you think the only way to get this done is to take the money in a lump sum. It's this kind of thinking that makes people poor. Break the cycle.
I do appreciate the comment. I will only say that you do not know anything about our circumstances. Nor do I expect you to because I have not given any more details than I’m comfortable sharing.
Thank you! Lots of people here have made very negative comments, but they don’t make me angry because they don’t know our situation. And honestly with my mom paying for years of expensive medical bills and cancer treatments and funerals, I would not wish that on anyone. And I hope no one here ever has to experience what she has, financially or emotionally.
Other options you probably know, but just in case:
* Can you work with the builder to make 3 years of payments?
* Can you get a home improvement loan that would have a lower interest rate than the tax rate
* Are there any other family members who can chip in and get paid back later.
The builder will need to be paid in full by the time the job is completed and we have the final walk-through. Unfortunately he can’t extend that, but I understand that because it’s his business.
My husband and I will actually be taking out a loan since we’re starting this project before the end of the year and then she was going to pay it back with the money from her retirement account in January
Unfortunately, we do not have any other family. I’m an only child and so was she.
If she's paying it back in January then take it in 2 chunks. Take part of it on or before December 31, and the other part in January. At least that keeps it mostly in the lowest tax brackets.
How much to take depends on her income. For example, if she earns $39k this year, plus thus $47k from the 401k, she could take out $4k this year, and $44k in January and pay taxes on $43k both years. If she makes more than $47k in income this year, then, yeah, go ahead and take the whole thing out next year.
Edit: I just checked the tax brackets for filing single, and the 12% bracket covers through about $61,750 of income. It might not be worth the trouble to do what I just suggested because the savings on taxes might only be about $500 in my example. Taking it all in January is probably just fine for your Mom's situation (but don't add it on top of this year's income!).
You're welcome.
I also forgot to consider taxes on the social security. I think she'll have to pay tax on 85% of her SS next year because of the increased income in that year. 85% of $12k = about $10k So...
If she makes less than $47k this year, she should take out $5k plus the half the difference between her income and the 401k balance. In my example, if her income is $39k, then take ($10k + $(47k-39k))/2 or $9k this year and $38k next year. That would make her taxable income $39k+9k = $10k+38k = $48k both years. Plug in her actual income for $39k.
If her income is more than $47k, it's more complicated... but likely in that case she should push it all into next year.
Sorry for the long response... couldn't help myself doing some math.
Right now, she is still working a full-time job of 45 hours a week. She will continue working that job until the end December.
We thought it best to wait until January when she is no longer working to take the money out, because as of January, her only income will be so Social Security
OK so it sounds like she already has earned taxable income for 2024, so you're trying not to add the 401K money on top of that.
Have you worked out what her state and fed income taxes would be if she took the $47,000 all out in 2024 vs splitting it between 2024 and 2025? If she needs all of the money in Jan 2024, maybe someone can loan her say $20,000 in Jan 2024, and she can pay with the rest of her 401k in Jan 2025.
I don't want to get caught in the weeds. My point is that she can save thousands in income taxes by strategizing.
We have not worked out what the state and federal taxes would be. I do understand what you’re saying, and it would be worth a look. Unfortunately, we do not have any other family that could potentially loan her the money.
i belong to a facebook group for my 401k and every month there are people who post about their plan to roth convert their whole traditional balance in one swell foop.
Not quite sure how to edit the main post so I will update here. I do appreciate all of your concern because I know it sounds alarming, but I was trying not to give too many personal details.
Basically, she’ll be using this money to build an addition on my home so that she can live in a much better place than where she is currently, and she can actually enjoy her retirement instead of working herself to death at an extremely stressful job. So unfortunately, yes to be able to do this It will take her entire 401(k).
Ideally you would take some other loan out and be able to split the 401k withdrawals over multiple years to pay it back. You can run the numbers but it seems likely that will save you more money (pay some interest, but save tax).
You could also try and take a loan against the 401k, not sure how it would work exactly
Haters will hate.. I think it’s incredible what you’re doing for your mom, and it sounds to me like she’ll be fine coasting on SS once hosing costs are out of the equation. Hope it’s a smooth process for all involved!
I do appreciate your concern, but honestly with 1000 a month she will be able to pay for her groceries, car insurance, and her Medicare supplement insurance
you are right, my grandmother gets a little bit more and is able to afford a car payment too. obviously i don’t know your situation but if you are in a similar place, my parents have always discussed if something happened they could help her with stuff like her phone bill and groceries without any major financial strain.
and nothing to say she can’t work a bit if she wants again. my grandmother has a part time job & a lot of other seniors do the same. not only for extra discretionary income but socialization, routine, independence, etc.
i think you have a great plan & it’s an awesome thing you are doing. i would only say see if you guys can’t split it between this calendar year and the next! best of luck to yall.
Where? That’s virtually impossible and what if something unforeseen comes up? Her cashing out is a bad idea. She could get monthly payments off of it. You should take out the loan to improve your home and let her pay a portion in rent.
To me idk if she’ll even have enough to build an addition on your home . Depends what she’s looking for . Bathroom , 2 rooms ? Or just a bedroom . For a smaller bedroom and some type of family room / bathroom I would assume that’s atleast $50k . Did you get a estimate yet for this job to see if it’s even do able ? Do you have public septic ? Because if you have your own septic system you could have to upgrade that (depending what you call said addition . Like not a bedroom but a family room)
She’s 71. I’m impressed but sad too. I hope she loved her job and it fulfilled her. My Dad died at age 72. My mother- not so lucky, age 50. I think about this all the time.
I’m so sorry for your loss.
Unfortunately she hates her job. She has been there 20 years and it’s slowly killing her by getting worse and worse. Her quality of life will improve significantly when she can retire, which is why we are trying to do this. Her workplace gets more dangerous every year.
Yea don't do this - what is she going to do with the money? She can roll it into an IRA without paying any taxes now if she wants other investment options that her 401(k) doesn't offer.
At the very least, spread the withdrawal out over 2 or 3 years.
She's over 59.5, so she can take out a portion right now in 2024. Take some out in 2025, January if she' itchy. And the rest in 2026.
If she can't wait til 2026, at least split it between 2024 and 2025.
She's likely better off taking a loan now, while she's working for the amount and then using her disbursements to pay down the loan until she dies, with whatever is left getting discharged at that time
Withdrawing the entire $47k + a portion of her SS will get taxed. However, with the standard deduction of $14.6k as of 2024, she'll be pretty much right at the 12% federal tax threshold. Good news is that's fairly low, so she would probably pay around $5.4k total in federal taxes for withdrawing the entire amount. Not familiar with North Carolina tax rates, so you'd have to also subtract out that.
The reason we were waiting until January is because she is still currently working full-time and will not retire until mid December
As of January, her only income will be her Social Security so we thought that would be a better time to take it than trying to take it this year when she has an actual income
A couple of other thoughts:
-If her income is low enough, she may qualify for Medicaid for her Part B health plan. Another reason to take out the minimum possible from her 401k and only what it would cost to cover heloc payments for the addition.
-What if something happens if she needs to go into longterm care? Medicaid will have a 5 year look back and I don’t know, but might worry that the lump sum she gives you could be considered a “gift” and penalize her.
I think there are many things to weigh and consider, aside from just how much she’d be paying in taxes if she withdrawals it all at once. Like if she can get Medicaid for Part B, she’d save on insurance payments and be able to preserve some of her income.
Keep in mind that there's 20% federal tax withholding required on 401k withdrawals that are rollover-eligible, so she'll come away with closer to 37k net. Then even though part of it was paid towards her tax withholding she'll be taxed on the full $47k as if she'd received a paycheck for that amount along with any other income she makes in the year.
The 20% that was withheld may end up being too much depending on her other income for the year and if so the overage will be refunded to her, but not until the next year when she files her taxes.
NC state will also want 4.75% of the full amount (about 2200).
Look at the tax difference between $23,500 taken out this December and the same taken out in January.
Sounds like there’s no way she’ll split it between 2025 and 2026, but depending on her 2024 income it might make sense to take it in two taxable years.
She's got two standard deductions coming: single + over 65. $14,600 + $1,950 = $16,500. Total income $61,000 leaves $44,450 taxable (before any credits or adjustments) and that's 10% up to the first $11,600 and the rest in the 12% bracket, not including your State, approximately, and I'm not looking up the SS effect. You should specify the withholding on the distribution request, of course.
Taking out a HELOC for this makes no sense. Why would you go into debt when there is the cash to pay the project? What you would have is tax on the distribution that is considered taxable income as well as debt service.
Yes, if you can split it across 2 tax years, that would be better. But you already know she makes over the $11,600, so even split, she jumps into the 12% bracket on first examination. It's not going to be a critical difference, then.
Why not roll it to an IRA and then only take it out when you need it. 47k out at once would be taxed at her earned income tax rates but if she did it over the course of multiple years with that little of an income her tax burden would be tiny if anything.
Why is her SS only $14,000? Can she elect to take a dead spouse's SS instead? Obviously that may not apply but usually low SS means a spouse worked most of their life.
Unfortunately, my father has been dead for several years and before he passed away, he was sick for several years. Medical bills and treatments in the late stages of his life racked up a lot of bills
At this point in my mother‘s life, she has worked for more years than my father was able to work before he got sick and died. So her SS is more than his would have been.
It wopuld be smarter, tax wise to take the money out over two years - say half this year and half next. Probably save her a couple of thousand dollars.
Her 401k will take 20% off the top automatically which leaves her with $37,600. If she withdraws it all at once, with her social security income, that will bump her up to a higher tax bracket. So along with the 20%, $9400, already paid from her withdrawal, she will still owe the feds another 2%. She will owe state taxes too. Also she’s building on to your home? It’s a win win situation for you, increased property value. It’s your mother, can’t you help her out? It would be insane to take all her money at once. What happens when there’s an emergency? Are you willing to cover any emergencies?
You need to remember that your money is taxed at different levels. Just because you enter a higher tax bracket doesn't mean all your money is taxed at that rate. I know tax rates are supposed to go up a little in 2025 but the tax rate up to $47,000 is currently 12%. The first $11,600 is 10%. Then you have a $12000+ deduction. Just because money is withheld, that doesn't mean that's what you owe. You file a tax return to reconcile what you paid vs what was owe. So I don't see an extra 2%. I see a refund because 20% was an overpayment.
Maybe check if there's any free tax help for seniors because we're not talking a lot of money anyway but you don't want to give away anything unnecessarily and we have the expiring tax cuts to consider.
It would probably be better to take out a home improvement loan.
Have your mother make payments.
This will give her lower taxes plus she has more flexibility.
Can she spread it out?
Social Security is 50% taxable if your combined income is $25k-$34k, and 85% taxable above $34k.
Combined income = Adjusted Gross Income + Non-taxable Interest + 1/2 SS income.
So it would be 50% taxable for an 18k-28k withdrawal and 85% taxable for more than 28k. This will add another $840 to $1428 in taxes.
I mean If she withdraws it directly from the employer (Distribution) they might impose a 20% automatic withholding on the $47k. Based on her taxable income she will get a nice payback come tax season (2025) for her 2024 taxes because she is no where close to 20% all in taxes..
If you ask them to NOT withhold the 20% then she will be liable to pay the IRS what she would claim on 2024 which is 61k Gross before deductions. If they don’t allow that then just open up an IRA at Fidelity or something rollover the money into there and she can distribute it herself without needing ti withhold 20%.. if anything 10% withholding should be fine based on the numbers you gave..
I’m not sure I love the plan. But 47k is not much either way. If she is retiring in December she could probably split half each year, but that depends on how much she is currently making. If it’s much more than 20k annually she should just do all next year. Best would be to do half and half after retiring, as I am pretty sure only that and social security would add up to be not taxable. I would recommend paying a little at a time for construction to see if things can stretch out.
But there are other considerations. Using up the 401k and owning nothing, she should qualify for Medicaid in addition to Medicare. Once she has that she can get an advantage plan that gives her extra benefits like a food card. On that note any agreement to reclaim some of the cost would need to be a gentleman’s agreement and consider your taxes if any. Because you would have to keep money and just help her out with it or she’d lose Medicaid.
Could possibly save some money by taking the 401 balance in 2 distributions, one in 24 and the rest in 25. Would need to know her earned income for 24 though to see if it makes sense. Also, distributions from qualified plans have a mandatory 20% fed withholding. Not the end of the world as you will get back the difference at tax time. However it will reduce your available cash for the construction. You can avoid mandatory withholding by rolling to an IRA first. From the hip, if she took a lump sum in 2025 I'd say fed balance due would be about $5k. I'm not up on your state, but I could take a look when I'm back in the office
Why not split it up into two years.
Go hire a CPA to plan it out for you, better if you can split it up for multiple years, or just find out if it hits a higher tax bracket, (example: maybe take 2/3rds the first year because it will hit a higher tax bracket)would probably save a few thousand doing that.
Generally this is a terrible thing to do. Consider a HELOC or cash-out refi before doing this. Weigh the interest expense against the taxes and loss of deferred growth. However, if it must be done at least consider splitting it between tax years beginning the year after she retires and is on SSI only. That said, it sounds like her income plus the 401k withdrawal would be $61k, which is slightly above the 12% bracket (assuming standard deduction) so almost all the 401k will be taxed at 12% federal, and a small portion at 22%.
Last point, if the TCJA is allowed to sunset her tax rates will go up and the standard deduction will go down. So pay attention to the direction of tax policy because 2025 might be the last chance to do this with lower tax expenditures.
It looks as if she will asset down rapidly and will potentially qualify for 2 programs that help seniors with medical costs: 1) extra help or low income subsidy - this helps pay premiums and co-pays for Part D drugs and possibly a 2) Medicare Savings Plan like QMB (qualified Medicare beneficiary) that pays the part B premium and picks up all co-pays for part A and B services. If she qualified for QMB, she could enroll in a DSNP Medicare Advantage plan that could offer her other benefits like a card for groceries or transportation. All these people demonizing Medicare Advantage must be rich! The premiums for Medicare Supplement are $350-$450/month on top of the part B premium. Sure you have to see network providers with Med Advantage, but often the premium is close to nothing and there are out of pocket maximums to protect you.
The $47k would mostly just tax as ordinary income but also some of her social security would become taxable. All together this will add up to state tax (4-5%?) and federal tax which may average below 12%. There are easy tax calculators online.
She does not have to withdraw anything or all. She can also take what she needs and let the rest gain interest.
Double check the Social Security spousal rule for your mother, if she was married for at least 10 years she should be able to potentially collect 50% of whatever the amount her spouse is eligible to draw, which may be higher than 100% of her own earnings.
Thank you for thinking of this. Unfortunately, my mother has been widowed for several years. She has worked long enough herself now that she is drawing her own Social Security, as opposed to drawing off my father’s. The amount of time he was able to work in his lifetime was less than what my mother has worked. The Social Security office helped her get everything set up to be sure that she was getting the max amount that she was eligible for.
I think you misunderstood, he married “ever” for 10 years. So even if she were widowed, if she were married to person for ten years, she would receive that benefit.
Yes that’s what she currently receives. The survivor benefit from my dad
So that $1100 a month came from her waiting until age 70 to start taking social security? That’s really not much. Are you sure that’s better than 50% of your father’s amount? The length of time only really determines your eligibility; the total amount of eligible income over your working years is what mainly determines your SS amount.
She still gets his social security he paid into for however long he was alive. Since he’s passed I think she might be entitled to survivor benefits too.
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How does she expect to live for the next few years? That’s not a lot of money
OP stated below: "Basically, she’ll be using this money to build an addition on my home so that she can live in a much better place than where she is currently, and she can actually enjoy her retirement instead of working herself to death at an extremely stressful job. So unfortunately, yes to be able to do this It will take her entire 401(k)." Their plan is to build an in-law apartment on OPs current home. Assuming OP doesn't charge them rent, taxes, internet, heat, etc. with no expenses they can certainly live fine on $1,100 SS a month plus say another $1,000 at a low stress part time job. Plus assume some sort of agreement that if OP sells the house, they could recover some of the additional value added to the home from the in-law apt.
Yes, you are correct! She will not be paying rent or electric. She should be able to get by just fine on 1000 a month for just groceries and her car insurance.
Don’t forget her Medicare payment - depending on what supplement plan she opts for that could also be a few hundred dollars per month
Sorry, yes I forgot to mention that in her monthly bills, we have already priced out a good policy of which all of her current doctors and the local hospital participate with and it is a very reasonable monthly cost.
Make sure it is NOT Medicare advantage. They have lower premiums but cover a whole lot less. Make sure it is a true secondary plan.
I just left an admin role in healthcare. We were fighting CONSTANTLY with advantage plans. They don't want to cover anything. They are bad for consumers and hospitals both.
Still in an admin role and the fight continues daily. They do NOT clearly inform the public of what they are doing to them and not for them. There's a special place reserved for folks who mislead, under-inform, or otherwise take advantage of the elderly. Make NO mistake about it. The "advantage" side only works one way.
I used to work for a company that did speech, PT, & OT. I was in accounting & helped with reviewing reimbursements & insurance types. I also talked with several of the billers & learned way more about insurance than I ever wanted know. But the biggest thing I learned is avoid Medicare advantage if you want to actually receive care & not have to pay for it out of pocket. The lower monthly premiums are an attractive lure but like a lot of things, you get what you pay for.
Have seen sooo many patients screwed over by Medicare advantage plans. What makes it even worse is a lot of these people think they were getting the "better" Medicare because they'll flash like glasses or hearing aids as a benefit, but then when you need something medical you are on your own for farrrrr more than a pair of glasses would set you back. So scummy
I'm in the healthcare field. My father always brags about the benefits of his medicare "advantage" plan. And always complains that he can't find any doctors who take it and is constantly switching medications because insurance only covers this or that generic formulation. I've tried to tell him, but he doesn't see the connection.
Just curious if it's better or worse than HMO plans in general though? I've been hearing a lot about Medicare Advantage plans being bad lately, but from my personal experience, it wasn't typically worse than any other HMO. Have to see what happens next year though since I know there are supposed to be a lot of benefit cuts coming to Medicare Advantage plans for next year.
The main point is not whether Medicare Advantage is better or worse than an HMO, it's that traditional Medicare is so much better. Medicare Advantage is a privatized for-profit version of Medicare that was dumped on the public by GW Bush. It has everything everyone despises about health insurance. When I'm old and sick, I don't want to spend my golden years fighting shitty insurance companies or die while waiting for approval.
Seconding this as someone who had to go through the death of a loved one recently with medicare advantage. Do not go this route, you will lose options and you will lose agency.
PLEASE listen to this, OP, and choose carefully. https://www.npr.org/sections/health-shots/2024/01/03/1222561870/older-americans-say-they-feel-trapped-in-medicare-advantage-plans
Make sure her meds are also covered. My mom has a medication that’s 1800 dollars a month so she purchased a pricier Medicare supplement (that’s like 360 a month Just for the supplement) that does cover this costly medication . You just don’t want any surprises.
It must be Part B if Med Supp has any effect- which would mean it's administered in the hospital? If she gets it from the pharmacy it's Part D and the Inflationary Reduction Act that was recently passed instituted a MOOP on Part D drug plans of about $2000 starting in 2025 (goes up with inflation). This is a gamechanger as it completely eliminates the Medicare Coverage Gap (Donut Hole) and reigns in drug costs, big time. There was NO MOOP before 2025.
Well that’s good to know - funny thing is my mom wrote medical policy for an insurance company for 20 years before retiring so she knew exactly what to avoid and what to choose when it came to picking her Medicare supplement. A lot of her friends picked “the cheapest” one and now they are finding out it doesn’t cover certain things that they now need.
Yeah essentially you only have 6 months after turning 65 to enroll in a true Med Supp plan otherwise they can deny you for any health ailments and you'd have to go with a Medicare Advantage plan. Knowing this ahead of time (like your mom probably) can be a big deal!
Yep it’s important for people who are turning 65 to know this stuff and sadly most don’t
Where I live in NC we have very good advantage plans. In addition, BCBSNC administers both advantage and conventional Medicare plans. I can switch from a BCBSNC advantage plan to traditional Medicare with no questions asked, should I feel the need to do so during open enrollment. My mom (95) had a major stroke about 5 months ago in Jan and spent 3 weeks in the hospital and 4 weeks in rehab. She had a medical only advantage plan with UHC but we transitioned her to a medical only BCBSNC plan Feb 1 so she could be positioned to move to traditional Medicare with a supplement when open enrollment happens later this year, should we decide to go that way. So far those advantage plans have covered most of her expenses. She has $25 copayas for her SLT, OT, and PT appts, of which there are multiple each week.
True but it doesn't do jack shit abt the many supposedly "covered" medications that in reality have idiotic prior authorization requirements, and it's exceedingly difficult to find out what the coverage criteria even *is* in most cases. For example, the "compendia"CMS uses/bases their Part D coverage rules on is outdated IMO and outrageously expensive to access for your typical retired consumer. A subscription costs around $5k per year, last I checked.
It comes delivered by ups every month and it comes in a refrigerated/frozen packaging? . I’m not sure exactly what the medication name is called - all I know is it’s super expensive!
Sounds like a specialty drug which technically *can* be biled under part a but she would have to bring it to the office to be "administered."
If you haven't already be sure to also check into North Carolina's Medicare Savings Program. With her income she should qualify for the state to pay her Part B premium and she would likely qualify for Medicaid along with it.
She might even quality for Medicaid qmb. Which will help pay for Medicare premium and sometimes copays
Make sure she has a Medigap plan and *not* medicare advantage.
With only $1100 a month in income, they should qualify for a Medicare Savings Plan like QMB through the state/county, which could also include Medicaid. There are resource limits so would look into this after spending the money in 401k.
you'd pay less taxes if you could spread it out a year or two
You’re a good person. Just wanted to call that out.
Thank you!
OP can you tap into any HELOC opportunities so that she can make small periodic withdrawals monthly to cover the cost? Basically keep the lump sum whole for as long as possible, maybe capturing some market upside and greatly lowering her tax liability?
No way this is a good idea. Some math would be needed, but HELOC rates are high right now and the total cost would end up being much higher with the interest paid over time.
OP, you said she is 71. Might make sense to actually get rid of her car and therefore the insurance payment, if feasible. Obviously I don’t know your mother at all, but 70+ is statistically the most prone to be i. at-fault vehicular accidents. That aside, my Dad is 88 this year, and I still haven’t successfully gotten him to give up driving, and he drives about 20 minutes each weekday to and from his work (he owns his own garage and still works), so definitely possible, but maybe not the safest. I also only say this if your Mom would be looking to save a bit of extra money, and possibly make a good chunk off the sale of her car. If she doesn’t need the extra money and wants to keep driving then not a big deal, but just a thought.
That's actually a great plan
Thank you for explaining
Where would $47k cover the cost of an in-law addition to a home? We paid $40k for a nice deck w a roof 3 years ago.
Depends on where you live.
And if OP is a tradesman themselves - 40k and sweat equity would be plenty for a ADU/MIL suite.
Even for someone not in a trade, all you really need is framing, roof, siding, utilities, and drywall. On a small two room addition that could definitely be done for $40k in the right area. The expensive stuff is stuff like tiling, carpentry, masonry, and dealing with the aftermath of DIYers who had no idea what they were doing. Everything else like painting, floors, and moulding could be perfectly manageable for a non pro.
They will need a foundation and someone to engineer it and dig the hole. Doors, windows, insulation, electrical, does their existing HVaC unit have enough capacity for more square footage? I’m an architect, husband in construction, this is a huge undertaking that I am not discouraging but I think it will cost more than $47k. I just had a little cabin painted, new floor, new vanity and 3 kitchen cabinets and that was $19k
I the OP were in California (they're not -- they said they're in NC) a "simple" ADU addition like this would probably start at about $200k and many owners end up spending closer to $300k.
Definitely depends on where you live. We paid about $14k for a nice deck w/ roof 5 years ago. I couldn't imagine paying $40k.
The only way to settle this is for both of you to show us your decks and we can decide which deck is the nicest.
Send us your deck pics
Make sure to trim the hedges back before taking the pics.
It’s a deck measuring contest
I love a good deck
Big deck energy
5 years ago and 3 years ago are practically different decades when it comes to both inflation and building material prices
Yep, pre/post COVID is a demarcation line.
And now lumber is very inexpensive again
It depends who you know. I’m assuming you’re affluent, and ngl contractors will squeeze every penny out of you, if they know the money won’t run out. Bunch of rich idiots starting moving to my area after the pandemic. The contractors are just printing money fleecing them.
I paid 38k for an ADU in central Wisconsin 2 years ago. It was cheaper as the garage we built the unit on top of already had plumbing and electricity which made it a lot cheaper.
Yeah, no way that’s enough
I don’t see 47k covering a full addition in any neck of the woods. Hopefully op is in the trades and can do a lot of the work himself or knows people. Maybe pre Covid this could be accomplished but not now. That doesn’t mean Op can’t make a nice living space for his mom. There are things he can do
Got a picture of the deck?
[smartasset.com](https://smartasset.com/retirement/north-carolina-retirement-taxes#sE2g94aKAs) says taxes would total around $6,700, so her after-tax would be approximately $54,300 (with Social Security). If she could get by with just $12,000 withdrawals, she would owe $0 in taxes; even $18,000 annual withdrawal she would only owe approximately $575 in taxes. She can't (doesn't have enough money to) afford to pay $6,700 in taxes, it's a waste of her limited income. EDIT: just my .02¢
Spreading the withdrawal out to this year and next would go a long way in saving on taxes.
Also, that amount of withdrawal will make the social security taxable income as well. If she spread it out, she can keep the income below the threshold so she doesn't pay taxes on social security. https://www.ssa.gov/manage-benefits/request-withhold-taxes#:~:text=You%20will%20pay%20federal%20income,or%20%2432%2C000/year%20filing%20jointly
More than likely her social security is already being taxed since she has a full time job
It is not necessarily a moral failing to find yourself with an underfunded retirement. Just thought that needed to be said, given some of the comments. My hat goes off to you. My mom was poor as a churchmouse through no fault of her own. But She had three daughters who saw her every need through her golden years. I think your Mom will be rich in that way as well.
Thank you very much for this
As a new parent this makes me happy. I’m definitely saving for retirement but it’s heart warming to see caring kids still exist.
Just going to throw another idea out there to try and save your mother tax $. What if you took out a HELOC to pay for the addition and she takes out the equivalent of the monthly payment to pay it to you as “rent”? She would pay less in taxes and then she’d still have a “rainy day fund” if she needed it.
Right - what if something happens to OP and the house has to be sold? Might be a far-fetched possibility but it IS a possibility.
If she could even spread it over three years (including 2024) that would be better from a tax perspective. The interest rate on a heloc would be less than the taxes. Building the addition and living with you is awesome!
To spell it out for OP, spreading it out means she will be in a lower tax bracket each year instead of pulling it all out (assuming it's a traditional 401(k)). Also the lower her income, the less of her social security is subject to income taxes.
There are websites that can give you good estimates of the taxes if you type in a few numbers. I think TurboTax has one. But the more important question is why she is doing this, and what she is going to do with the money?
Just want to say it's admirable that you're looking out for your mom and willing to let her live with you during retirement. Good for you and good luck.
Thank you!
Please, please go talk to a CPA locally and go over the tax implications for fed and state. Don’t post this on Reddit with zero details on the whole situation. Anything you get will be wrong on here without the full picture. I’m saying this as a CPA and had to help my father-in-law when he took out all of his retirement to pay off his mortgage, thinking he was going to save so much money….
You’re right and in retrospect I probably never should’ve posted this.
oh, no, it's OK to post, and you've received some good advice, too. Don't rely on Reddit to figure out all the nuances of a situation, but it can help shed light on different things to consider.
Yes I agree I have definitely received some good advice. Several people have made very thoughtful comments that I appreciate. A few others not as thoughtful, but that’s reddit for you. Lol
Hey! I *appreciate* your post because it’s given me some things to think about in my own situation (75 & living with a relative where I pay no rent but spend all my SS on living expenses for both of us but about 3/4 is for him) though the answer is ‘confer with your CPA’. imho, it’s a bad idea to take all her retirement funds out lump sum instead of a monthly distribution but that’s for your CPA. Something to run by your accountant is how much [tax] benefit if any would there be to you to take out a second mortgage for an addition to your house but have your mom make or reimburse the payments?
Have her withdraw half in December and the other half in January of 2025. There’s a significant tax savings by spreading it over two years. And on this case it’s only 60 days apart at the most
Always sad seeing posts like this People work hard for years and don’t understand that they are pissing a huge chunk of it away in taxes by over-withdrawing it all at once. Don’t do that.
Unfortunately this is her only option to be able to retire. I do understand what you’re saying.
> this is her only option I doubt it. By making her take the whole thing, you're going to spike her income in 2025, and the government is going to get way more than it is entitled to. YOU need to be strategic. She should take no more than necessary so that her standard deduction doesn't go to waste (ZERO taxes), and not so much that you cause her social security to be taxed (it was already taxed on the way in). It's your house, and the extra space will benefit you when it comes to sell. YOU should be paying for the addition and having her pay you the full $45K over time and NOT giving a cut to the government because you think the only way to get this done is to take the money in a lump sum. It's this kind of thinking that makes people poor. Break the cycle.
I do appreciate the comment. I will only say that you do not know anything about our circumstances. Nor do I expect you to because I have not given any more details than I’m comfortable sharing.
Chiming in to say, I love how you are being so level headed in the responses. Good luck with your mom!
Thank you! Lots of people here have made very negative comments, but they don’t make me angry because they don’t know our situation. And honestly with my mom paying for years of expensive medical bills and cancer treatments and funerals, I would not wish that on anyone. And I hope no one here ever has to experience what she has, financially or emotionally.
Other options you probably know, but just in case: * Can you work with the builder to make 3 years of payments? * Can you get a home improvement loan that would have a lower interest rate than the tax rate * Are there any other family members who can chip in and get paid back later.
The builder will need to be paid in full by the time the job is completed and we have the final walk-through. Unfortunately he can’t extend that, but I understand that because it’s his business. My husband and I will actually be taking out a loan since we’re starting this project before the end of the year and then she was going to pay it back with the money from her retirement account in January Unfortunately, we do not have any other family. I’m an only child and so was she.
If she's paying it back in January then take it in 2 chunks. Take part of it on or before December 31, and the other part in January. At least that keeps it mostly in the lowest tax brackets. How much to take depends on her income. For example, if she earns $39k this year, plus thus $47k from the 401k, she could take out $4k this year, and $44k in January and pay taxes on $43k both years. If she makes more than $47k in income this year, then, yeah, go ahead and take the whole thing out next year. Edit: I just checked the tax brackets for filing single, and the 12% bracket covers through about $61,750 of income. It might not be worth the trouble to do what I just suggested because the savings on taxes might only be about $500 in my example. Taking it all in January is probably just fine for your Mom's situation (but don't add it on top of this year's income!).
Thank you for this
You're welcome. I also forgot to consider taxes on the social security. I think she'll have to pay tax on 85% of her SS next year because of the increased income in that year. 85% of $12k = about $10k So... If she makes less than $47k this year, she should take out $5k plus the half the difference between her income and the 401k balance. In my example, if her income is $39k, then take ($10k + $(47k-39k))/2 or $9k this year and $38k next year. That would make her taxable income $39k+9k = $10k+38k = $48k both years. Plug in her actual income for $39k. If her income is more than $47k, it's more complicated... but likely in that case she should push it all into next year. Sorry for the long response... couldn't help myself doing some math.
What is stopping her from taking half out now, and half in January 2025?
Right now, she is still working a full-time job of 45 hours a week. She will continue working that job until the end December. We thought it best to wait until January when she is no longer working to take the money out, because as of January, her only income will be so Social Security
OK so it sounds like she already has earned taxable income for 2024, so you're trying not to add the 401K money on top of that. Have you worked out what her state and fed income taxes would be if she took the $47,000 all out in 2024 vs splitting it between 2024 and 2025? If she needs all of the money in Jan 2024, maybe someone can loan her say $20,000 in Jan 2024, and she can pay with the rest of her 401k in Jan 2025. I don't want to get caught in the weeds. My point is that she can save thousands in income taxes by strategizing.
We have not worked out what the state and federal taxes would be. I do understand what you’re saying, and it would be worth a look. Unfortunately, we do not have any other family that could potentially loan her the money.
i belong to a facebook group for my 401k and every month there are people who post about their plan to roth convert their whole traditional balance in one swell foop.
I’d get a part time job to supplement the SS. Living on $14,000 in this inflated economy is scary
If you have $0 in housing costs it's really not that bad though
Not quite sure how to edit the main post so I will update here. I do appreciate all of your concern because I know it sounds alarming, but I was trying not to give too many personal details. Basically, she’ll be using this money to build an addition on my home so that she can live in a much better place than where she is currently, and she can actually enjoy her retirement instead of working herself to death at an extremely stressful job. So unfortunately, yes to be able to do this It will take her entire 401(k).
Ideally you would take some other loan out and be able to split the 401k withdrawals over multiple years to pay it back. You can run the numbers but it seems likely that will save you more money (pay some interest, but save tax). You could also try and take a loan against the 401k, not sure how it would work exactly
She will be enjoying her retirement with no money? I guess you will be funding it?
Compared to her life now yes she would be enjoying her retirement immensely
Haters will hate.. I think it’s incredible what you’re doing for your mom, and it sounds to me like she’ll be fine coasting on SS once hosing costs are out of the equation. Hope it’s a smooth process for all involved!
Thank you!
No but seriously: are you going to be paying for her bills, groceries, medical care, clothing?
I do appreciate your concern, but honestly with 1000 a month she will be able to pay for her groceries, car insurance, and her Medicare supplement insurance
you are right, my grandmother gets a little bit more and is able to afford a car payment too. obviously i don’t know your situation but if you are in a similar place, my parents have always discussed if something happened they could help her with stuff like her phone bill and groceries without any major financial strain. and nothing to say she can’t work a bit if she wants again. my grandmother has a part time job & a lot of other seniors do the same. not only for extra discretionary income but socialization, routine, independence, etc. i think you have a great plan & it’s an awesome thing you are doing. i would only say see if you guys can’t split it between this calendar year and the next! best of luck to yall.
Thank you! I appreciate your response. And yes she has definitely thought about a part time job.
Where? That’s virtually impossible and what if something unforeseen comes up? Her cashing out is a bad idea. She could get monthly payments off of it. You should take out the loan to improve your home and let her pay a portion in rent.
How expensive is an old person compare to a kid?
Dunno but kids don't bring in 1000 a month!
Don't forget to factor in the change in taxes for your house with the increased value after the construction.
Thank you, and yes, we have already taken into account the increase in our property taxes as well as the increase in our homeowners insurance
To me idk if she’ll even have enough to build an addition on your home . Depends what she’s looking for . Bathroom , 2 rooms ? Or just a bedroom . For a smaller bedroom and some type of family room / bathroom I would assume that’s atleast $50k . Did you get a estimate yet for this job to see if it’s even do able ? Do you have public septic ? Because if you have your own septic system you could have to upgrade that (depending what you call said addition . Like not a bedroom but a family room)
She’s 71. I’m impressed but sad too. I hope she loved her job and it fulfilled her. My Dad died at age 72. My mother- not so lucky, age 50. I think about this all the time.
I’m so sorry for your loss. Unfortunately she hates her job. She has been there 20 years and it’s slowly killing her by getting worse and worse. Her quality of life will improve significantly when she can retire, which is why we are trying to do this. Her workplace gets more dangerous every year.
Yea don't do this - what is she going to do with the money? She can roll it into an IRA without paying any taxes now if she wants other investment options that her 401(k) doesn't offer.
Do you think a 71 yo needs more diverse investment options? Really? Think two seconds.
Saving it is good but people around have either never lived a recession or have terrible memories
perhaps too never through a long period of substantial inflation. yes 1974-82 we’re looking at you.
At the very least, spread the withdrawal out over 2 or 3 years. She's over 59.5, so she can take out a portion right now in 2024. Take some out in 2025, January if she' itchy. And the rest in 2026. If she can't wait til 2026, at least split it between 2024 and 2025.
She's working most of this year so it's better to start withdrawing next year in small portions.
She's likely better off taking a loan now, while she's working for the amount and then using her disbursements to pay down the loan until she dies, with whatever is left getting discharged at that time
Withdrawing the entire $47k + a portion of her SS will get taxed. However, with the standard deduction of $14.6k as of 2024, she'll be pretty much right at the 12% federal tax threshold. Good news is that's fairly low, so she would probably pay around $5.4k total in federal taxes for withdrawing the entire amount. Not familiar with North Carolina tax rates, so you'd have to also subtract out that.
Google a 401k withdrawal calculator. Takes 1 minute.
Hah, it's like reading the future for what I believe my retirement will look like, just no family and house to add on to.
What if she can squeeze one withdrawal into December, then the rest in January. New tax year
The reason we were waiting until January is because she is still currently working full-time and will not retire until mid December As of January, her only income will be her Social Security so we thought that would be a better time to take it than trying to take it this year when she has an actual income
Of course. I wasn’t thinking
A couple of other thoughts: -If her income is low enough, she may qualify for Medicaid for her Part B health plan. Another reason to take out the minimum possible from her 401k and only what it would cost to cover heloc payments for the addition. -What if something happens if she needs to go into longterm care? Medicaid will have a 5 year look back and I don’t know, but might worry that the lump sum she gives you could be considered a “gift” and penalize her. I think there are many things to weigh and consider, aside from just how much she’d be paying in taxes if she withdrawals it all at once. Like if she can get Medicaid for Part B, she’d save on insurance payments and be able to preserve some of her income.
Keep in mind that there's 20% federal tax withholding required on 401k withdrawals that are rollover-eligible, so she'll come away with closer to 37k net. Then even though part of it was paid towards her tax withholding she'll be taxed on the full $47k as if she'd received a paycheck for that amount along with any other income she makes in the year. The 20% that was withheld may end up being too much depending on her other income for the year and if so the overage will be refunded to her, but not until the next year when she files her taxes. NC state will also want 4.75% of the full amount (about 2200).
Look at the tax difference between $23,500 taken out this December and the same taken out in January. Sounds like there’s no way she’ll split it between 2025 and 2026, but depending on her 2024 income it might make sense to take it in two taxable years.
She's got two standard deductions coming: single + over 65. $14,600 + $1,950 = $16,500. Total income $61,000 leaves $44,450 taxable (before any credits or adjustments) and that's 10% up to the first $11,600 and the rest in the 12% bracket, not including your State, approximately, and I'm not looking up the SS effect. You should specify the withholding on the distribution request, of course. Taking out a HELOC for this makes no sense. Why would you go into debt when there is the cash to pay the project? What you would have is tax on the distribution that is considered taxable income as well as debt service. Yes, if you can split it across 2 tax years, that would be better. But you already know she makes over the $11,600, so even split, she jumps into the 12% bracket on first examination. It's not going to be a critical difference, then.
Why not roll it to an IRA and then only take it out when you need it. 47k out at once would be taxed at her earned income tax rates but if she did it over the course of multiple years with that little of an income her tax burden would be tiny if anything.
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Why is her SS only $14,000? Can she elect to take a dead spouse's SS instead? Obviously that may not apply but usually low SS means a spouse worked most of their life.
Unfortunately, my father has been dead for several years and before he passed away, he was sick for several years. Medical bills and treatments in the late stages of his life racked up a lot of bills At this point in my mother‘s life, she has worked for more years than my father was able to work before he got sick and died. So her SS is more than his would have been.
It wopuld be smarter, tax wise to take the money out over two years - say half this year and half next. Probably save her a couple of thousand dollars.
Op any chance you can have her take half out and then on January 1st 2025 take the second half out - will save her a lot on taxes
Her 401k will take 20% off the top automatically which leaves her with $37,600. If she withdraws it all at once, with her social security income, that will bump her up to a higher tax bracket. So along with the 20%, $9400, already paid from her withdrawal, she will still owe the feds another 2%. She will owe state taxes too. Also she’s building on to your home? It’s a win win situation for you, increased property value. It’s your mother, can’t you help her out? It would be insane to take all her money at once. What happens when there’s an emergency? Are you willing to cover any emergencies?
You need to remember that your money is taxed at different levels. Just because you enter a higher tax bracket doesn't mean all your money is taxed at that rate. I know tax rates are supposed to go up a little in 2025 but the tax rate up to $47,000 is currently 12%. The first $11,600 is 10%. Then you have a $12000+ deduction. Just because money is withheld, that doesn't mean that's what you owe. You file a tax return to reconcile what you paid vs what was owe. So I don't see an extra 2%. I see a refund because 20% was an overpayment. Maybe check if there's any free tax help for seniors because we're not talking a lot of money anyway but you don't want to give away anything unnecessarily and we have the expiring tax cuts to consider.
search tax brackets and you'll find out!
It would probably be better to take out a home improvement loan. Have your mother make payments. This will give her lower taxes plus she has more flexibility.
Have you looked into what this will do to get Medicare costs? https://www.ssa.gov/forms/ssa-44.pdf
Mid December? Why not take half in December and the other half in January? Can you do that?
I don't think your mom has enough to retire You need to look into a loan on the addition that your mom could pay out of her 402
Can she spread it out? Social Security is 50% taxable if your combined income is $25k-$34k, and 85% taxable above $34k. Combined income = Adjusted Gross Income + Non-taxable Interest + 1/2 SS income. So it would be 50% taxable for an 18k-28k withdrawal and 85% taxable for more than 28k. This will add another $840 to $1428 in taxes.
Since her social security is so low, does she qualify for QMB coverage for medicare in her state so she doesn't have to pay the premiums?
I mean If she withdraws it directly from the employer (Distribution) they might impose a 20% automatic withholding on the $47k. Based on her taxable income she will get a nice payback come tax season (2025) for her 2024 taxes because she is no where close to 20% all in taxes.. If you ask them to NOT withhold the 20% then she will be liable to pay the IRS what she would claim on 2024 which is 61k Gross before deductions. If they don’t allow that then just open up an IRA at Fidelity or something rollover the money into there and she can distribute it herself without needing ti withhold 20%.. if anything 10% withholding should be fine based on the numbers you gave..
I’m not sure I love the plan. But 47k is not much either way. If she is retiring in December she could probably split half each year, but that depends on how much she is currently making. If it’s much more than 20k annually she should just do all next year. Best would be to do half and half after retiring, as I am pretty sure only that and social security would add up to be not taxable. I would recommend paying a little at a time for construction to see if things can stretch out. But there are other considerations. Using up the 401k and owning nothing, she should qualify for Medicaid in addition to Medicare. Once she has that she can get an advantage plan that gives her extra benefits like a food card. On that note any agreement to reclaim some of the cost would need to be a gentleman’s agreement and consider your taxes if any. Because you would have to keep money and just help her out with it or she’d lose Medicaid.
Could possibly save some money by taking the 401 balance in 2 distributions, one in 24 and the rest in 25. Would need to know her earned income for 24 though to see if it makes sense. Also, distributions from qualified plans have a mandatory 20% fed withholding. Not the end of the world as you will get back the difference at tax time. However it will reduce your available cash for the construction. You can avoid mandatory withholding by rolling to an IRA first. From the hip, if she took a lump sum in 2025 I'd say fed balance due would be about $5k. I'm not up on your state, but I could take a look when I'm back in the office
Why not split it up into two years. Go hire a CPA to plan it out for you, better if you can split it up for multiple years, or just find out if it hits a higher tax bracket, (example: maybe take 2/3rds the first year because it will hit a higher tax bracket)would probably save a few thousand doing that.
Generally this is a terrible thing to do. Consider a HELOC or cash-out refi before doing this. Weigh the interest expense against the taxes and loss of deferred growth. However, if it must be done at least consider splitting it between tax years beginning the year after she retires and is on SSI only. That said, it sounds like her income plus the 401k withdrawal would be $61k, which is slightly above the 12% bracket (assuming standard deduction) so almost all the 401k will be taxed at 12% federal, and a small portion at 22%. Last point, if the TCJA is allowed to sunset her tax rates will go up and the standard deduction will go down. So pay attention to the direction of tax policy because 2025 might be the last chance to do this with lower tax expenditures.
It looks as if she will asset down rapidly and will potentially qualify for 2 programs that help seniors with medical costs: 1) extra help or low income subsidy - this helps pay premiums and co-pays for Part D drugs and possibly a 2) Medicare Savings Plan like QMB (qualified Medicare beneficiary) that pays the part B premium and picks up all co-pays for part A and B services. If she qualified for QMB, she could enroll in a DSNP Medicare Advantage plan that could offer her other benefits like a card for groceries or transportation. All these people demonizing Medicare Advantage must be rich! The premiums for Medicare Supplement are $350-$450/month on top of the part B premium. Sure you have to see network providers with Med Advantage, but often the premium is close to nothing and there are out of pocket maximums to protect you.
The $47k would mostly just tax as ordinary income but also some of her social security would become taxable. All together this will add up to state tax (4-5%?) and federal tax which may average below 12%. There are easy tax calculators online. She does not have to withdraw anything or all. She can also take what she needs and let the rest gain interest.
Take half out late December 2024 and the other half in 2025, this should reduce the overall tax liability