Check out some similar questions!

Jbert · Nov 29, 2006, 12:54 AM

In a move to accompany losing my employment and becoming disabled, I had to make 2 distributions from my 401K. The first was to buy a new vehicle as a result of a wreck and the second was to pay off my house note. When I file taxes for 2006 can either of those, especially the house be considered for some kind of deduction to offset the income for the distribution

Thanks

Jim

AtlantaTaxExpert · Nov 29, 2006, 03:51 PM

If you are disabled, you MAY be exempt from the 10% early withdrawal penalty. The distributions themselves will be taxed, however.

Jbert · Nov 29, 2006, 04:18 PM

ATE, thanks. I understand that part you mentioned. What I was asking, especially the house. Payoff was $43,000.00. Can that be climed or exempted anywhere to compensate for the $43,00.00 that will be income.

Jim

AtlantaTaxExpert · Nov 29, 2006, 08:53 PM

Negative. Only disbursements from IRAs to buy a house for a first-time homebuyer can be exempted from the early withdrawal penalty, and that disbursement is limited to $10,000. It is STILL taxed as ordinary income.

Jbert · Nov 30, 2006, 04:58 AM

ATE, I have been on many forums and you are #1 in helping people. I am glad I took out 20% on each W/D. I did qualify for no 10% on the house W/D. again, thanks so much for all your help. [email protected].

Jim

ScottGem · Nov 30, 2006, 07:14 AM

Its too late now, but it may have been a mistake to pay off the note, especially with a 401K distribution. Interest on a mortgage is tax deductible. So what you have done is reduce your deductions, increasing your tax liability.

It might have been better to deposit the 401K distribution and use it to make your monthly payments on the mortgage.

As I said, its too late for you, but this might help others contemplating a similar strategy.

Jbert · Nov 30, 2006, 11:09 AM

Scott Gem,

You are absolutely correct. The reason we did not do that was I was not itemizing deductions and I at least saved the interest per month on the note if we paid it out. You and ATM always give such great advice. People do not realize the impact 401K's have and the destruction if you pull out money. We did use your exact advise on the remaider. Hard to live off disability income so we have to pull a small amount out spendable savings to pad income. Once a year I W/D from 2 small funds. Other funds are locked away. Good advise and I thanks you.

Jim

AtlantaTaxExpert · Nov 30, 2006, 07:53 PM

Glad to help!