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I got permission from ShortStuff to copy this from my board: "My son told me a story of a friends mother who was collecting $2300 a month social security. She then took $76,000 from her annuity last year to do some remodeling on her home. She did her taxes this and paid the tax owed on the funds, but the government said she made too much money last year putting her into a higher tax bracket and took 1,000 from her ss each month. Now she makes only $1300 each month and had to do a reverse mortgage just to survive. This woman lives in California which shouldn't really have anything to do with this because it is federal."
So, this person would have been paying very little in Federal taxes on about 28K per year in SS benefits, right? And taking out 76K pushes her into the 28% bracket, with little to no offsets in terms of deductions, I'll bet. So she got a whopping tax bill for that year and the IRS is taking what she owes from her SS, which is her only income, yes?
I just want you to understand that her SS gross hasn't changed; her benefit hasn't been reduced. Her NET has been reduced because she owed taxes.
I think the moral of this tale is that you need to consult a good tax adviser before you do this.
And I just want to ask, is it wise to saddle yourself with a house in your 70s? Just something you might want to think about.
Do you mean that the funds were paid in on a Pre-Tax basis?
Are you over 59 1/2?
Your social security payments are based upon your earnings while you were working. To my knowledge, what you take out of your 401K has no bearning on your SS. It may make a difference in whether or not your SS gets taxed or not, I think.
I'm not sure what you mean when you say that you are taking money from your annuity which was a 401K.
Do you mean that you used funds that had been in a 401K to buy an annuity? Have you inquired what the penalty for early withdrawal is from the Insurance Company that sold you the annuity?
If you and your spouse file a joint return with a combined income below $32,000, your Social Security benefits are not taxable. For income between $32,000 and $44,000, up to 50 percent of benefits may be taxable, and up to 85 percent if combined income is more than $44,000. For more information, go to Social Security's website.
The withdrawal may put you into a higher tax bracket, but that is NOT the same as your SS payment being reduced.
If you didn't pay income tax on these monies when they were sheltered in the 401K, or when you rolled them into an annuity, they are taxed as regular income now.
So, SS, if your friend took out 76K from her annuity in addition to her SS, she would have been very under withheld during the year and should have been filing quarterlies returns with the estimated tax owed, right? Is that why the IRS is clawing back some of her SS? To pay taxes and penalties?
Just to make this a little more "real", this year, if one had an income of 28K, one owes $2100 in Federal taxes. If one makes 104K, one owes $19,190. in Federal taxes.
If you buy the annuity with pretax money, then the entire balance will be taxable. If you use after-tax funds, however, then you'll be taxed only on the earnings. If you cash out a deferred annuity in a lump sum, then you'll have to pay income taxes on all of the earnings higher than your original investment. How Annuities Are Taxed - Kiplinger kiplinger.com/article/.../T003-C001-S001-how-annuities-are-taxed
Long Post. The original question's answer depends on the nature of the annuity/pension plan/401 or 403b plan you take money out of. The important element in this is REMEMBER that the IRS is a super-creditor. That means that taxes that are due can and will be paid to the federal government one way or another. This is why any lump-sum withdrawal from a pension plan or 401K or life insurance plan or annuity has to be carefully reviewed and the proper withholding or extra tax deposits made. You can have money withheld from the lump sum distribution - usually ranging from 10-20% - but your particular tax situation is not the responsibility of the entity paying out your lump sum to anticipate. It is the taxpayer's responsibility to make sure that sufficient taxes are withheld or paid separately as an estimated tax to cover their tax debt. From the IRS website: "Beginning in February 2002, Social Security benefits paid under Title II - Federal Old-Age, Survivors and Disability Insurance Benefits will be subject to the 15-percent levy through the Federal Payment Levy Program (FPLP); to pay your delinquent tax debt. As of October 5, 2015, IRS will no longer systemically levy the SSA Disability Insurance Benefits through the FPLP. The Old Age and Survivors Benefits will continue to be levied at 15% through the FPLP to pay your delinquent tax debt." If you usually have social security at a low enough point that you owe little or no tax, a lump sum distribution can cause a very large TAX BILL for federal and state purposes. $75,000 can easily move you up 2 or 3 tax brackets. The taxpayer then faces choices: you either make a payment plan with the IRS and follow it to the letter, or the IRS files a lien on bank accounts and withdraws funds if available whether you need them to pay bills or not, or IRS files a lien with your employer and takes a portion of wages if you are still working, or IRS files a lien on social security or pension distributions if you are retired. Social security is "safe" from being seized for debts (garnishment) like credit cards or mortgages or court judgments BUT social security and other pensions can have money taken out of it to repay a tax debt to the IRS. It's limited to a max of 15% of the person's income for IRS debt, but that can cause a person with low income to be in bad shape. Before this action is taken, the IRS has to send multiple notices to the taxpayer with requests to arrange payment. At least 3 separate legal communications are sent with a final notice 30 days before the garnishment takes place. If taxes are being garnished from social security or pension, no one set up a payment plan or dealt with the IRS before it got ugly. If you owe taxes, interest and penalties, it gets ugly fast. 401K contributions are taken out pre-tax from a salary or wages paid by a company to an employee. They reduce a person's taxable income for federal income tax in the period that they are taken out. Example: You make $100,000; take out $5,000 for 401K, and will have an adjusted earnings of $95,000. This will be adjusted by exemptions, deductions, etc. as applicable by law. You will still owe Social Security taxes and Medicare taxes on the $100,000 because when you take money OUT of the 401K it will NOT have social security taxes or Medicare taken out of it. When you take money out of the 401K account, you owe taxes on it; and if you take money out before you are 59 1/2, you owe an extra 10% penalty at tax time unless you meet very specific exceptions. If a lump sum is being taken out to purchase a house in 70's, you should consult an elder care lawyer familiar with Medicaid and with tax planning available. Medicaid on the horizon and the lack of money available to maintain the house later is a consideration at this point, in all honesty, and you don't want to put yourself in a bind.
By proceeding, I agree that I understand the following disclosures:
I. How We Work in Washington.
Based on your preferences, we provide you with information about one or more of our contracted senior living providers ("Participating Communities") and provide your Senior Living Care Information to Participating Communities. The Participating Communities may contact you directly regarding their services.
APFM does not endorse or recommend any provider. It is your sole responsibility to select the appropriate care for yourself or your loved one. We work with both you and the Participating Communities in your search. We do not permit our Advisors to have an ownership interest in Participating Communities.
II. How We Are Paid.
We do not charge you any fee – we are paid by the Participating Communities. Some Participating Communities pay us a percentage of the first month's standard rate for the rent and care services you select. We invoice these fees after the senior moves in.
III. When We Tour.
APFM tours certain Participating Communities in Washington (typically more in metropolitan areas than in rural areas.) During the 12 month period prior to December 31, 2017, we toured 86.2% of Participating Communities with capacity for 20 or more residents.
IV. No Obligation or Commitment.
You have no obligation to use or to continue to use our services. Because you pay no fee to us, you will never need to ask for a refund.
V. Complaints.
Please contact our Family Feedback Line at (866) 584-7340 or ConsumerFeedback@aplaceformom.com to report any complaint. Consumers have many avenues to address a dispute with any referral service company, including the right to file a complaint with the Attorney General's office at: Consumer Protection Division, 800 5th Avenue, Ste. 2000, Seattle, 98104 or 800-551-4636.
VI. No Waiver of Your Rights.
APFM does not (and may not) require or even ask consumers seeking senior housing or care services in Washington State to sign waivers of liability for losses of personal property or injury or to sign waivers of any rights established under law.
I agree that:
A.
I authorize A Place For Mom ("APFM") to collect certain personal and contact detail information, as well as relevant health care information about me or from me about the senior family member or relative I am assisting ("Senior Living Care Information").
B.
APFM may provide information to me electronically. My electronic signature on agreements and documents has the same effect as if I signed them in ink.
C.
APFM may send all communications to me electronically via e-mail or by access to an APFM web site.
D.
If I want a paper copy, I can print a copy of the Disclosures or download the Disclosures for my records.
E.
This E-Sign Acknowledgement and Authorization applies to these Disclosures and all future Disclosures related to APFM's services, unless I revoke my authorization. You may revoke this authorization in writing at any time (except where we have already disclosed information before receiving your revocation.) This authorization will expire after one year.
F.
You consent to APFM's reaching out to you using a phone system than can auto-dial numbers (we miss rotary phones, too!), but this consent is not required to use our service.
"My son told me a story of a friends mother who was collecting $2300 a month social security. She then took $76,000 from her annuity last year to do some remodeling on her home. She did her taxes this and paid the tax owed on the funds, but the government said she made too much money last year putting her into a higher tax bracket and took 1,000 from her ss each month. Now she makes only $1300 each month and had to do a reverse mortgage just to survive. This woman lives in California which shouldn't really have anything to do with this because it is federal."
So, this person would have been paying very little in Federal taxes on about 28K per year in SS benefits, right? And taking out 76K pushes her into the 28% bracket, with little to no offsets in terms of deductions, I'll bet. So she got a whopping tax bill for that year and the IRS is taking what she owes from her SS, which is her only income, yes?
I just want you to understand that her SS gross hasn't changed; her benefit hasn't been reduced. Her NET has been reduced because she owed taxes.
I think the moral of this tale is that you need to consult a good tax adviser before you do this.
And I just want to ask, is it wise to saddle yourself with a house in your 70s? Just something you might want to think about.
Are you over 59 1/2?
Your social security payments are based upon your earnings while you were working. To my knowledge, what you take out of your 401K has no bearning on your SS. It may make a difference in whether or not your SS gets taxed or not, I think.
I'm not sure what you mean when you say that you are taking money from your annuity which was a 401K.
Do you mean that you used funds that had been in a 401K to buy an annuity? Have you inquired what the penalty for early withdrawal is from the Insurance Company that sold you the annuity?
If you didn't pay income tax on these monies when they were sheltered in the 401K, or when you rolled them into an annuity, they are taxed as regular income now.
How Annuities Are Taxed - Kiplinger
kiplinger.com/article/.../T003-C001-S001-how-annuities-are-taxed
The original question's answer depends on the nature of the annuity/pension plan/401 or 403b plan you take money out of.
The important element in this is REMEMBER that the IRS is a super-creditor. That means that taxes that are due can and will be paid to the federal government one way or another. This is why any lump-sum withdrawal from a pension plan or 401K or life insurance plan or annuity has to be carefully reviewed and the proper withholding or extra tax deposits made. You can have money withheld from the lump sum distribution - usually ranging from 10-20% - but your particular tax situation is not the responsibility of the entity paying out your lump sum to anticipate. It is the taxpayer's responsibility to make sure that sufficient taxes are withheld or paid separately as an estimated tax to cover their tax debt.
From the IRS website: "Beginning in February 2002, Social Security benefits paid under Title II - Federal Old-Age, Survivors and Disability Insurance Benefits will be subject to the 15-percent levy through the Federal Payment Levy Program (FPLP); to pay your delinquent tax debt. As of October 5, 2015, IRS will no longer systemically levy the SSA Disability Insurance Benefits through the FPLP. The Old Age and Survivors Benefits will continue to be levied at 15% through the FPLP to pay your delinquent tax debt."
If you usually have social security at a low enough point that you owe little or no tax, a lump sum distribution can cause a very large TAX BILL for federal and state purposes. $75,000 can easily move you up 2 or 3 tax brackets. The taxpayer then faces choices: you either make a payment plan with the IRS and follow it to the letter, or the IRS files a lien on bank accounts and withdraws funds if available whether you need them to pay bills or not, or IRS files a lien with your employer and takes a portion of wages if you are still working, or IRS files a lien on social security or pension distributions if you are retired. Social security is "safe" from being seized for debts (garnishment) like credit cards or mortgages or court judgments BUT social security and other pensions can have money taken out of it to repay a tax debt to the IRS. It's limited to a max of 15% of the person's income for IRS debt, but that can cause a person with low income to be in bad shape. Before this action is taken, the IRS has to send multiple notices to the taxpayer with requests to arrange payment. At least 3 separate legal communications are sent with a final notice 30 days before the garnishment takes place. If taxes are being garnished from social security or pension, no one set up a payment plan or dealt with the IRS before it got ugly. If you owe taxes, interest and penalties, it gets ugly fast.
401K contributions are taken out pre-tax from a salary or wages paid by a company to an employee. They reduce a person's taxable income for federal income tax in the period that they are taken out. Example: You make $100,000; take out $5,000 for 401K, and will have an adjusted earnings of $95,000. This will be adjusted by exemptions, deductions, etc. as applicable by law. You will still owe Social Security taxes and Medicare taxes on the $100,000 because when you take money OUT of the 401K it will NOT have social security taxes or Medicare taken out of it. When you take money out of the 401K account, you owe taxes on it; and if you take money out before you are 59 1/2, you owe an extra 10% penalty at tax time unless you meet very specific exceptions.
If a lump sum is being taken out to purchase a house in 70's, you should consult an elder care lawyer familiar with Medicaid and with tax planning available. Medicaid on the horizon and the lack of money available to maintain the house later is a consideration at this point, in all honesty, and you don't want to put yourself in a bind.
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