I’m 67 and took $85,000 from my 401(k) as a down payment for my son, and then my Medicare premiums went up. Is this permanent?
Setting aside a large amount of money in a 401(k) can give you truly rich financial options. But if you withdraw too much money at once, you’ll soon find Uncle Sam’s IRS hawk sinking its beak into your savings.
So if you decide at age 67 to put down 20% for your devoted son on his first home for $425,000, does that mean the government reserves the right to claim its share multiple times over?
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Here’s how it works: The government monitors your taxable income — and retirement account distributions are part of it.
Depending on how much you withdraw, some of your income may be in a higher marginal tax bracket – and no, the IRS agent near you doesn’t care if you stop working.
Income thresholds also extend to health insurance. Exceeding a certain modified adjusted gross income can cause your premiums to skyrocket. This means you could end up paying that withdrawal fee multiple times.
But is there a way to ensure this never happens again?
The answer depends on how much you know about finances.
Assume you receive a monthly Social Security check of $1,925, which is the average amount for retired workers as of November 2024, which works out to $23,100 per year.
Since you’re still in your 60s, you don’t need to take annual withdrawals from your retirement account yet.
So if this $23,100 is your only income – and it’s enough to live on – and you file as a single individual taxpayer, you won’t pay any federal taxes. The IRS only begins filing Social Security taxes when 50% of your benefits for the year plus any other income total more than $25,000.
But that changes if you come up with $85,000 for a down payment for your son. The IRS formula for taxing Social Security adds half of your benefit to $85,000, or $96,550. This means you’ll exceed the $34,000 threshold at which up to 85% of your benefits will be taxed. Ouch.
Now see if you can follow this, non-accountants: 85% of $23,100 means $19,635 of your Social Security benefits are taxable, plus your $85,000 withdrawal, our taxable income for the year is $104,635.
