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Dear Tax Talk,
I am over 59½ and unemployed. I would like to pay off my mortgage by taking $100,000 from my standard IRA. How much taxes do I withhold?
Although it may seem like a good idea to pay off your mortgage, the tax cost of making the lump-sum payment is prohibitive. While you’re over 59½ years of age, you still have to pay income tax on the withdrawal. Your tax could be easily $30,000 or more, depending on state taxes. You won’t save this in mortgage interest for several years. If you’re set on this, you should consider doing it over a period of years to minimize your tax exposure.
If you’ll need to work in the future, you may want to consider using your IRA to start a business. This is a much wiser use of your funds. If structured properly, you could even use your IRA to make the business loan tax-free. You could do this by setting up a qualified retirement plan that allows you to roll over your IRA. The retirement plan can provide for participant loans, which would be tax-free up to $50,000. You’ll have to have set up the right type of plan and business structure, so I recommend you talk to a good CPA about this before taking any action.
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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.