What do I cash out??

krsis · #1 (**permalink**) 05-21-2008, 09:26 PM

I need some help in determining my best option. My brother is in serious financial trouble and needs my help. I need to get him $20K asap. I have $2,500 in stock and money market I can withdraw with no peneties. I have $16K in a Roth IRA. I also have a 401(k) at $85K which I really don't want to touch.

My other option is to take a home equity loan on my co-op. I have a $160K mortgage. Lucky for me, I bought at a good time and my home could list for $300K easily (I'm in NYC and the housing crisis isn't as dire here as elsewhere).

My brother will be able to make the monthly payments on the home equity loan. This seems like my best option. I am 43 years old and employed, though currently looking for a better paying job.

Any feedback or suggestions would be extremely welcome. I have no one to turn to with this and am afraid of making a decision that will haunt me next tax season.

Thanks.

maat55 · #2 (**permalink**) 05-21-2008, 11:34 PM

You can take out your contributions from your roth with no penalties. You cannot take any of the earnings, just the contributions.

GarySpicuzza · #3 (**permalink**) 05-22-2008, 09:17 AM

Quote:

You can take out your contributions from your roth with no penalties. You cannot take any of the earnings, just the contributions.

Not EXACTLY correct maat55:

See THIS link.

A 43 year old would suffer a 10% early withdrawal penalty from a Roth IRA.

Quote:

Title 26, Section 72(t), states:

(t) 10-percent additional tax on early distributions from qualified retirement plans

(1) Imposition of additional tax,

If any taxpayer receives any amount from a qualified retirement plan (as defined in section 4974 (c)), the taxpayer’s tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income.

(2) Subsection not to apply to certain distributions

Except as provided in paragraphs (3) and (4), paragraph (1) shall not apply to any of the following distributions:

(A) In general Distributions which are—

(i) made on or after the date on which the employee attains age 59 1/2.

Withdrawals from a Roth IRA are tax and penalty free IF:

The account owner is at least 59 ½ years old and the account has been held at least five years.

GarySpicuzza · #4 (**permalink**) 05-22-2008, 07:32 PM

Source LINK.

I also found the article below that I thought was well written with simple, clear, plain English.

By Roy Lewis

Quote:

Qualified Distributions

Any qualified distribution from a Roth IRA is NOT included in gross income for individual tax purposes. Simple as that. In effect, a qualified distribution from a Roth IRA is tax-free... no taxes due on the principal... no taxes due on the earnings... no taxes due, period.

To be qualified, the distribution MUST be:

Made on or after the date you become age 59 1/2; OR
Made to your beneficiary, or to your estate, after you die; OR
Made to you after you become disabled within the definition of the IRS code; OR
Used to pay for qualified first-time homebuyer expenses.

But -- and this is a very big but -- even if one of the qualifications above is met, the distribution is STILL not qualified if it is made within a five-tax-year period. We'll see how to compute the five-tax-year holding period a bit later. Just know that five tax-years are NOT necessarily the same as five calendar years.

So, in effect, there are two sets of rules that must be met before a Roth IRA distribution becomes qualified, and therefore tax-free: The distribution rules and the five-tax-year rules. Unless both sets of rules are met, the distribution will NOT be qualified, and the earnings will be subject to tax, and possibly penalties.

maat55 · #5 (**permalink**) 05-22-2008, 09:20 PM

Quote:

Originally Posted by GarySpicuzza

Source LINK.

I also found the article below that I thought was well written with simple, clear, plain English.

By Roy Lewis

I stand corrected, they do have a five year waiting period. Thanks, that might save me a hassle in the furture.

Newbie · #6 (**permalink**) 05-26-2008, 12:41 AM

Maat55, you are correct. You can withdrawal contributions at any time. Just not earnings.

go to: irs.gov/publications/p590/ch02.html#d0e10519

"Are Distributions Taxable?

You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s). You also do not include distributions from your Roth IRA that you roll over tax free into another Roth IRA. You may have to include part of other distributions in your income. See Ordering Rules for Distributions, later."

maat55 · #7 (**permalink**) 05-26-2008, 10:20 AM

There is a five year waiting period on contributions.

maat55 · #8 (**permalink**) 05-26-2008, 10:40 AM

Quote:

Originally Posted by Newbie

Maat55, you are correct. You can withdrawal contributions at any time. Just not earnings.

go to: irs.gov/publications/p590/ch02.html#d0e10519

"Are Distributions Taxable?

You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s). You also do not include distributions from your Roth IRA that you roll over tax free into another Roth IRA. You may have to include part of other distributions in your income. See Ordering Rules for Distributions, later."

The distribution is not taxable, but there is a 10% penalty because of the five year rule.

FredS · #9 (**permalink**) 05-27-2008, 12:45 PM

There is a lot of discussion regarding how to access the funds. There is very little discussion on if you should provide the funds.

I don’t mean to be a hard a**. I truly believe in helping family members in times of crisis. However, sometimes, depending on the circumstances, the best help is no help.

Ask yourself a few questions:

What caused the problem?
Has this happened before?
Can it happen again?

If you are content with the answers to the above then here are a few more:

Will he sign a loan contract with you?
Is there any collateral?

This YOUR money we are talking about. In helping him you must also protect yourself. Generally, in similar situations, there is more than a 50% chance that you will suffer a substantial loss.

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