04-16-2010, 06:15 AM
Personally, I would never touch 401k or IRA money (especially roth) unless I needed to or I was subject to the MRD (mandatory retirement distribution). Money growing tax-deferred (or tax-free in the case of a Roth) is an invaluable tax-shelter. And if you want to leave an asset to your kids, there is NOTHING better than a stretch IRA that could potentially pay them millions over their lifetime.
That being said, if you want to take the money out for whatever purpose, you should do so as tax efficiently as possible. I would almost say no situation is worth paying the 10% early distribution penalty for those under 59.5 years old. Paying 35% federal tax today (and don't forget CA state tax) on it isn't that bad if you believe tax rates are going higher. Obviously it would be better to take out small chunks each year at a lower rate or 0% rate.
Now as far as buying a 2nd home, I wouldn't. Unless you are very wealthy, a 2nd home is a major expense. Even if you can pay cash, you still have taxes, insurance and maintenance. Maybe in your housing market the cap rates on homes are 8% or better, but around me, most homes rent for 2-3% of their fair market value.
I think you are better off renting a place for your son and paying for it with a slow, tax efficient withdrawal of your 401k. Not to sound harsh, but if your son can't save enough for the downpayment on a home, does he really need a home?
That being said, if you want to take the money out for whatever purpose, you should do so as tax efficiently as possible. I would almost say no situation is worth paying the 10% early distribution penalty for those under 59.5 years old. Paying 35% federal tax today (and don't forget CA state tax) on it isn't that bad if you believe tax rates are going higher. Obviously it would be better to take out small chunks each year at a lower rate or 0% rate.
Now as far as buying a 2nd home, I wouldn't. Unless you are very wealthy, a 2nd home is a major expense. Even if you can pay cash, you still have taxes, insurance and maintenance. Maybe in your housing market the cap rates on homes are 8% or better, but around me, most homes rent for 2-3% of their fair market value.
I think you are better off renting a place for your son and paying for it with a slow, tax efficient withdrawal of your 401k. Not to sound harsh, but if your son can't save enough for the downpayment on a home, does he really need a home?