As I near retirement, I wish to borrow $50k from my 401K, and close on a residence in Florida. About 10 days later, I will be retiring from the full time job in Wisconsin. As the amount to be repaid is then able to be removed from my 401K without the 10% penalty, can I also reclaim a new state of primary residence during this 10 day period after closing, and avoid the normal amount of state tax that will be due on the amount I draw from the 401K to repay the short term "loan". This is my plan. Is it a legal thing to do??
2011-06-13T12:44:42Z
Thanks, I do qualify for the over 55, over 5 years no penalty. I really want to avoid the state tax on the distribution. My question is how quickly I can legally switch my state residency.
Bostonian In MO2011-06-13T10:11:11Z
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Borrowing from a 401(k) as you are very close to retirement won't get you any tax benefits. Once you depart the service of your employer you will have a very limited time to pay back the loan or it will automatically become a taxable distribution. The 10% penalty will apply if you don't meet the age requirements -- i.e. age 59 1/2 or age 55 with 5 continuous years of service with the employer and concurrent participation in the plan -- at the time that it becomes a taxable distribution.
As far as any state tax issues are concerned, it will depend upon where you reside when the distribution becomes taxable. If you have not moved to Florida by that time then Wisconsin will be entitled to tax the distribution. Wisconsin is likely to balk at this one, so you need to be ABSOLUTELY SURE that you are physically present in Florida when that happens and have taken the usual steps to establish Florida residency such as getting a Florida license, tagging your vehicle(s) in Florida, and registering to vote in Florida.
Exactly when the loan will become a taxable distribution will depend upon the plan. Most give you 30 to 60 days to pay back any loans before the outstanding balance automatically becomes a taxable distribution.
my concern is your plan to borrow and repay etc since you very likely will have to take distribution of this 401(K) when you retire, you will have to declare the income at that time and in if you are not yet 59 1/2 of course there is a 10% penalty on early withdrawal if you borrow, you very likely cannot repay it within the 10 days before you retire so what is the advantage here, except the urgency to pay for the new residence not repaying the loan is income to you and anyway you take it will be taxable to you the state the distribution was made is where it will be taxable
Your residency doesn't change by simply buying a house. You still live in the old state and have a state drivers license etc there. It's not a valid change of residency. It's also reported as earned in the old state too.