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Say, when we get to the age of 65 or 67, and retire, and we take out most of the 401(k) and IRA money, if luckily they can grow to $1,000,000 to buy a second house, all at once, will we be subject to a huge amount of tax, such as $300,000?

That is, if most of the money is in "pre-tax". If the money is "after-tax", then we won't need to pay tax, just that we have paid high tax during the years we were working (probably quite high tax bracket).

In this case, can we finance the house and take the 401(k) and IRA money out year by year (such as each year for 15 years on a 15-year mortgage)? But at this stage, we may be 65 or 67 years old and the bank or mortgage company may not loan money to us, and if we wait 6 months after we stop working, we also don't have proof of income as well.

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    Why do you think a mortgage company will not loan money to you if you're over 65/67? All they really care about is that you have sufficient regular income to meet the mortgage payments, which you might well have from Social Security, or by setting up regular monthly withdrawals from the IRA/401(sk).
    – jamesqf
    May 19 '20 at 16:38
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Say, when we get to the age of 65 or 67, and retire, and we take out most of the 401(k) and IRA money, if luckily they can grow to $1,000,000 to buy a second house, all at once, will we be subject to a huge amount of tax, such as $300,000?

All the funds in the traditional 401(k) and traditional IRA are pre-tax. This also includes any matching funds from your employers. So yes pulling out all that moeny in a single year will generate a large tax bill.

In this case, can we finance the house and take the 401(k) and IRA money out year by year (such as each year for 15 years on a 15-year mortgage)? But at this stage, we may be 65 or 67 years old and the bank or mortgage company may not loan money to us, and if we wait 6 months after we stop working, we also don't have proof of income as well.

Lenders can't discriminate on age, so that part isn't a concern.

According to Fannie Mae it is possible to get a loan when in retirement.

Retirement, Government Annuity, and Pension Income

The following table provides verification requirements for retirement and pension >income.

Verification of Retirement and Pension Income

Document regular and continued receipt of the income, as verified by

  • letters from the organizations providing the income,
  • copies of retirement award letters,
  • copies of signed federal income tax returns,
  • IRS W-2 or 1099 forms, or
  • proof of current receipt.

If retirement income is paid in the form of a distribution from a 401(k), IRA, or Keogh retirement account, determine whether the income is expected to continue for at least three years after the date of the mortgage application. In addition

  • the borrower must have unrestricted access without penalty to the accounts; and
  • if the assets are in the form of stocks, bonds, or mutual funds, 70% of the value (remaining after any applicable costs for the subject transaction) must be used to determine the number of distributions remaining to account for the volatile nature of these assets.

Documentation of asset ownership must be in compliance with the Allowable Age of Credit Documents policy (see B1-1-03, Allowable Age of Credit Documents and Federal Income Tax Returns, for additional information).

Since Fannie Mae defines what qualifies for their programs it is clear that lenders will include in income Social security, pensions, and also 401(k) and IRA sources.

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Well, my answer is yes. Let me prove why, when you contribute to 401k its tax free, and when your employer matches its tax free, plus you still pay income tax through withholding.

Now this is where it gets funny.

When you retire and pull out your 401k it gets pulled out as ordinary income, which gets taxed at the normal tax rate as though you worked for the money, you differed the taxes till when you pull it out.

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