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
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
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.