Federal Tax question dealing with passive activity loss limitations
My friend made a withdrawal from her 401K plan to rehab a house for rental property purposes. My question is, the 401k withdrawal amount combined with her annual income exceeds the threshold for Head of Househlold tax filers. Therefore causing a large amount of additional federal tax due. Would the tax obligation be different if the 401k funds are considered active participation in her rental property, or would it be classified as passive activity? What’s the best option to lessen the additional tax burden?
Terry Says
Too late now! She should have considered that before she made the withdrawal. Doesn’t matter what the money was used for — it’s HER 40l(k) and the rules for taxation of withdrawals applies. If she was under age 59-1/2, she also paid a 105 penalty. NEVER withdraw money from your 40l(k) plan early!! Lesson to all who read this.
