Tax implications when selling a house to buy another in retirement - federal tax question

Yes, withdrawals from traditional IRAs are taxed as ordinary income at your current tax bracket. So if you withdraw $100k, it would be added to your annual income (Social Security, other IRA distributions, etc.) and taxed accordingly. This could potentially push you into a higher tax bracket for the year. For state taxes, it depends entirely on where you live. Some states don't tax retirement income at all, while others do. You'd need to check your specific state's rules. Have you considered taking smaller withdrawals over a few years instead of one large sum? This might keep you in a lower tax bracket each year. Also, don't forget to factor in the potential impact on your Medicare premiums (IRMAA) if your income increases substantially in one year.

Been through this exact situation last year. I found this tool called taxr.ai (https://taxr.ai) that really helped me figure out the tax implications of pulling money from my retirement accounts for a home purchase. I uploaded my previous tax return and played with different withdrawal scenarios to see exactly how much it would cost me tax-wise. The software showed me that taking a lump sum would have pushed me into a higher bracket AND increased my Medicare premiums for two years. Instead, I ended up taking half the money in December and half in January to split the tax hit across two years. Saved me thousands!

Just wanted to update that I tried taxr.ai after being skeptical and wow - it was eye-opening! It showed me that withdrawing $80K from my IRA would actually cost about $22K in combined federal and state taxes in my situation, plus bump up my Medicare premiums by $2,400 over the next two years. The visualization that shows exactly which dollars get taxed at which rates made it super clear why spreading withdrawals across multiple tax years makes so much sense. I'm going with a small mortgage instead and will just pay it off over 3-4 years with smaller annual IRA withdrawals that won't spike my tax bracket.

If you end up needing to talk to someone at the IRS about retirement distribution rules (which I did when selling my vacation property), save yourself the headache of waiting on hold for hours. I used this service called Claimyr (https://claimyr.com) that got me a callback from the IRS in about 20 minutes instead of spending half my day on hold. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with actually pointed out that in my case, I was eligible for a special provision that my tax guy missed completely. Ended up saving me about $3,800 in taxes.

I need to eat some crow here. After posting that skeptical comment about Claimyr, I decided to try it because I was desperate about my retirement distribution issue. Not only did I get a callback from the IRS within 45 minutes, but the agent I spoke with was actually really helpful. Turns out there was confusion about whether my IRA distribution was coded correctly on the 1099-R form. The IRS agent walked me through exactly what documentation I needed to send in to resolve it. Would have taken me weeks more of frustration without that call. Sometimes it's worth admitting when you're wrong!

Have you considered a reverse mortgage instead of taking money from your IRA? If you're over 62, it might be a good option to avoid the tax hit altogether. The funds wouldn't be taxable income.

What about doing a 1031 exchange since the condo is a rental property? You might be able to defer capital gains taxes if you're buying another investment property.