Advice on who pays taxes

When you withdraw money from your retirement account, you are personally responsible for the taxes and penalties, not your friend. Here's how this works:

What Happens During the Withdrawal?

Taxes and Penalties:
- Withdrawals from retirement accounts like traditional IRAs or 401(k)s are typically subject to ordinary income tax and, if you're under age 59½, a 10% early withdrawal penalty (exceptions may apply).
- The taxes withheld by the plan provider may not cover the full amount you owe, so you might still have additional tax liability when you file your return.
Gross Withdrawal vs. Net Amount Lent:
- If you withdraw $6,000 for your friend, more than $6,000 is deducted from your account to cover the withholding for taxes. For example, if 20% is withheld for taxes, your account might lose $7,500 to leave you with $6,000 to lend.

Does Your Friend Owe You More Than $6,000?

This depends on your agreement. However, your friend is not legally responsible for your tax burden. It's up to you to decide if you want to:

Ask for Repayment of Only the $6,000:
- Your friend repays only the loan amount. You absorb the taxes and penalties as part of your decision to use retirement funds.
Include the Tax Cost in the Loan:
- You could ask your friend to repay both the $6,000 and an additional amount to offset the taxes and penalties. For example:
  - If $7,500 was withdrawn to cover $6,000 for the loan, you might ask for repayment of the full $7,500.

What Should You Do?

Clarify the Loan Terms:
- Decide upfront whether your friend will repay only the $6,000 or also cover part of the taxes and penalties.
- Consider drafting a formal agreement to avoid misunderstandings.
Minimize the Tax Hit:
- Before withdrawing, explore alternatives like a personal loan, as borrowing from a bank might have lower costs compared to withdrawing from retirement savings.
- If you must withdraw, consult a tax professional to understand the full tax impact.