Mortgage payoff

[Hooligan House]

Don't know if anyone else has experienced this-but looking for some feedback. We'll be retiring before SS kicks in & will be doing some work on house & prepping for sale. But since $$ will be tight we had the idea of using some of the retirement lump sum to pay off the mtg & not have that expense. Then when it sells we replenish the fund & buy our fiver. Anyone been down THIS road? Any tax penalties? Much thanks!

[Hooligan House]

Don't know if anyone else has experienced this-but looking for some feedback. We'll be retiring before SS kicks in & will be doing some work on house & prepping for sale. But since $$ will be tight we had the idea of using some of the retirement lump sum to pay off the mtg & not have that expense. Then when it sells we replenish the fund & buy our fiver. Anyone been down THIS road? Any tax penalties? Much thanks!

[Hitchhiker]

If your retirement is already in a pre-tax account, you might be better off to decline the lump sum payout and do a direct roll over of those funds into a 401k account. Keeping the funds untaxed until they're needed to live on may be to your tax advantage.

Plus, if you're under 59 1/2 and take a pre-mature distribution, there may be a 10% tax penalty on the funds unless you take out equal monthly distributions. Once the funds are distributed, they become taxable. Replacing the funds after a real estate sale will not regain that pre-tax status.

Study this carefully before making any commitments to move funds.... seek financial advice from a professional if you don't fully understand it.

[Route 66]

<BLOCKQUOTE class="ip-ubbcode-quote"><div class="ip-ubbcode-quote-title">quote:</div><div class="ip-ubbcode-quote-content">Any tax penalties? </div></BLOCKQUOTE>

Yes.

If you do not roll your lump sum pension into an IRA, you will be taxed on it, or at least the part that is not rolled into an IRA.

If it's a large amount, it could push you into a higher tax bracket.

[Tom N]

Its cheaper to be out of debt than in debt. Paying off a loan means the $$$s the lender makes from your loan will now stay in your pocket.

Taxes?? Makes no sense to me to pay $1 in interest to save 50 cents on your taxes.

IMHO

-Tom

[Tom N]

I agree with Hitchhiker concerning paying off the loan with untaxed dollars.

-Tom.

[TXiceman]

Your best bet is to spend a few $$$ and talk to a good accountant that has experience in IRA's and such.
Ken

[siems7]

A lot of retirement accounts allow you to take a loan , generally one half of the account or up to $50,000. Since it's a loan, it's not a distribution to be taxed. Your payments are made back to your account. You might explore this possibility.

[amy5708]

I second the advice to talk to an investment advisor. Make sure the guy doesn't also sell insurance and is not a broker; there are a lot of financial planners that work for a flat fee as opposed to a % of investment.

You need to weigh cash flow and opportunity costs; every dollar invested today at a 7% inflation adjusted return (stock market average historically) will provide you with $2 in 10 years, and $4 in 20 years. That will provide you a cash flow through your retirement.

People are finding themselves very underfunded later in their retirement because savings runs out. The SS has increased their life expectancy tables to 116 years because folks are living so much longer.

[Hooligan House]

Certainly some good thoughts--I think we DO need to find an independant advisor. We have 401K's that I know wouldn't be touchable for this, so were looking at using pension as a "loan" til the house sold. I felt like we started planning early, but time is flying even though it's 14 months or so to go. THANKS ALL!

[Barbaraok]

Cut back on other things, but paying down a mortgage while waiting for the house to sell doesn't make a lot of sense, especially when you are talking about taking a hit on retirement funds. Those need to be taken SLOWLY over a long period of time after you have retired and thus are in a lower tax bracket. A lump sum could bump you up to a bracket that you don't want to be in.

[mjstef]

<BLOCKQUOTE class="ip-ubbcode-quote"><div class="ip-ubbcode-quote-title">quote:</div><div class="ip-ubbcode-quote-content">Originally posted by Tom N:
Its cheaper to be out of debt than in debt. Paying off a loan means the $$$s the lender makes from your loan will now stay in your pocket.

Taxes?? Makes no sense to me to pay $1 in interest to save 50 cents on your taxes.

IMHO

-Tom </div></BLOCKQUOTE>


You got that right!! If you can pay it off DO IT. Say you have a 200K mortgage @5% interest. (i'm using all simple figures)You would pay $10,000 in interest last year. Say you make $70K a year. With the 10K deduction you would pay tax on 60K instead of 70K. If you didn't have the mortgage you would pay tax on that extra 10K so in the 30% tax bracket you would pay $3000 to the IRS. So in effect by not paying off your mortgage if your able your spending $10,000 dollars to keep from sending $3,000 dollars to the IRS. This is to deep for some accountants to grasp and as a matter of fact i switched accountants as the one i had couldn't get it. He still thought it was better to have a home interest deduction.

[Barbaraok]

A $100,000 mortgage - take that amount as a lump sum from the retirement account and then pay taxes. And you are in what bracket now? Say it was just 30% (but IIRC more like 36 or 38 depending upon other salary), you'd only have 70K so you need to take more like $150K out. So $45K is gone to the government. House sells one year later. So Uncle Sam got an extra $35K that he won't have received before. Had the retirement funds stayed in place and been withdrawn SLOWLY then rate would have been say 15%. But its a choice one makes.

Barb