401 Withdrawl

L1: 401 WithdrawlI have approx 500K in my company IRA my wife has 140K in hers. Come April 2008 I will be out of work
I am 57 and plan on continuing to look for work. We owe only 60K on our mortgage with 5 years left to pay
Our payments are 1,532 including taxes. The interest over the next 5 years will be 9,842
Should we withdraw 75,000 from the 401 pay the taxes of approx 15kand keep the balance in the company plan which we were told we could do.
Thanks
Tony
2007-11-21 10:59, By: Tony, IP: [12.104.10.11]

L2: 401 WithdrawlHello Tony:
Given the information provided it is virtually impossible to give you an accurate answer. However, here are some things to think about:
1. Almost everyone suffers negative arbitrage; e.g. the interest rate on your credit card is 12% to 18% but you only get 4% on your savingfs account.
2. The mortgage is one of the last (if not the last) opportunity for positive (in your favor) arbitrage; you borrow at 6% (likely 4.5% after tax) and can explicitly or implicitly invest those proceeds at 8% plus.
As a result, I would not pay off a mortgage; I would head in the opposite direction and borrow more; not to spend but to invest at higher rates of return.
TheBadger
wjstecker@wispertel.net

2007-11-22 08:40, By: TheBadger, IP: [72.42.67.29]

L2: 401 WithdrawlHello, Tony:
You have an interesting situation there and a number of possible options on how you can handle it. No one can tell you what to do in this situation, but perhaps Alan or Bill will outline what is possible.
One thing I will mention is that you should check with your HR people at work to see whether or not you can take partial distributions from your 401k plan after you separate from service next year. The law allows this but does not require it. Some plans will allow this and some won”t. If your plan does, then you could take whatever amount you need from your plan with no 10% early withdrawal penalty. This only works if the plan allows it and if you separate from service in the year you turn age 55 or later. Regular income tax will be due on these withdrawals but no 10% early withdrawal penalty tax. If you can do this, you can withdraw only as much as you need, leaving the rest to grow over time. There should not be any need to pull out all of the money at once unless you want to pay the mortgage off. You could take the $60k plus whatever is needed for paying the tax due on this withdrawal and then take small amounts to cover the taxes, insurance, and maintenance on the home.
Another option to consider, if your plan does not allow partial withdrawals, would be to set up a 72t plan and take regular distributions based on your situation. This would be kind of late in the game for such a plan but it would work. You could do a rollover of your 401k plan money to a traditional IRA, set up the 72t plan, and receive regular distributions. If done correctly, you would not have to pay the 10% early withdrawal penalty on the money distributed to you. You would have to pay ordinary income tax on this money.
Since you will be age 58 or close to it when you separate from service, you will only have another 18 months or so until you reach age 59.5 and can take money from a rollover IRA without the 10% early withdrawal penalty. If you can find a way to do this without touching your 401k plan money, then you would not need to consider setting up a 72t plan. Sometimes this is workable and sometimes not, depending on your particular financial situation but it may be worth considering.
Some people who are planning to work at alower-paying job or who plan to work part time at this stage of their lives will set up a 72t plan and then choose the minimum distribution calculation method for their withdrawals. This can give them the money they need to supplement their reduced income so that they can maintain their standard of living. Think carefully about this, as once this choice is made, you may be stuck with it for 5 years until your 72t plan is completed.
Paying off a mortgage is an enticing idea, especially for anyone who is in or nearing retirement. My wife and I found ourselves in this situation a couple of years ago. We decided that in our situation, this was not as good an option as investing the money in a low-cost taxable mutual fund account. Retirement can be about cash but it is more likely to be about cash flow. Since we have adequate cash flow to handle the mortgage and our other living expenses, there is no rush on our part to pay it off. Also, the mortgage we have is at a very low rate due to a re-fi in 2003. Although the market has slumped lately, this money has been returning over 11% for the past couple of years and compares favorably with the 4.6% interest rate on our mortgage.
Ed2007-11-22 09:01, By: Ed_B, IP: [67.170.159.37]