trying to use distribution to help reduce mortage
L1: trying to use distribution to help reduce mortage
My wife and I are in the process of buying a house. I have about 225 in an 401 k – which I understand that I could not use as I am still employed by the same place (which I am glad to be).
But we had anticipated taking about 100k in other ira stuff that we have – and paying the penalty – and using that to buy down the mortgage to make it more reasonable.
I had been reading your site and got the idea that we could instead of actually taking out the money and paying the 10% penalty and of course driving up our annual income by about 100k – that we could use the method that you indicate in your site. We then could use the yearly distribution to pay part of our mortgage with.So basically we were looking to use this method to be able to have an amount to use every year that we could then use to offset the monthly payments on the house and not have to remove all the money from the ira and pay the penality. But we need to know about how much money are we talking about on a yearly basis – and could we take this money out at the beginning of the year. I am 48 and my wife is 46 – and I was hoping to generate about 500 a month. Would this work?
2008-08-31 08:18, By: David , IP: [18.104.22.168]
L2: trying to use distribution to help reduce mortageIt could work, BUT, you would be adding to your taxable income, and possibly end up into a higher bracket, but at least be paying more taxes at your current rate on these distributions, which would therefore not yield the full $500 per month for the mortgage. You may need $650 or $700 per month, in orderto end up with $500 net after Fed and State? taxes you will pay on this withdrawal, so you may need a larger starting balance in the SEPP IRA that I am listing from using the reverse calculator on this site.But, if all went well, the IRA that would be needed would have an initial balance of about $112,000 in it for the $500 per month using amortization method (this balance can be done by splitting your existing larger one? one up into two IRA”s to isolate that amount before starting). At the end of the 11-12 years that this would have to run, you would likely end up still having about $112,000 in that IRA if you stayed conservative in your investments, so no growth, and you are closer to retiring, and the mortgage is probably only 1/2 way paid off. You are, in essence, taking out the growth and paying taxes on what you take out.This decision reallyall depends on future pensions, projected balances in 401ks etc, children”s education plans and cost, etc, before you make this leap. On the face of it, I would say if you need $500 per month to pay this mortgage, then you should not be buying the house with retirement money at your age. I am 58, and retired for 3 years. Istarted a 2nd SEPP plan last year to help pay the mortgage on a second home I was buying, but the numbers worked for me. You can use the REVERSE CALCULATOR on this website for specific figures, and to see the possible effect to your balance. Good luck. I am sure there will be more opinions posted, so don”t go by me. KEN2008-08-31 09:19, By: Ken, IP: [22.214.171.124]
L2: trying to use distribution to help reduce mortageRather than getting involved with the complexities of SEPP 72-T, why not find out if your 401-K permits you to borrow from it. You could borrow up to $ 50,000, possibly in increments of $ 10,000, which you could use to help make the motgage payments, and that would be tax-free. Of course, you would have to make payments to repay your own 401-k over 5 years, but youmay or may not take additional loans while you are repaying other ones. If not, you could take the $ 50,000 and put it ina “lader” of 4 $ 10k CDs maturing in each of the next 4 years, using the other $ 10,000 to help make the mortgage payments the first year or so, and start the repayment of the loan. Rememberr also that the CDs will generate income to help make part of the payments.You”ll have to play with the figures in order to see how it works out. Remember you are in effect borrowing from yourself.
Loans against 401-Ks are usually frowned upon by financial advisors, because they have to be repaid with after-tax dolars. But yours may work out, especially if you can do this again in 5 years, until you get to the yera you become 55 if you might separate from service sometime in 2015 or later.2008-08-31 12:48, By: dlzallestaxes, IP: [126.96.36.199]
L2: trying to use distribution to help reduce mortageDavid,Your post seems to indicate more of a preference than a real need to reduce the mortgage. Perhaps you should consider a tax analysis to determine the after tax cost of the mortgage, keeping in mind that your interest and property taxes are deductible, so you will likely be itemizing deductions. Contrast this with a lower mortgage balance coupled with taxable retirement plan distributions, both of which will increase your taxes.
Also, if you have not owned a primary residence in the past 24 months, you would qualify for up to 10,000 (lifetime) IRA distributions which are taxable but penalty free. The same is true of your wife, if she has an IRA. This penalty exception does not apply to 401k distributions, even if you were able to get them.
In addition, the recently passed housing relief bill includes a tax credit for qualifying homeowners, which is re payable over 15 years. See if you qualify for that.
I agree with dlz that you should avoid a SEPP plan at your age, as these plans are not flexible and are best applied for relatively short terms of 7 or less years. You would be looking at 11 years here, and the plan would likely not match your needs long before it was allowed to terminate in 11 years.
Perhaps some combination of a higher mortgage and a smaller 401k loan would work. But you should also read up on the pitfalls of a 401k loan, particularly if you leave your current employer.2008-08-31 19:44, By: Alan S., IP: [188.8.131.52]