Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
I've seen questions similar to mine, but always pre-retirement. I'll reach full social security retirement age in a little less than 2 years. When I retire, between social security and a small pension from my company I'll have enough money to live on without touching my 401 (K), with one exception: My mortgage. Other than the tax liabilities,(I'm 64, so no 10% penalty) are there other reasons I shouldn't use part of my 401(K) to pay off the mortgage? If that's not a good plan, are there IRAs or other plans that could be set up to make automatic payments to the mortgage, with maybe a clause to pay it off if I die? I'm upside down, but that's not really a problem. I just don't want to worry about mortgage payments 'till I'm 88.
I've had a hard time finding advisers who don't tell me "Don't do it..."" keep saving... " or want to sell me something.. So, like the title.. 'at or shortly after retirement' when I'll be rolling my 401(K) into something else.
One factor (of many) to consider is this: are you still paying enough in interest (plus taxes, etc) so that itemizing, on Sched A of your income taxes, is still greater than your "Minimum Standard" deduction ? If not, then paying the interest is no longer a tax "advantage".
This happened to us at age 61. After 2 re-fi's, and 15 years on 30 yr mort, the interest dropped enough that total itemized deductions were less than the standard deduction. And interest paid out was greater than income generated by 401K/IRA money. So withdrew enough (about 70K) and paid off the loan. Never looked back. And when it came time to sell 7 years later, the equity was all ours. :-)
That was my plan until we refinanced at a low rate that I've been beating in my retirement account (where the funds would come from). I just can't bring myself to pay taxes early when we can earn more than the interest payments.
Since you're upside down, you first need to decide if this is your forever home. You might be better off having the mortgage foreclosed or do a short sale, and then move to a home of your dreams (assuming you can get it for less than your mortgage). If you want to stay in the home, I'd first check on any programs that might provide relief for upside down mortgages. Once you've done this, then you can think about paying it off.
If it were me, I'd get the lowest rate 30 year mortgage that I could, then withdraw enough money from the retirement account to make the payments. Have the mortgage payment deducted from your checking account automatically, have the retirement deposit go into your bank account automatically, and call it good. Buy sound blue chip companies with a history of raising dividends over time in your retirement account (or mutual funds that do this) and let them work.
Otherwise, you are giving a free gift to the government in terms of unnecessary taxes. If you insist on taking retirement account money out to pay off the mortgage, please talk to a tax expert first to see if you should do it over a three or five year period in order to stay out of ridiculous high tax brackets. After all, if you pull $200,000 out to pay off a mortgage, for that one year you would be one of those dirty rotten rich scoundrels who always keeps a boot on the necks of the poor--and some politicians think you just cannot pay enough if you are one of those people.
Unless you are talking a very small mortgage, a lump sum withdrawal to pay it off will throw you into tax hell. You are much better off withdrawing incrementally, say over five years, than to pay it all off at once.
Do some serious tax planning on the effect of a lump sum withdrawal before doing anything. Otherwise, you will be throwing money down a tax rathole at the rate of 15-25%, plus taxing your SS benefits, vs. the 5% or thereabouts you are paying on your mortgage.
I agree with Ariadne22 to withdraw over a few years to pay it off so you don't get hit with a penalty.
It sounds like you want to be mortgage free. That alone is another debate people have.
I went into retirement mortgage free and my low monthly budget loves it
Gives me that much more fun money to play with every month.
Location: We_tside PNW (Columbia Gorge) / CO / SA TX / Thailand
34,725 posts, read 58,067,115 times
Reputation: 46190
I'll side with Marcopolo.
Get the low interest loan and use the 401k *REAL MONEY and YOURS to make payments to yourself and the bank. If inflation hits (as predicted and possible) you (or estate) will be paying the joint of with VERY small future Dollars.
Many of us are House Rich and Cash Poor. That is not so 'smart' at age 90, no matter how good it feels at age 70.
Like many, we paid off our mortgage before retiring. However, we also retained a sizeable self-directed IRA in liquid 'growth' funds, savings and managed accounts; Plus, we bought a sizeable annuity to offset potential future inflation or health issues (with a LTC policy). Like you, we pretty much live on our pension and SS accounts.
If you will wipe-out your 401K by taking a large withdrawal to pay your mortgage, and then live on your pension/SS, three important questions are: 1) What will you do for emergency funds, or for liquidity, if something happens? 2). Will the tax bite on withdrawn funds put you in a higher tax bracket than necessary? and 3). What is the interest rate on your mortgage, compared with the expected income rate on your 401K/IRA?
There are too many missing variables in your financial picture, but, if you decide to use the 401K mortgage pay-off approach, there may be some different ways to do that: 1). Pay off your mortgage and, at the same time, establish a sizeable line-of-credit to give you a back-up position for liquidity, emergencies, etc. 2). Check with a tax accountant and balance-out your withdrawals to keep you in the lowest possible tax bracket. --- etc.
Whatever amount of money you withdraw from your 401K to pay off your mortgage will be considered income and your tax bill will probably be outrageous. Get the low interest loan and withdraw from your 401K to make the payments. I had thought of doing this several years ago when DH became very ill and our accountant adamantly advised against paying off the mortgage with our 401K because of taxable income.
I've seen questions similar to mine, but always pre-retirement. I'll reach full social security retirement age in a little less than 2 years. When I retire, between social security and a small pension from my company I'll have enough money to live on without touching my 401 (K), with one exception: My mortgage. Other than the tax liabilities,(I'm 64, so no 10% penalty) are there other reasons I shouldn't use part of my 401(K) to pay off the mortgage? If that's not a good plan, are there IRAs or other plans that could be set up to make automatic payments to the mortgage, with maybe a clause to pay it off if I die? I'm upside down, but that's not really a problem. I just don't want to worry about mortgage payments 'till I'm 88.
I've had a hard time finding advisers who don't tell me "Don't do it..."" keep saving... " or want to sell me something.. So, like the title.. 'at or shortly after retirement' when I'll be rolling my 401(K) into something else.
I guess the answer is what ever makes you feel better. Guess that is paying off the mortgage.
You should also have a cash reserve.
Maybe the answer is to take as much money out of your 401k as you can without going into the next tax bracket. Use that money to pay down part of your debt.
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
