| Am I about to make a big mistake with what I'm planning? |
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LawnRanger
New Poster
Cash: $ 0.45
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Joined: 11 Aug 2005
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| Am I about to make a big mistake with what I'm planning? |
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Here are the facts...
I'm 54 years old, married, and still working. I have about $260,000.00 in two IRA's that I dumped 401K money into, and a pension with a large and very stable company in which I was employed for 23 years. Due to the stress level and hours, I quit working there in 1998 and have had a much lower paying job for the last 6 years. We got by with a couple of second mortgages. Now I have had to quit that job and move to another city because my wife needs to be closer to her aging parents to take care of them.
Without going into details, we are currently at the point where we need to come up with $100,000.00 to pay for the difference on the nice home we moved into. If we were to take out a loan and pay notes, we would barely get by. And that is not the lifestyle we want at this point in our lives. I love this job and expect to keep it until I am at least 59-1/2 years old. The only problem is, we can't afford to pay house notes and live like we want on my salary of about $30,000.00/year. My wife is physically handicapped enough to prevent her from working full time. I would prefer that she not work at all. She paid her dues and loves being a housewife and quilting with her friends, plus she spends a lot of time taking care of her parents. So employment for her is really not an option. To live comfortably, I will have to start digging into the savings or take the pension early to supplement my pay.
So....we have discussed things, and we are thinking about pulling out $100,000.00 of the savings, plus whatever will be needed for taxes and penalties, and paying off the house. Without the house note, we can live very comfortably. I cringe when I think about just giving the IRS $10,000.00 in penalties for early withdrawal. The taxes are going to be paid sooner or later though, so that doesn't matter to me.
I guess my questions are....
1. Isn't it about the same cost to pay off the house, the taxes on the IRA money, and the early withdrawal penalty as it would be to pay interest on a mortgage for 20 years?
2. Is the $100,000.00 added income I receive from the IRA withdrawal going to kill me when it comes tax time this year?
I will readily admit that I am no financial genius. I do believe that I made a wise decision to jump into the savings plan/401K that was offered me on my first job, and not touch it for 23 years. It was almost $400,000.00 before the markets took a dive. I don't have the savvy to calculate and estimate things to figure out what the best route is for me to take here. So I'm open to your suggestions and advice. I don't mind paying a financial advisor or CPA to advise me but I would like some opinions and such from you all first. I've read some of the posts on this forum but didn't find anything that addresses my situation close enough. Your comments will be greatly appreciated. Thanks in advance for your time.
LawnRanger
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Fri Aug 12, 2005 1:16 am |
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bong12187
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| Re: Am I about to make a big mistake with what I'm planning? |
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If you are going to see a CPA, please read what I have written here and keep it in mind so that you are not going in blind when you see him/her.
Tough choices. You have three options. First option. Take out 111k now (100k + 11k for penalty) plus get hit with taxes for 111k (early withdrawal) which will be another 35k (30% tax bracket and it could be more). Additionally, this will bring your IRA to 149k. If you receive 8% per annum return (sorry but I like keeping my # low just to be safe) your 149k will turn to 255k by end of your 60th year.
Second option. The other choice is for you to take a 100k loan. 100k loan amortized for 30 years running 8% (sorry I like to make my interest higher to be in the safe side) will give you $734 monthly and $8808 yearly. You have to withdraw $968.80 per year (it includes the 10% penalty). If you keep doing this every year until then end of the year that you turn 60, and you continue to receive 8% return on your IRAs, your investment will be $336k. After paying monthly mortgage for 6 years (year 54-60) your mortgage left will be about $93,717. You can then take out $93,717 from your IRAs without having to pay the 10% penalty and you will still have about $261k in your IRAs. Unfortunately, you will still have to pay taxes for the $93,717. However, you still save the 10% penalty and the loan will give you deduction from year 54-60.
The last option is the same as #2 but you never pay the balance and continue to draw yearly loan payment, you will have $336k at the end of year 60. At the end of year 70, you will have $573k. The yearly interest payment you've been making will help you lower down your taxes.
Now for my recommendation: If I am in your situation, I will take option 3. Why? Because it will give me the best return for my IRAs, save me some of the 10% penalty, and allows me to deduct the interest payment when I file my tax. Here is the best part, there was a recent supreme court ruling that creditors can't touch your IRA if you ever have to go into bankruptcy. However, Congress just passed a law that makes it harder for you to file for bankruptcy.
Goodluck to you..
I have the comparisons in my excel worksheet. PM me your email add and I will send it to you...
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Fri Aug 12, 2005 3:29 am |
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MattL
Senior Member
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You should also look at your other alternatives (and not tapping into the money). I would sit down and discuss with your wife the goals for the next 5 years or so. Are you planning on staying in the house or downsizing at some point? If you are planning on downsizing, now would be an ideal time to do it given your situation and the real estate market. If you are planning on waiting just a few years to downsize the home you may not make out nearly as well. The real estate market will probably be flat while more retirees are also downsizing. In that case you would get less for your current home and pay more for a townhouse.
Just something to think about.
$$$ Debt Elimination
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Fri Aug 12, 2005 3:13 pm |
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LawnRanger
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Cash: $ 0.45
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Joined: 11 Aug 2005
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Thanks so much for the replies. And I appreciate you taking so much time to show me the choices I have there bong. I will send you my email address as I would be glad to see your spreadsheet and how you arrived at all this in more detail.
Matt, I will not be downsizing at all. And there is no way I will move to a townhouse. As my handle here might suggest, I love to mow my one acre yard and also working in the numerous flowerbeds and my large garden. I'm a country boy and I would be totally miserable if I were crammed into a townhouse with no appreciable yard to play in.
Yes, I could cut back on this and on that and scrimp and save and get by enough to make house payments until I turn 60. But the thing is, I don't want to. I've worked my butt off since I was 17 years old for the savings I have and I am at the point where I am ready to enjoy life a little. If I weren't, I could get another high-stress job where I was on call 24/7 again like I was for several years and I could make a lot more than I do now. But I would rather go to work 8 to 5, 5 days a week, and come home, turn off the work cell phone and enjoy life with my wife and the dogs and my nice neighbors. Money just doesn't seem that important anymore.
I do want to be able to go to Home Depot and buy the stuff I need to build a pond with waterfalls, or a bbq house, or an irrigation system for my garden, etc, etc. I also want to go on another cruise sometime soon. If I pay house payments, that will all have to wait until I'm 60. A lot can happen to me in the next 6 years and I may not be able to then.
We all have priorities in life. When I was younger, my job was perhaps a higher priority than I should have let it be, but I didn't have a lot of choice. I finally decided enough is enough and it's time to take the monetary hit and lose the stress.
I will visit a CPA and talk this over with him/her before making any decision. I would still love to hear from anyone else out there that has suggestions or opinions on my situation. I appreciate it all.
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Fri Aug 12, 2005 6:13 pm |
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