<<I don't understand scenario 1: You said you have 85K left
<<on mortgage but you want to withdraw $106K from
<<401K to pay it off?>

- quote -

After age 59-1/2, which applies to you, you can take distributions from
an IRA without manditory income tax withholding. Of course, you still
are liable for the actual income tax (and state income tax, if any, as
another poster mentioned). I think you also can take distributions from
your 401(k) without manditory withholding, but whether you can take
partial distributions will depend on your plan rules, so ask your
former employer, or simply roll your entire 401(k) into a rollover IRA.

Dave Dodson

In article <1124892678.499120.235220[at]f14g2000cwb.googlegroups.com> , "bo peep" <cowartmisc1[at]yahoo.com> wrote:
- quote -

One downside to having no mortage while retired, is that should something
happen, such as unexpected medical bills, you may not be able to get a new
mortgage. Here's a different viewpoint on the topic:

http://www.ricedelman.com/planning/home/rule21.asp

On the other hand, there's a lot to say for peace of mind of having no mortage
payments.

"bo peep" <cowartmisc1[at]yahoo.com> writes:

- quote -

[snip]

You don't understand it.

Your "effective rate" says nothing whatsoever about your marginal
rate, which is how your next $1 of income is taxed. If you are in the
25% bracket, your next $1 is taxed at 25%, i.e. a $1 increase of
income produces a $0.25 increase of tax[*]. Likewise, a $1 increase
of deductions produces a $0.25 decrease of tax[*]. Even if your
"effective rate" is 14.03%.

The way the system works is that your first so many dollars of taxable
income (which is gross income minus deductions and exemptions) is
taxed at 10%, the *next* so many dollars is taxed at 15%, the *next*
so many dollars is taxed at 25%, etc.

So while "effective rate" is OK for telling you what share of your
income went to pay taxes, it says nothing about how your tax is
affected by changes in income or deductions. For that, you need to
know your tax bracket[**].

Notes:[*] Yes, I know it's more complicated than that, what with special capital
gains and dividend rates, the various AGI-related phaseouts of deductions
and exemptions, etc. But for many people most of the time their marginal
rate is their bracket rate.

[**] And yes, I know that what you really need to know is your true
marginal rate. But see the first note. :-)

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

bo peep wrote:

- quote -

There really are distinct tax brackets, but the way it works is that
the tax rate for each bracket only applies to the chunk of income
within that bracket, so that when you average all of chunks of income
taxed at different rates together you come up with an average tax rate
for your entire taxable income. For example, the tax on 29,600 is
calculated as follows (I am working straight off of Form 1040-ES;
download it from www.irs.gov and you will see everything explained):

For 2005 the first $0-$7,300 is taxed at 10% (but only if total income
is over $7,300), and income between $7,300 to $29700 is taxed at 15%.

Applying this to taxable income of $29,600: (0.10 * 7,300) + (0.15 *
22,300) = 730 + 3,345 = $4,075. If you average the whole thing you come
up with 4,075/29,600 = 13.8%, which is a little lower than your 2004
figure, but I guess thats more tax cuts perhaps?

Anyways, download Form 1040-ES and read it and everything will become
clear.

Andy

bo peep wrote:
- quote -

The comparison can be straightforward...the money ($85k) is costing you
6% to keep in your personal account instead of paying off the mortgage.
And the true cost is probably close to the whole 6%, based on what you
said about itemizing deductions. If you're at least making 6% on your
money, it's a wash from your "bottom line" perspective.

An adjustment to the "85k" part of this comparison is that it's going to
cost you some money to get your hands on 85k net. You mentioned the 20%
mandatory withholding on distribution, but really as another poster
described, you need to predict your actual tax liability from doing the
withdrawal, it may be higher than 20%. And include state income taxes if
you're in a state that has them. If you were in CA and had other income
in the year of the withdrawal, you could be talking about giving up the
use of say $120-130k pre-tax, to net your $85k. If you didn't do that
all of the money could continue to plug along tax-deferred year to year.
Sure you'll pay tax as you eventually make withdrawals from the 401k,
for example to make mortgage payments, but it won't be all at once, so
it's likely your total taxes will be lower. And in the meantime, the
whole (120?k 110?k) continues to grow.

Meaning you may decide it'll be relatively easy for the $120k or
whatever it would be if left in the 401k to at least keep pace with the
6%-of-85k cost of the mortgage.

Also, there's also the point that while carrying the debt you can get
your hands on that money, without needing to sell the home or take out a
new loan. Even if it's invested in a way that produces less earnings per
year than the cost of the mortgage, that may be OK for you - because
there's no alternative source of cash. It sounds like that's not the
case now but over a period of a 28 year mortgage things could change of
course. I actually work with a couple retirees in that situation and I
can say that down the line, having a fully-paid-off-home isn't
necessarily a benefit. Consider the extreme example of $0 in the bank
and a $200k fully paid off home. How do you pay bills?

Last point - you mentioned a 4% return assumption on the 401k -
conservative, but I think pessimistic. Even Treasury bonds are north of
that and you could find fixed annuity products paying higher than 4%.

-Tad

<<You then look at the tax table at the end of form 1040-ES and you see
that the 15% tax bracket for single filers extends from $7,300 to
$29,700, and any income above $29,700 is taxed at the 25% bracket (a
10% jump!).>
I don't think this is right, or perhaps I don't understand it. I
downloaded the 2004 tax tables and figured the actual tax due on a
small group of incomes, with these results:

Income Tax due Effective rate
29,600 4,131 13.96
29,650 4,144 13.98
29,700 4,156 13.99
29,750 4,169 14.01
29,800 4,181 14.03
29,850 4,194 14.05
...
71,950 14,766 20.52

It looks to me like a smooth progression, with no distinct "brackets"
to worry about...? I'm looking for a formula to find the place where
the upward rise of that progression crosses the downward slope of the
total mortgage interest paid over the lifetime of the loan.

bo peep wrote:
- quote -

Try this, at least for the tax brackets:
http://www.fairmark.com/refrence/index.htm

Also look it up for your state if your state has income tax.

-Tad

bo peep wrote:

- quote -

I will try to answer your question as asked, rather than ignoring it
and trying to tell you to do something completely different.

Your goal here is to pay off the mortgage as quickly as possible, to
minimize interest expense, while at the same time minimizing extra
income tax due to large 401k withdrawels. I think your goal is a smart
one, and its good that you are trying to thinki it through and come up
with an effective strategy for reaching this goal.

As you know the federal income tax is graduated. You pay 10% tax on the
first X number of dollars, 15% on the income between X and Y, 25% on
the income between Y and Z, etc. What you want to do is each year
withdraw as much 401 money as you can without kicking yourself into the
next higher tax bracket. If you withdraw enough to pay off the mortgage
in one year you will find that a good chunk of it will be taxed at the
25% and 28% brackets, which is something you want to avoid.

So the first step is to figure out exactly what tax bracket your
expected retirement income will put you in. The quickest and easiest
way to do this is download form 1040-ES from www.irs.gov and fill it
out for your expected retirement income and deductions, etc. The
1040-ES form is what is used by people who have to pay quarterly
estimated tax to calculate how much tax they will have to pay for the
current year, but its also perfect for doing tax planning like this.

Lets say your filing status is single, and using 1040-ES you figure out
that your taxable income in retirement will be $22,000 (just to make a
number up). You then look at the tax table at the end of form 1040-ES
and you see that the 15% tax bracket for single filers extends from
$7,300 to $29,700, and any income above $29,700 is taxed at the 25%
bracket (a 10% jump!). This means that you could withdraw an extra
$7,000 from the 401k and pay it on the mortgage without having any of
the extra money be taxed at the 25% rate.

The next step is to see which would cost you more: paying mortgage
interest for the extra years you have to carry it in order to avoid
moving into the 25% tax bracket, or the extra 10% tax you incur by
paying the mortgage off in one year and moving into the 25% and 28%
brackets. The closer your normal retirement income is to the top of
the 15% bracket the more likely it is that you should just do one big
withdrawel and pay off the mortgage because if you take too many years
to pay off the mortgage the extra interest expense will offset the tax
savings. This should be pretty straightforward to calculate using a
spreadsheet, but if you post your exact numbers from the 1040ES and
your exact principle balance and interest rate I can do it for you.

If your retirement income is already into the 25% tax bracket even
before making any extra 401k withdrawels for the mortgage, then your
strategy is much simpler because the 25% tax bracket extends from
$29,700 to $71,950, and the next bracket is only 3% higher (28%) and
extends all the way up to $150,150. If you are in the 25% tax bracket
already I would just withdraw enough to pay the whole mortgage off in
one year.

By the way, I think it is crazy to keep your mortgage on the
expectation that you will be earning a higher rate of return on your
401k money. Once you retire almost none of your money should be in the
stock market, and instead it should be in stable investments which are
going to pay interest of, at most, 5% if you are lucky. Once you are
no longer earning, and assuming you don't have huge piles of money, you
can't afford the normal ups and downs of the stock market.

Andy

<<what is your life expectancy?>
Hard to say, but both sides of the family seem to favor short life
spans. My father died at 54, my mother at 63.

<<how long do you plan to live in the house?>
Till I die.

<<on your new, lower income, can you still make the payments?>
Yes

<<how long do you expect to continue working?>
I don't want to continue working. I'm just looking for a way to get rid
of my big recurring bills such as the mortgage payment.

<<I plan to work until my mortgage is paid off...>
That's the trap I'm trying to get out of...

<<It depends how your 401k investments are doing vs. mortgage interest
rate, especially considering that mortgage interest is deductable
(lower effective interest being paid).>
For simplicity, I'm assuming an average return of 4% on the 401k and
IRA vs 6% going out on the mortgage.

The deductibility of the mortgage interest is not a big factor. Last
year I paid $5,366 in mortgage interest and it was my only large
deduction, and that amount will get steadily smaller in future years.
And the actual saving is only the tax not paid on the *difference*
between my total deductions and the standard deduction, and I'm already
only a few thousands per year away from not being able to itemize at
all.

<<I believe that you have to be over 65 to qualify>
It's actually 62 as far as I know

<<one of the benefits is the opportunity to live out the BALANCE of
your life with NO MORTGAGE PAYMENTS.>
That's a good point that I hadn't considered - I would not get very
much in the monthly payments due to my limited equity so far, but this
would meet my goal of simply getting rid of the monthly outflow of
cash. I don't need to leave an estate, so that would not be a problem.

<<I don't know how much liquid cash and 401K money you have, but if
it's significant enough that you feel comfortable paying off the
mortgage, then fine.>
I was trying to find the most tax-efficient way to pay off the
mortgage, balancing paying more mortgage interest over a longer peiod
of time vs. having to pay a higher income tax rate on the withdrawls
from the retirement accounts.

<<I don't understand scenario 1: You said you have 85K left on mortgage
but you want to withdraw $106K from 401K to pay it off?>
$106,000 - $21,200 (20% mandatory income tax withholding) = $84,800

<<Also, can you start taking regular withdrawals from your 401k based
on your life expectancy (I don't know how that's
calculated),withdrawing just enough to make up the difference between
your previous income and your current income?>
Yes, that was one of the scenarios I considered. The problem is that
this scenario would result in me paying a lot more interest on the
mortgage for only a small savings in reduced income tax. I'm looking
for a way to calculate the *optimum* early payoff which results in me
having the most dollars in my pocket in the long run.

If I pay off too fast, I get hit with a big tax bite. If I pay off too
slow, the mortgage company gets too much out of my pocket.

<<I believe that you can start making withdrawals from retirement
accounts at 59.5>
Since I was laid off of the previous job in 2004 after reaching age 55,
that restriction did not apply to me. I'm only a few weeks away from
age 59.5 anyway.

On Wed, 24 Aug 2005 09:35:10 CST, bo peep <cowartmisc1[at]yahoo.com> wrote:
- quote -

It depends how your 401k investments are doing vs. mortgage interest rate,
especially considering that mortgage interest is deductable (lower
effective interest being paid).

When I had some extra money, instead of paying down my mortgage, I bought
stock in my bank (direct purchase w/dividend reinvestment). I figure that
with long term capital gain, the dividends would just about pay for loan
interest after deduction, and if the stock gains per its worst 3 yr
history in past 5 yrs, I will end up with twice what I would have saved in
interest. And if I need the money I cash out the stock instead of
borrowing from my HELOC (related to my fixed rate loan, but unused at this
time). So far the stock is worth more than I paid for it (including
purchase fees) in June and July.

I am gradually converting some money from IRA to Roth IRA (paying tax now
from outside that money to avoid tax on future gains), so if I want to pay
off my loan when I retire, I will not take a tax hit for lump sum from
Roth IRA. But I probably will not retire for 13 yrs (age 53), so marginal
tax rate from my 401k may not be any lower than it is now.

"jIM" <noreplysoccer[at]hotmail.com> wrote in message
news:1124904574.329382.104120[at]f14g2000cwb.googlegroups.com...
- quote -

Also, can you start taking regular withdrawals from your 401k based on your
life expectancy (I don't know how that's calculated),withdrawing just enough
to make up the difference between your previous income and your current
income? I believe that you can start making withdrawals from retirement
accounts at 59.5.

Has your property appreciated much over the period you've lived there? You
could sell and get into a smaller place, either purchase something smaller
or invest the equity and get into an apartment. Vacancy rates are low in
many areas of the county and have forced rental prices down. If you do
that, you could make annual contributions to a Roth IRA as long as you're
working, shifting the equity proceeds invested into a tax advantaged account
so that future withdrawals are not taxed.

Leigh

what is your life expectancy? how long do you plan to live in the
house?

on your new, lower income, can you still make the payments?
how long do you expect to continue working?

My initial brainstorm would be to pay mortgage if you continue to have
emplyment. if you can work for 5 more years, have a plan to pay off
mortgage over those 5 years. If you can work for 10 years, pay off
mortgage in 10 years.

This allows your savings to grow over the 5-10 years you continue
working, and allows you to continue paying down without a huge tax bite
from one 401k/IRA withdraw.

I do not work in financial industry, but the comments I listed are some
ideas I thought of to tackle the problem if it were me in that
situation. I plan to work until my mortgage is paid off...

You may also want to take a look at something called a Reverse Mortgage.....

I believe that you have to be over 65 to qualify, but when you do, one of the benefits
is the opportunity to live out the BALANCE of your life with NO MORTGAGE PAYMENTS.
Cal


"bo peep" <cowartmisc1[at]yahoo.com> wrote in message
news:1124892678.499120.235220[at]f14g2000cwb.googlegroups.com...
- quote -

I don't know how much liquid cash and 401K money you have, but if it's
significant enough that you feel comfortable paying off the mortgage,
then fine.
Otherwise if you don't have a lot of cash on hand I would keep the
mortgage. 6% is a pretty good rate. And if you ever find yourself in a
bind, you have that cash on hand to help you out.
I don't understand scenario 1: You said you have 85K left on mortgage
but you want to withdraw $106K from 401K to pay it off?

I'm looking for help with a financial calculation to find the best
way to deal with mortgage payments in retirement.

My age is 59.5, never been married, no dependents, no CC debt. Had a
good job for many years, accumulated good balances in traditional IRA,
401k, and savings. Bought new house in 2003, 20% down, 30 year mortgage
at 6.0%, monthly payment about $700, which includes $35 extra on
principal. About $85K remaining balance on mortgage. Lost job in 2004,
unemployed for 10 months, ended up with much lower paying new job, now
wanting to retire. Only other projected income besides interest
(until/unless social security program survives) is a small fixed
annuity payment - about $2K per year. What to do about mortgage
payments after retirement?

Scenario 1 - in year 1 of retirement, pay off mortgage all at once
with single $106K withdrawal from 401k. Maximizes interest savings on
mortgage, but also maximizes tax bite on withdrawal.

Scenario 2 - pay off half of mortgage in year 1 of retirement, pay
off other half in year 2. More interest paid on mortgage, but smaller
tax bite.

Scenario 3 - pay off over 3 years.
Etc.

Other scenario - just keep paying the mortgage monthly from the
401k/IRA.