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Payoff house with deferred money?!?
Old 03-16-2007, 11:08 PM   #1
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Payoff house with deferred money?!?


I don't want to kick off the dreaded "payoff the house" thread. I know it's an emotional decision. Sleep at night kind of stuff.
Got an acquaintance who is interested in paying off his house. He's just turned 59.5 and has a nest egg. Unfortunately, it's all in deferred accounts. Mortgage is in the neighborhood of 200k. From my limited understanding he'll have to pay income tax on all of this money. Is that right? And this tax bill would be at normal income rates using this 200k income. Not the 15% dividend rate, right?
By my thinking, this would be a terrible way to get this done. Do I understand this right? I'm thinking of steering him another way, but wanted to run it past the group first.

Gracias,
devo
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Re: Payoff house with deferred money?!?
Old 03-16-2007, 11:35 PM   #2
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Re: Payoff house with deferred money?!?

The answer is Right!
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Re: Payoff house with deferred money?!?
Old 03-17-2007, 12:32 AM   #3
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Re: Payoff house with deferred money?!?

I guess if I were going to do it, I wouldnt do it all in one year...
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Re: Payoff house with deferred money?!?
Old 03-17-2007, 12:39 AM   #4
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Re: Payoff house with deferred money?!?

To expand on CFBs comment....

He can take out enough money each year so he is just below the 25 or 28% tax bracket... maximize the lower tax brackets...
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Re: Payoff house with deferred money?!?
Old 03-17-2007, 12:40 AM   #5
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Re: Payoff house with deferred money?!?

My comments are already pretty well expanded. I'm thinking of asking for an avatar size increase...
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Re: Payoff house with deferred money?!?
Old 03-17-2007, 05:56 AM   #6
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Re: Payoff house with deferred money?!?

I'd vote in favor of increasing CFB's avatar size. The girl has an amazing smile--I've tried to copy and paste her image into other formats to get a better look (at her pearly whites) but no luck.
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Re: Payoff house with deferred money?!?
Old 03-17-2007, 11:59 AM   #7
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Re: Payoff house with deferred money?!?

If he can afford to keep making the payments, then it's in his financial best interests to not pay off the house. You're right that it's strictly an emotional decision... to feel the comfort of having a 'paid off home' but financially it's usually a bad idea (especially with low interest rates right now).

If you want to steer him in the right direction, show him a spreadsheet detailing how much assets he will have if he chooses to pay off the mortgage and then invest the amount of the mortgage payment every month vs. if he doesn't pay off the mortgage and instead uses the lump sum to invest.

Of course at his age, it may not make much difference. In which case other posters' comments are more applicable -- take out enough that it doesn't increase his taxable income bracket, or use some other source of non-taxable income to keep his taxes low while he's making the withdrawals.

However, lump sum is about the worst financial way he can go about this situation.
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Re: Payoff house with deferred money?!?
Old 03-17-2007, 12:07 PM   #8
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Re: Payoff house with deferred money?!?

What is the interest rate on the Mortgage? If he has cheap money... why pay it off. If he is paying it off just to have more money to spend... I think it is a bad idea. If he has overextended himself, he might consider selling and downsizing. That said... it is a personal decision.

The only reason it would make sense to me is if he is wealthy and money is not issue or there is a compelling reason or situation where it cannot be avoided (e.g., job loss).




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Re: Payoff house with deferred money?!?
Old 03-19-2007, 08:18 AM   #9
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Re: Payoff house with deferred money?!?

I plan to use funds from my Roth IRA to pay off my mortgage the year I retire. No income tax on Roth withdrawals assuming to meet the age and account holding time requirements.
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Re: Payoff house with deferred money?!?
Old 03-19-2007, 03:21 PM   #10
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Re: Payoff house with deferred money?!?

I wouldn't do that unless the interest rate on the mortgage is higher than the growth rate on the Roth. For some there may be 'piece of mind' insurance of not having a mortgage, the mortgage payments cannot be supported by retirement income, or they intend the house to be inherited and the growth in the value of the home exceed the Roth return... maybe then. Can anyone tell me why, financially, cashing in a Roth to pay off a mortgage is a good idea?

Remember that the Roth not only grows tax free but it is protected from creditors and can be passed on to your children.
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Re: Payoff house with deferred money?!?
Old 03-19-2007, 04:12 PM   #11
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Re: Payoff house with deferred money?!?

Quote:
Originally Posted by samclem
I'd vote in favor of increasing CFB's avatar size. The girl has an amazing smile--I've tried to copy and paste her image into other formats to get a better look (at her pearly whites) but no luck.
She's wearing pearls?
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Re: Payoff house with deferred money?!?
Old 03-19-2007, 04:29 PM   #12
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Re: Payoff house with deferred money?!?

Quote:
Originally Posted by samclem
I'd vote in favor of increasing CFB's avatar size. The girl has an amazing smile--I've tried to copy and paste her image into other formats to get a better look (at her pearly whites) but no luck.
I'd vote for a nude lap dance or similar animation.

Or better yet - bring back the beer can crusher.

heh heh heh - yep - working on the reinvested dividend part of my DRIP plans/sells and other pain in the butt part of tax returns(fed and state). :P, , , . What was the subject again??
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Re: Payoff house with deferred money?!?
Old 03-19-2007, 05:14 PM   #13
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Re: Payoff house with deferred money?!?

Quote:
Originally Posted by unclemick2
bring back the beer can crusher.

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Re: Payoff house with deferred money?!?
Old 03-20-2007, 08:11 AM   #14
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Re: Payoff house with deferred money?!?

Quote:
Originally Posted by Brat
I wouldn't do that unless the interest rate on the mortgage is higher than the growth rate on the Roth. For some there may be 'piece of mind' insurance of not having a mortgage, the mortgage payments cannot be supported by retirement income, or they intend the house to be inherited and the growth in the value of the home exceed the Roth return... maybe then. Can anyone tell me why, financially, cashing in a Roth to pay off a mortgage is a good idea?

Remember that the Roth not only grows tax free but it is protected from creditors and can be passed on to your children.
Those are all good points, but I am aware of all those issues. About 70-75% of my investment money is in tax-deferred accounts. I plan on converting some of my traditional IRA to Roth each year (after retirement) to take advantage of the lower tax brackets (assuming I am in the 25% or below bracket).
I have run 8 different scenarios on Flexible Retirement Planner and on Fidelity Retirement Income Planner (4 on payoff mortgage and 4 to keep mortgage) and the top 3 indicate it is better to payoff the mortgage.
I think this issue and the "when to take SS issue" are issues that you can't generalize. Each individual situation is different and each much determine which option is best for their situation.
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