Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Use 72T method (pre retirement) to pay off mortgage/heloc?
Old 06-19-2019, 07:00 AM   #1
Confused about dryer sheets
 
Join Date: Jun 2018
Location: Long Island
Posts: 9
Use 72T method (pre retirement) to pay off mortgage/heloc?

I'm in my mid fifties and would love to retire by 59. Unfortunately I still have a pretty substantial mortgage and a HELOC too, with 12 years left on one and 15 years left on the other. I do however have a 401k, an IRA, and either a a lump sum payment of $600-700k or a traditional pension due me when I retire. I only just recently learned that at 55 years old you can do a 72T withdrawal on your IRA (or a portion) without incurring the 10% penalty, even if you are not retiring. I'm wondering if it might be a good idea to take the 5 equal distributions of a portion of my IRA to significantly pay down/pay off these loans. On the one hand I'm aware I'm taking retirement funds away from myself but on the other hand I'm getting rid of debt and paying way less interest and so less money would be needed in retirement. TIA for any insights.
__________________

myfire123 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 06-19-2019, 07:20 AM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 21,275
What's the interest rate on each? -ERD50
__________________

ERD50 is online now   Reply With Quote
Old 06-19-2019, 07:45 AM   #3
Confused about dryer sheets
 
Join Date: Jun 2018
Location: Long Island
Posts: 9
Quote:
Originally Posted by ERD50 View Post
What's the interest rate on each? -ERD50

Mortgage, approx $140k remaining is at 4.375%, HELOC, approx $60k remaining is at 5%. Thanks.
myfire123 is offline   Reply With Quote
Old 06-19-2019, 07:57 AM   #4
Recycles dryer sheets
The Cosmic Avenger's Avatar
 
Join Date: May 2016
Location: Mid-Atlantic
Posts: 487
Over 12-15 years, I'm betting you can do better than 5% overall if you're not too conservative, but then paying off debt and saving the interest payment is a guaranteed return, and higher than any CD. I'd say it's pretty close. Me, personally, I'd play the odds and keep the money invested, but that's easy for me to say, as we did pay off our mortgage early. However, I'm considering taking out a new one when we move in retirement, rather than paying cash, because I think our long-term gains would be better than the mortgage interest.
__________________
Looking to FIRE in the mid-2020s, which would be our mid-50s.
The Cosmic Avenger is online now   Reply With Quote
Old 06-19-2019, 09:23 AM   #5
Thinks s/he gets paid by the post
 
Join Date: Nov 2015
Posts: 1,579
Quote:
Originally Posted by myfire123 View Post
Mortgage, approx $140k remaining is at 4.375%, HELOC, approx $60k remaining is at 5%. Thanks.
I'd look into refinancing both of those into a 10 or 15 year loan. Rates are low once again on mortgages, should be around 3.25% or less. Should save you about $3k/yr. Keeps your money invested, no tax hit and market return should exceed your mortgage rate over that long window.
bobandsherry is offline   Reply With Quote
Old 06-19-2019, 09:27 AM   #6
Thinks s/he gets paid by the post
 
Join Date: Aug 2005
Posts: 2,323
At the very least, I think I'd try to do something about that HELOC. 5% is a bit high, and IIRC, you can't write off interest on an HELOC any more.
Andre1969 is offline   Reply With Quote
Old 06-19-2019, 09:44 AM   #7
Full time employment: Posting here.
 
Join Date: Nov 2013
Posts: 527
You would not pay the penalty, but five big withdrawals would significantly add to your tax bill if you are still working. Much better to that in retirement IMO. Refi is probably the best route however.
NgineER is online now   Reply With Quote
Old 06-19-2019, 10:18 AM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 21,275
I'll join the "look into a refi" chorus. -ERD50
ERD50 is online now   Reply With Quote
Old 06-19-2019, 11:07 AM   #9
Thinks s/he gets paid by the post
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 3,491
Move into a cheaper house or to a cheaper location? Maybe the kids are gone and you don't need such a big place. Maybe you want to try to age in place so a single-level with shower grab bars and wide hallways could be included in the change. Maybe you want to move closer to where the grandkids will be. Maybe moving costs are less than taxes on a 72(t).
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Old 06-19-2019, 01:12 PM   #10
Thinks s/he gets paid by the post
HNL Bill's Avatar
 
Join Date: Dec 2017
Posts: 1,276
Quote:
Originally Posted by myfire123 View Post
I'm in my mid fifties and would love to retire by 59....I only just recently learned that at 55 years old you can do a 72T withdrawal on your IRA (or a portion) without incurring the 10% penalty, even if you are not retiring.

I'm wondering if it might be a good idea to take the 5 equal distributions of a portion of my IRA to significantly pay down/pay off these loans. On the one hand I'm aware I'm taking retirement funds away from myself but on the other hand I'm getting rid of debt and paying way less interest and so less money would be needed in retirement. TIA for any insights.
I'm not quite sure you're understanding this correctly.

1) If you're between 55 and 59.5, and your employer allows it, you can take distributions from your 401(k) without the 10% penalty (taxes only).

2) IRS Rule 72t can be used at any age prior to 59.5. IRS rule 72(t)(2)(A)(iv): Take penalty-free withdrawals from IRA prior to age 59 by making ‘substantially equal periodic payments’ (SEPP) based on one of 3 methods as long as payments continue at least 5 years, or until 59.5, whichever is later.

You have to take Substantially Equal Periodic Payments, which are very similary to RMDs. If you use a 72t calculator, will the annual distributions be enough to accomplish your debt elimination? For example if you have a life expectancy of 30 years, you can only take 1/30th of the 401(k) account annually under 72t. Note that if you mess up the 72t distributions, you are subject to draconian financial penalties.
__________________
Balance in everything.
HNL Bill is offline   Reply With Quote
Old 06-19-2019, 01:26 PM   #11
Full time employment: Posting here.
 
Join Date: Sep 2011
Location: Placerville
Posts: 846
Refi at today's rates for 30 years and payments are $900 a month. How's that compare to what you are paying now and can that work into your post retirement budget? I would think so as the money is still 'working' for you at 'hopefully' at least 4% and the interest rates are below that.

From personal experience, I took a loan out on my 401K (I know it's not the same as your situation, but hear me out) and was paying back through mandatory payroll deduction with principle and interest going to my account. However, when I actually retired, the IRS considered the remaining balance outstanding to be due and payable immediately since there was no longer a paycheck to make the mandatory deductions back into my 401K.

You need to know for sure what the tax implications are AFTER retirement for anything you do to your retirement accounts, be they 401K, IRA, etc. Don't just guess and don't just assume advice here is accurate. Everyone's situation can be something other than posted and situations change. A change may trigger something that would cause more burden than it's worth for the risk.

For example; say you do this at age 55 and you are laid off or otherwise loose your job before 59 1/2. The full amount would be considered a draw and taxable.


So, my advice is to fund a refi through the money you already pay to the mortgage holders and pocket the difference in a retirement account or make additional principle payments.
skipro33 is offline   Reply With Quote
Old 06-19-2019, 02:37 PM   #12
Thinks s/he gets paid by the post
zinger1457's Avatar
 
Join Date: Jul 2007
Posts: 2,040
As HNLBill hit on about 72t withdrawals, you would need about $930K in your IRA to be able to make the 72t withdrawals ($40K/year) necessary to pay off your loans in 5 years.
zinger1457 is offline   Reply With Quote
Old 06-19-2019, 02:56 PM   #13
Thinks s/he gets paid by the post
38Chevy454's Avatar
 
Join Date: Sep 2013
Location: Cincinnati, OH
Posts: 2,178
Quote:
Originally Posted by NgineER View Post
You would not pay the penalty, but five big withdrawals would significantly add to your tax bill if you are still working. Much better to that in retirement IMO. Refi is probably the best route however.

I agree. If you are still working, then i assume you are able to make the payments now without big financial stress? If you work until 59, you can start taking the 401k/IRA withdrawals near when you quit working. Refi now to get better interest rates, do not take 72t withdrawals, make new mortgage payments while working until 59, and then you can take 401k/IRA withdrawals as needed once 59.5 to cover expenses and mortgage. Taking 72t withdrawals now will have you paying the maximum tax rates on that money. The idea is to take it out when your rates are lower than what you saved tax rates with the money saved pre-tax.

Your pension vs lump sum is a different question you can address later.
__________________
The advice we're giving you is invaluable, that's why it's free
Experience is a good teacher, but the tuition can get expensive real fast

Semi-Retired 7/1/16: working part-time (60%) for now [4/24/17 changed to 80%]
Retired Aug 2, 2017; age 53
38Chevy454 is offline   Reply With Quote
Old 06-19-2019, 06:48 PM   #14
Thinks s/he gets paid by the post
 
Join Date: Nov 2015
Posts: 1,579
Guess OP exploring another option.

https://r.tapatalk.com/shareLink?url...0&share_type=t
bobandsherry is offline   Reply With Quote
Old 06-19-2019, 08:43 PM   #15
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: North Oregon Coast
Posts: 16,078
Quote:
Originally Posted by myfire123 View Post
I'm in my mid fifties and would love to retire by 59. Unfortunately I still have a pretty substantial mortgage and a HELOC too, with 12 years left on one and 15 years left on the other. I do however have a 401k, an IRA, and either a a lump sum payment of $600-700k or a traditional pension due me when I retire. I only just recently learned that at 55 years old you can do a 72T withdrawal on your IRA (or a portion) without incurring the 10% penalty, even if you are not retiring. I'm wondering if it might be a good idea to take the 5 equal distributions of a portion of my IRA to significantly pay down/pay off these loans. On the one hand I'm aware I'm taking retirement funds away from myself but on the other hand I'm getting rid of debt and paying way less interest and so less money would be needed in retirement. TIA for any insights.
You don't even have to be 55. You can elect 72T at any age -- you just have to keep up the SEPP until at least age 59.5. (I did last year at 52.) If you are not having problems making the payments now, I wouldn't take 72T just to pay them off. IF you needed to pay it off so you could retire and still have good cash flow, that's different.

If you were in a position where you could retire now IF you took 72T (with or without the mortgage), and doing so would still leave you in good shape after age 59.5 with the remaining balance, I'd do it. But whether or not I had a mortgage to pay off would not likely be a major concern.

I just took 72T last year in part to qualify for a new mortgage loan rather than pay cash for the house entirely, but ours is an atypical case that rarely makes sense.
__________________

__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
ziggy29 is offline   Reply With Quote
Reply

Tags
72t


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Just paid off the mortgage. Putting the pay off the mortgage question to rest. FUEGO FIRE and Money 65 06-08-2015 05:08 PM
Pay off mortgage with HELOC CBR900RR FIRE and Money 9 04-28-2014 01:19 PM
Pay down mortgage or HELOC? scooter260 Young Dreamers 8 01-10-2010 11:28 AM
What would you do - pay off student loan or pay down mortgage? bank5 FIRE and Money 27 07-27-2009 05:30 PM
Pay off mortgage with HELOC? nanannjen FIRE and Money 16 12-21-2008 08:57 AM

» Quick Links

 
All times are GMT -6. The time now is 08:36 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2019, vBulletin Solutions, Inc.