Today TaxMama® hears from Larry with this concern. “At age 64, I am still working full time. My hours and pay rate have been reduced so that I now have a $ 600 + per month deficit. My mortgage payment is $700 per month. (My wife is a full time student and my son is in high school.) I have enough money in my traditional IRA to pay off the mortgage. Would this be a good idea or are there other options?” 

Ask TaxMama

 Hi Larry,

That’s a tough break. That’s got to be hard to budget around, after all this time.  

Have you looked at refinancing your mortgage? Interest rates are very low right now. 

The reason I ask is, even though you’re old enough to draw the money from your IRA without the early withdrawal penalty, you will pay federal and state income taxes on that money.  

Another alternative is, instead of paying off the mortgage, how about drawing just enough money from the IRA to make the mortgage payments for the year? That way, you won’t pay as much in taxes as if you draw all the money at one time. Drawing all the money is apt to put you into a higher tax bracket.  

Play around with the numbers and see what amount of draw gives you the best result AND the lowest taxes.

 Another thing, dare I say this?

Discuss the situation with your family. Make sure they understand what’s going on. They may have some ideas that don’t involve depleting your retirement savings.

And remember, you can find answers to all kinds of questions about drawing money from IRAs, and other tax and business issues, free. Where? Where else? At www.TaxMama.com.

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Comments4
  1. Jim MultererOctober 23, 2012   

    Refinancing takes somewhere between $5,000 and $10,000 due to all the bank fees, including appraisal. Instead of a re-fi, how about a home equity line of credit (HELOC)? The normal HELOC in my area has a 3.25% interest rate and you only have to pay the interest charge each month. If you have $100K in equity, borrow $50K and you don’t have to pay it off until the house is sold.

    I hate bank fees for things like re-fi and Reverse Mortgages. Just another way for banks to gouge on funny-money loans. (“Don’t worry, we’ll just add the fees to your mortgage and you won’t have to pay any money down.”)

  2. TaxMamaOctober 22, 2012   

    Dear Doug and Janet,

    Thanks for the feedback.

    Doug, that’s great information.

    Janet, I would never presume to tell anyone to drop out of school, especially the wife of a 64 year old man. I wouldn’t make the assumption that she is much younger than him, either.

    First of all, for all we know, her education will be instrumental to the family’s future stream of income. Her education might well be an investment.

    Second, if she has been caring for the family all these years and is FINALLY getting to pursue her own (set-aside) dreams, more power to her! I’ve seen many women return to school in their 50s, 60s, even 70s to finally get to study what they didn’t have time to learn while they were raising a family. Would YOU want to take that away? I sure as heck wouldn’t.

    This family does have some communicating to do. A little budgeting wouldn’t hurt. But it doesn’t need to lead to sacrifice.

    Hugs
    Eva

  3. Doug DunbarOctober 22, 2012   

    Since Larry’s wife is a full time student, I’m guessing she’s in college or university and probably eligible, based on household income, to borrow all or nearly all of the money needed to attend school. It’s been over 45 years since I did the same thing and I haven’t kept up with payback rates, rules for qualifying for loans, etc., but in the old days, you didn’t have to start paying back your loan until you had graduated and secured employment. This is a leap of faith, but is it possible for you to do what I (and millions of others) did, and borrow the money for her education. I don’t know all your details, obviously, but if you aren’t already doing this, the education cost must be eating into your income to some degree. Another thing to consider is to find a source listing every scholarship or grant available in your state for higher education. Way back when I was preparing to go to university, I did this and found a scholarship related to a parent having served in the military (a veteran’s scholarship). It was based on ACT test scores and whoever applied and had the highest overall score. My score was above average, but certainly not outstanding. However, I got the scholarship anyway because no one else applied for it. Seemed odd to me that not one other person in the state applied for this scholarship, considering that many parents had been in the military because I was the first of the baby boomers born right after WW II ended, but it happened. Incidentally, your son’s local high school should have a list of all scholarships available in your state and what the criteria for each is Good luck.

  4. Janet StotlerOctober 22, 2012   

    I would suggest to Larry that his obviously much younger wife go out and get a job. She can go to school part time. The high schooler should too if old enough. And they can see how much they can cut out of their budget by eliminating cable tv and internet, land line if they have cell phones and get the cheapest cell plan they can. etc, etc.

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