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Q&A: Here’s a case where taking retirement funds early might make sense

May 20, 2019 By Liz Weston

Dear Liz: My wife and I are both retired and receiving annuity payments. In addition, we have about $1.3 million in traditional IRAs and $350,000 in another annuity that will pay us each about $1,000 per month. We are moving from Texas to Arkansas sometime in the next year. Texas has no state income tax and pretty high property taxes, while Arkansas has lower property taxes but about 6% income tax. We plan to put down about $200,000 on a new home and obtain a mortgage for about $350,000 at about 4% interest.

Does it make sense to withdraw money from the IRA to pay down the amount we need to borrow for the mortgage? I can withdraw about $90,000 without putting us into the next higher federal tax bracket, if that makes any difference, and end up saving $5,400 in Arkansas income tax at the same time.

By my calculations, the return on the $90,000 would be almost $8,000 every year in reduced mortgage payments if we took out a 15-year mortgage. If we did the 30-year loan, that savings would be over $5,000. I don’t think we’ll achieve the same returns on $90,000 leaving those funds invested as they are in bonds or cash.

Answer: It usually doesn’t make sense to tap retirement funds to pay down a mortgage, but your case may be one of the exceptions. You have enough saved that the withdrawal won’t claim a big chunk of your available funds and leave you cash-poor.

We’ll assume you’re over 59½ and won’t face penalties for early withdrawal. If that’s the case, then you’ll also be facing required minimum distributions within a few years. These mandatory withdrawals, which must start after you turn 70½, would subject at least some of this money to taxation. The question is whether you want to pay those taxes now or later, and you’re making a pretty good case for now.

Before you withdraw any money from a retirement fund, however, you should consult with a tax pro or a fee-only financial planner, or both. Mistakes made in early retirement often have irreversible consequences, so you want an objective second opinion before you proceed.

Filed Under: Q&A, Retirement Tagged With: mortgage, q&a, real estate, Retirement, retirement savings

Q&A: Bad Social Security math

May 20, 2019 By Liz Weston

Dear Liz: Regarding when to begin receiving Social Security payments: I would think that people should begin taking payments as early as possible if they can invest it rather than spend it, as a lot of money is “left on the table” between ages, say, 62 and 70. Your thoughts?

Answer: That argument was more compelling a few decades ago when you could get a 7% or 8% return on an FDIC-insured certificate of deposit. These days, there’s no investment that offers a guaranteed return as high as what you’d get from delaying the start of Social Security.

The “take it early and invest” approach also ignores the longevity insurance aspect of Social Security benefits. Most people face a real risk of outliving their savings, which could leave them relying on Social Security for most if not all of their income. Maximizing Social Security benefits by delaying your application can help you live more comfortably, should that happen.

Also, starting early can cause harm to whichever spouse survives the other. When one spouse dies, one of the two Social Security checks the couple was receiving will stop. The remaining spouse will get only the larger of the two checks, which is known as a survivor’s benefit. Maximizing that benefit can help ease the shock of going from two checks to one, so financial planners generally recommend that the higher earner in a couple delay his or her application if possible.

Filed Under: Q&A, Social Security Tagged With: q&a, Retirement, Social Security

Q&A: Tax take on inherited house

May 20, 2019 By Liz Weston

Dear Liz: In a recent column, you quoted an attorney saying that if an inherited home in a trust is sold for its value at the date of death, the trust won’t owe capital gains. We sold our family’s house in 2007 within a month of my mother’s death and the government took half. Fortunately it was a really valuable house in Brentwood, but what are you talking about? I must be missing something.

Answer: If the government took half, then estate taxes — rather than capital gains taxes — probably triggered that hefty bill.

When your mother died, the estate tax exemption limit was much lower — $2 million, compared with the current $11.4 million. The top federal estate tax rate then was 45%, compared with 15% for capital gains.

Filed Under: Inheritance, Q&A, Real Estate Tagged With: capital gains tax, estate tax, Inheritance, q&a, real estate

Friday’s need-to-know money news

May 17, 2019 By Liz Weston

Today’s top story: These 3 tricks can help you shop less. Also in the news: What you need to know about Slack’s IPO, a college survival guide for your money, and how to use travel rewards for a Memorial Day Weekend getaway.

These 3 Tricks Can Help You Shop Less
Curbing your spending.

What you need to know about Slack’s IPO.
The work chat hits Wall Street.

College Survival Guide for Your Money
Surviving the unexpected.

How to Use Travel Rewards for a Memorial Day Weekend Getaway
The official kickoff of summer.

Filed Under: Liz's Blog Tagged With: budget, college and money, IPO, Memorial Day Weekend, shopping, Slack, tips, travel rewards

Thursday’s need-to-know money news

May 16, 2019 By Liz Weston

Today’s top story: Why you shouldn’t give up on public service student loan forgiveness. Also in the news: The life-changing magic of working a bit longer, why your financial aid may plummet after freshman year, and 7 thoughtful and unique graduation gifts — all under $25.

Don’t Give Up on Public Service Loan Forgiveness
The odds are slim, but still worth trying.

The Life-Changing Magic of Working a Bit Longer
It’s worth it.

Why your financial aid may plummet after freshman year
How you can prepare.

7 thoughtful and unique graduation gifts — all under $25
Celebrate without going broke.

Filed Under: Liz's Blog Tagged With: financial aid, graduation gifts, public service, Retirement, student loan forgiveness, Student Loans

Wednesday’s need-to-know money news

May 15, 2019 By Liz Weston

Today’s top story: 5 steps to reaching financial freedom. Also in the news: How to furnish your new home without breaking the bank, growing your garden with only a little green, and how to compare and decipher college financial aid offers.

5 Steps to Reaching Financial Freedom
One step at a time.

You Got the House! Now, How Do You Afford to Furnish It?
How to avoid overpaying.

Grow Your Garden With Only a Little Green
You want a garden, not a money pit.

Accepted to college? How to compare and decipher financial aid offers
Making sense of it all.

Filed Under: Liz's Blog Tagged With: financial aid, financial freedom, furniture shopping, gardening, Student Loans, tips

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