Ask Liz Weston

Get smart with your money

retirement plan withdrawals

Q&A: Should I tap retirement savings for home repairs?

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Dear Liz: We had a plan to make our retirement savings last until our mid- to late 80s. Now we have unanticipated house repairs that could amount to tens of thousands of dollars. Should we draw down our retirement savings and pay the associated taxes at a 22% rate, or take out a home equity loan, or some combination of that? Or are there other ideas?

Answer: Obviously, money that you spend can’t generate future returns to help fund your retirement. Liquidate too much of your nest egg, and you could find yourself short of funds long before your retirement ends.

But loans require paying interest, increasing your living costs and causing you to draw down your retirement funds faster than intended. Which is the better option depends on the details of your situation. A fee-only financial advisor or accredited financial counselor could give you personalized advice.

They will also be able to discuss additional options. A reverse mortgage could allow you to tap your home equity without having to repay the loan until you move out, sell the home or die. Or maybe it’s time to sell the house and move to a lower-maintenance living situation, such as a condo or retirement community. There’s no one-size-fits-all solution, but discussing the possibilities will help you clarify which is the best approach for you.

Q&A: Rob Peter to pay … off the mortgage?

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Dear Liz: Would it make sense to pay off a low-balance, refinanced mortgage at 3% using a portion of my wife’s 401(k)? Would that not be better than paying the mortgage off from my IRA? I am 70 and on Social Security. My wife still works, at least till her birthday in December. She will then be 70 as well and should qualify to maximize her Social Security payout.

Answer: It’s not clear how a withdrawal from one account would be “better” than the other, given your similar ages and the fact that either withdrawal would be taxable as income. The more appropriate question might be why you’re in such a rush to pay off this mortgage.

At this point, you’ve paid most of the interest on this loan and your payments are largely principal, so you won’t save much by paying the loan off early. If there’s a compelling reason to do so, then you may want to postpone the withdrawal until your wife retires and you’ll presumably be in a lower tax bracket. A tax pro can help with that projection.

You should be consulting a tax pro in any case, since required minimum withdrawals from most retirement accounts have to start at age 73 and you may need help managing that tax bill.

One way around early withdrawal penalties

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Dear Liz: My son is 52 and has been unemployed for three years. He has been forced to withdraw money from his 401(k) and pay early withdrawal penalties on it to pay his mortgage and other bills. Is there such a thing as a hardship exception to avoid this tax bill?

Answer: There’s a way to avoid the 10% federal penalty, but not income tax, on early withdrawals from retirement accounts when someone is under 591/2 (the usual age when penalties end). The distributions must be made as part of a series of “substantially equal periodic payments” made using that person’s life expectancy. When these distributions are taken from a qualified retirement plan, such as a 401(k), the person making them must be “separated from service” — in other words, not employed by the company offering the plan.

Your son wouldn’t be able to withdraw big chunks of his savings, however. Someone his age who has a $100,000 balance in a retirement plan could take out about $3,000 per year without penalty. Revenue Ruling 2002-62, available on the IRS site, lists the methods people can use to determine these periodic payments. If he might benefit from this approach, it would be smart to have a tax pro review his calculations.