Any financial guys on here?

madmax

I have the 401K like everyone else but I also have a little IRA thing going. Little is a good description, about 18K. I've been thinking it might actually be worth cashing in the IRA, receiving about half of it after taxes and penalties and putting that towards my new house. In 30 years that saves me maybe 20K but also puts the payment a little lower which would allow me to triple up on payments and pay off in 4 yrs. At that point I would be putting everything extra in my 401K. Is this even a reasonable thought?
madmax

shack

No! You are giving up too much for too little in return. You lose the tax deferred income plus as you said it is costing you almost 50% of the value. There is no way you recover that with your plan. Pay what extra you can on your mortgage and leave the IRA alone. Cashing in an IRA or 401K is absoultely one of the worst financial moves one can make unless it is a dire emergency.

Shizelbs

Seems to me it would be wiser to pay what you can now, pay extra towards the principal of the mortgage and refinance later to lower payments if thats what you want to do.

PolkThug

I agree with Shack. Also, this is the wrong time to get out of the market. If you were going to do this, a DJIA of 14k would have been the time, not 11k.

dkg999

Isn't there a first time home buyer exclusion for withdrawing money from an IRA? (assuming that is the scenario). Some IRA's also let you borrow from your IRA for a very low interest rate.

tcrossma

I also agree that it's not a good idea to cash in your 401k, especially for a mortgage. Mortgage rates are so low that you're usually better investing that money, and in the case of cashing in the 401k the penalty just makes matters that much worse. Take out the mortgage, pay extra if you can but don't sweat it if you can't because if you can invest that money instead you'll make out better in the long run.

madmax

I lean towards leaving retirement stuff alone. Just thinking that at the beginning of a big loan is the time to think about stuff like this. I hate it, I was almost paid off with my old house and was looking forward to not having a mortgage, now I have a new one...
madmax

TroyD

Yeah, but that few grand now will cost you WAY more in the long run.

Let it ride, man, let it ride

BDT

madmax

TroyD wrote: »

Yeah, but that few grand now will cost you WAY more in the long run.

Let it ride, man, let it ride

BDT

Yep, you guys are right. Besides, you never know when something really big comes up and you need some emergency money. A new amp or something.
madmax

mule

Please correct me if I am wrong, but this is the way I look at it.

I have a 5 5/8 interest rate on my mortgage, I have that payed down to 120k and I pay a good bit extra each month because I look forward to the day of no mortgage.

So I look at it like paying 5 5/8 on 120k is more money than if I got paid 5 5/8 on say 50k, so unless I have more money invested than what I owe on the mortgage I will allways be losing money. So I figure that the extra 200 to 500 I pay toward princaple each month has a bigger effect on what I pay in interest as opposed to what I would get paid in interest on a investment.

Feel free to tell me if my reasoning is retarded, I just want to elliminate my bills by the time I'm 45, I'm not really into this working full time stuff:D

madmax

If you pay extra on a 6% mortgage it is the same as making 6% on a retirement investment EXCEPT you will pay a different amount of tax later when you take out the investment than what you paid when you made the 6% used to put on the mortgage. The general idea is you will be paying less tax when you take it out after you retire. I no longer agree with this premise. In the future it is quite possible we may be paying more tax percentage wise than we are today. This is just an "opinion".
Also, the general rule of thumb people use is that you don't want to pay off your home instead of investing. I always hear this from people who have no means to pay off their home even if they wanted to. The people "I know" who have plenty of money pay it off.
madmax

polktiger

madmax wrote: »

If you pay extra on a 6% mortgage it is the same as making 6% on a retirement investment EXCEPT you will pay a different amount of tax later when you take out the investment than what you paid when you made the 6% used to put on the mortgage. The general idea is you will be paying less tax when you take it out after you retire. I no longer agree with this premise. In the future it is quite possible we may be paying more tax percentage wise than we are today. This is just an "opinion".
Also, the general rule of thumb people use is that you don't want to pay off your home instead of investing. I always hear this from people who have no means to pay off their home even if they wanted to. The people "I know" who have plenty of money pay it off.
madmax

Of course we may also have a variation of a national sales tax in the future too. One way to think of the home mortgage is means leverage for your investment portfolio (please note I am not advising that you go out and borrow against your house to put money in other investments other than real estate). The benefit to home mortgage as leverage as it is generally tax deductible making the effective interest rate on a 6% loan around 3.5% - 4.0%. Investment interest expense is only deductible against investment income, and I need to double check, but investment interest expense may also be an AMT adjustment where home mortgage interest is not.

jdwmap

I wouldn't do it on for a couple of reasons, many already stated. First, if you are paying your mortgage off faster as posted earlier, it doesn't matter, the last few years of a mortgage are mostly principal with a small amount of interest, it is paying off more at the beginning that will create the largest savings in interest.

As for withdrawing from any retirement account early, no way. The penalties/fees more than offset any savings and unless it is a dire situation where you would potentially lose your home to foreclosure, I would not do it. And as mentioned earlier, you are at best getting 2/3 of the money you would have a year ago and then penalties on top of that, I would absolutely say leave it there and let it grow.

heiney9

shack wrote: »

No! You are giving up too much for too little in return. You lose the tax deferred income plus as you said it is costing you almost 50% of the value. There is no way you recover that with your plan. Pay what extra you can on your mortgage and leave the IRA alone. Cashing in an IRA or 401K is absoultely one of the worst financial moves one can make unless it is a dire emergency.

+1000

heiney9

mule wrote: »

Please correct me if I am wrong, but this is the way I look at it.

I have a 5 5/8 interest rate on my mortgage, I have that payed down to 120k and I pay a good bit extra each month because I look forward to the day of no mortgage.

So I look at it like paying 5 5/8 on 120k is more money than if I got paid 5 5/8 on say 50k, so unless I have more money invested than what I owe on the mortgage I will allways be losing money. So I figure that the extra 200 to 500 I pay toward princaple each month has a bigger effect on what I pay in interest as opposed to what I would get paid in interest on a investment.

Feel free to tell me if my reasoning is retarded, I just want to elliminate my bills by the time I'm 45, I'm not really into this working full time stuff:D

Your reasoning fails to take into account that real estate appreciates in value. Maybe not right now in this market (but in the long term). Borrowing money at a low at a low interest rate with an appreciating asset is better than completely paying it off. Of course you have to invest the money you WOULD have used to pay the mortgage down in order to get any benefit.

H9

shack

mule wrote:

Feel free to tell me if my reasoning is retarded, I just want to elliminate my bills by the time I'm 45, I'm not really into this working full time stuff:D

You fail to consider the tax advantages of BOTH. The ability to borrow and deduct the interest paid reaps significant benefits and the ability to earn interest, dividends and capital appreciation and REINVEST them on a tax deferred basis is HUGE.

On the other side, if you decide to accelerate the morgage payments on your house and want to pay an extra $500 per month...just imagine that when you make the payment, the mortgage holder sends $250 to pay taxes and applies the rest to your mortgage. THIS is what you are doing if you cash in an IRA to pay down a mortgage.

jdwmap

I think the other side of paying off early is a reduction in risk, and there is always risk involved, whether it would be loss of income to make the payments or even the potential of a total loss of the asset. Paying off early reduces that risk, and to your significant other/kids, should you die, they have one less thing to worry about.

shack

jdwmap wrote:

I think the other side of paying off early is a reduction in risk, and there is always risk involved, whether it would be loss of income to make the payments or even the potential of a total loss of the asset. Paying off early reduces that risk, and to your significant other/kids, should you die, they have one less thing to worry about.

You are actually increasing risk by diluting assets. As long as the assets in the IRA are in fairly safe investments, then that asset will continue to exist and grow. There are bond funds, money market accounts and as stated in other threads guaranteed return and insured principal up to $250,000 bank IRA accounts are available so the risk of loss can be non existant. If the owner were to die there would be more assets available to the heirs (ie: the estate would be larger) to take care of debt or stay in the IRA for their retirement. Even Dave "simplistic no debt" Ramsey does not recommend cashing in an IRA to pay off debt.

jakelm

madmax wrote: »

If you pay extra on a 6% mortgage it is the same as making 6% on a retirement investment EXCEPT you will pay a different amount of tax later when you take out the investment than what you paid when you made the 6% used to put on the mortgage. The general idea is you will be paying less tax when you take it out after you retire. I no longer agree with this premise. In the future it is quite possible we may be paying more tax percentage wise than we are today. This is just an "opinion".
Also, the general rule of thumb people use is that you don't want to pay off your home instead of investing. I always hear this from people who have no means to pay off their home even if they wanted to. The people "I know" who have plenty of money pay it off.
madmax

Retirement is making 6% (well probably more like 2.5-3%) on 6%. 6% on $1. Then 6% on $1.06, then 6% on $1.12.....etc

Its alittle different then 6% interest rate on a principle.

I am a Buisness/Finance manager at a Chevy dealership. I know this is alittle different, but I see people everyday wanting to drop 30k cash on a vehicle. With the rates going right now, they will make more money in interest @ 2.5% over 6 years than they will pay in interest on a 30k vehicle with a 6 year/72 @ around 5.5% rate a month loan. I advise them to keep their money in the bank.

shack

jakelm wrote: »

Retirement is making 6% on 6%. 6% on $1. Then 6% on $1.06, then 6% on $1.12.....etc

Its alittle different then 6% interest rate on a principle.

It is the abilty to EARN tax deferred and pay interest with a tax deduction advantage that totally makes keeping the IRA the best option...IN ADDITION TO the substantial penalty to withdraw early. There may or may not be a tax advantage to taking it out once you retire. One can leave it in the IRA earning tax deferred until they are 70 1/2 without having to withdraw anything or pay any taxes. At that point there is a formula as to how much you are required to withdraw and the increased value of the assets should far outweigh the tax rate you are subject to at that time. There are always Roth IRAs it you feel that your tax rate after retirement will be substantially the same as now. Pay the tax now on the balance and your future IRA deposts and never pay another cent of tax on the principal OR INTEREST/ASSET GROWTH when you take it out after retirement.

I can't say enough about the need for IRAs and 401Ks. PUT IN AS MUCH AS YOU CAN AFFORD! (and maybe a little more) Because you are living longer, because company pensions are a thing of the past, because even though Social Security wont go away, it will not be enough to live as you would like. Statistics say that 40% of people will out live their retirement savings.

jakelm

shack wrote: »

It is the abilty to EARN tax deferred and pay interest with a tax deduction advantage that totally makes keeping the IRA the best option...IN ADDITION TO the substantial penalty to withdraw early. There may or may not be a tax advantage to taking it out once you retire. One can leave it in the IRA earning tax deferred until they are 70 1/2 without having to withdraw anything or pay any taxes. At that point there is a formula as to how much you are required to withdraw and the increased value of the assets should far outweigh the tax rate you are subject to at that time. There are always Roth IRAs it you feel that your tax rate after retirement will be substantially the same as now. Pay the tax now on the balance and your future IRA deposts and never pay another cent of tax on the principal OR INTEREST/ASSET GROWTH when you take it out after retirement.

I can't say enough about the need for IRAs and 401Ks. PUT IN AS MUCH AS YOU CAN AFFORD! (and maybe a little more) Because you are living longer, because company pensions are a thing of the past, because even though Social Security wont go away, it will not be enough to live as you would like. Statistics say that 40% of people will out live their retirement savings.

Good post. +1

66chevyIISS

My 401K is taking a beating this year good thing I am only 28 so I have many years for it to correct itself.

candyliquor35m

jakelm wrote: »

Retirement is making 6% (well probably more like 2.5-3%) on 6%. 6% on $1. Then 6% on $1.06, then 6% on $1.12.....etc

Its alittle different then 6% interest rate on a principle.

I am a Buisness/Finance manager at a Chevy dealership. I know this is alittle different, but I see people everyday wanting to drop 30k cash on a vehicle. With the rates going right now, they will make more money in interest @ 2.5% over 6 years than they will pay in interest on a 30k vehicle with a 6 year/72 @ around 5.5% rate a month loan. I advise them to keep their money in the bank.

I've never bought a new car and never will until I can pay cash for it.

cfrizz

PREACH IT SHACK! PREACH IT!!!

One of the most unsmart things people do is either withdraw money or take out loans on thier 401k's!

cfrizz

Precisely always keep that in mind! When we had the last big downturn I ignored ALL of my investments for 2 whole years. I didn't open any statements, or go online to check my 401k. I DIDN'T WANT TO KNOW & DRIVE MYSELF CRAZY!

When it came back I was sitting pretty. My coworker asked me to move her funds around for her. I tried my best to talk her out of it but she insisted. Now she is 64 yrs old & trying to figure out if she can retire. If she had left everything alone she could have gone years ago!

66chevyIISS wrote: »

My 401K is taking a beating this year good thing I am only 28 so I have many years for it to correct itself.

exalted512

isnt their an exception for taking out cash with no penalty for first time home buyers?
-Cody

exalted512

isnt their an exception for taking out cash with no penalty for first time home buyers?
-Cody

Shizelbs

66chevyIISS wrote: »

My 401K is taking a beating this year good thing I am only 28 so I have many years for it to correct itself.

You and me both. I'm about the same age as you, so I don't really care. I keep dumping funds into it.

shack

exalted512 wrote: »

isnt their an exception for taking out cash with no penalty for first time home buyers?
-Cody

Yes. You avoid the 10% early withdrawal penalty but must pay the income tax on the funds withdrawn.

Question: May I withdraw IRA funds without penalty for education or the purchase of a home?

Answer: Yes, within strict limits. IRA distributions made after 1997 and used for "qualified higher education expenses" for yourself, spouse, or your or your spouse’s child or grandchild. Expenses are limited to tuition, fees, books, supplies and equipment in connection with post-high school education (including graduate courses) at a qualified educational institution. Scholarships and educational assistance received tax-free reduce the allowable qualified higher-education expense withdrawal.

Note: A qualified educational institution is described in section 481 of the Higher Education Act of 1965 and must be eligible to participate in a program under Title IV of such Act.

Qualified first-time homebuyer IRA distributions also escape the penalty, but are limited to withdrawals totaling $10,000 during an individual’s lifetime. The home must serve as a principal residence of the taxpayer, spouse or any child, grandchild, or ancestor of the individual or spouse. The money may be used to buy, build or rebuild the home.

Note: A distribution from a Roth IRA which meets these rules is tax -- and penalty -- free, provided the funds have been in the Roth at least 5 years.

The "first" home means that the taxpayer or spouse must not have owned a principal residence within two-years prior to the purchase of the new home. The purchase date is when the contract to purchase is signed (not closing date) or construction begins. Should the acquisition or construction be terminated prematurely, the funds must be placed back in the IRA within 120 days to avoid tax and penalty.

Remember: Any IRA withdrawals prior to age 59 ½ for medical, educational or first-time home expenses will always be subject to income tax under regular IRA tax rules, whether or not there is an early-withdrawal penalty.

ND13

Hell, I'll be working til I die anyways.:rolleyes::(

Mazeroth

jakelm wrote: »

I am a Buisness/Finance manager at a Chevy dealership. I know this is alittle different, but I see people everyday wanting to drop 30k cash on a vehicle. With the rates going right now, they will make more money in interest @ 2.5% over 6 years than they will pay in interest on a 30k vehicle with a 6 year/72 @ around 5.5% rate a month loan. I advise them to keep their money in the bank.

Your math is way off. This is a quick and dirty calculation. The first year of the loan they will pay over $1500 in finance charges. With 30k in the bank and 2.5% interest they will make $750 in interest. However, they will also pay taxes on that interest so we'll say $600. Year two they will pay around $1250 in interest. Their $30600 will make them $765, or about $615 in interest (keeping things simple).

So, after 2 years they're $2750 in the hole with taking out the loan or they have $1215 they've made in interest from a bank at 2.5%. Now, if the bank was paying out 5% then it would be roughly a wash. Another thing you need to understand is the 30k they started with in the bank is no longer 30k as the payments are reducing that money, which I didn't calculate.

Laptop battery about to die. Goodnight!