Mortgage versus Cash from Retirement Funds

[AlaskaHunter]

We are a retired couple in our 60s with no debt, no major expenses and plenty of savings in retirement funds.

We are selling our Alaska house and moving to Montana.
Houses in MT are about $100k more expensive than in AK.
Say we need $100k to purchase a MT house beyond the cash from the sale of our AK house.

One option would be to take out a $100k mortgage and keep our income in the 12% federal income tax bracket.
Paying as much towards principal as we can each year.

The other option would be to take $100k from retirement funds, so no debt,
but our 2023 federal income tax bracket would likely rise to 24%.

What type of professional would be best to advice us?
Certified Financial Planner™ (CFP) · Chartered Financial Analyst (CFA) · Personal Financial Specialist (PFS) ·
Enrolled Agent (EA) · Certified Public Accountant (CPA)?

 

[MTHunter1321]

Are your retirement funds coming from a Roth or a traditional? Ie are they taxable or not. If they’re taxable and they kick you into a higher tax bracket at 24% then it seems like a no brainer to get a mortgage at 6% and let your retirement funds stay invested. Not sure what they’re invested in but I would think a balanced portfolio should average a LT return of at least 6% if not higher. If it were me I’d get mortgage, avoid the tax jump and then let my retirement funds stay invested. If the retirement account is taxable then you’d likely have to withdraw approx $125k to net your $100k.

 

[SAJ-99]

Probably a CFP or CPA, one that does individuals taxes, are your best bet. You could probably build out the calc pretty easy yourself. Just remember that you can always take out the mortgage and pay it back early by withdrawing whatever amount of funds minimize your tax hit. You could also pay back x% on Dec 31 and then X% on Jan 1 and diffuse it across time. There may be other tricks in the tax code. I’m not familiar with it.

 

[Willy Dee]

Or…

 

[AlaskaHunter]

Are your retirement funds coming from a Roth or a traditional? Ie are they taxable or not. If they’re taxable and they kick you into a higher tax bracket at 24% then it seems like a no brainer to get a mortgage at 6% and let your retirement funds stay invested. Not sure what they’re invested in but I would think a balanced portfolio should average a LT return of at least 6% if not higher. If it were me I’d get mortgage, avoid the tax jump and then let my retirement funds stay invested. If the retirement account is taxable then you’d likely have to withdraw approx $125k to net your $100k.

Taxable retirement funds in IRA and 401k.

 

[2rocky]

Use a Partial budget with real dollars.

On one side: Increased Costs ( Tax penalty) and Reduced income (Reduced investment income in IRA/401K)
Minus the other side: Reduced Costs and Increased income. A CPA will be able to tell you what the Tax penalty nets out to.
.
Take a look at what the Difference in Cost of Living will be in your new abode as well. https://www.bankrate.com/real-estate/cost-of-living-calculator/ (that could be an increase or decrease)

 

[BigHornRam]

Be a patriot and help the government out with our ever expanding deficit. Pay cash and jump in the 24% tax bracket!

 

[Sytes]

No clue though best with your move to MT.

 

[westbranch]

CPA and/or CFP would probably be best. The 24% tax bracket is still historically low and unlikely to decrease in the future so paying some tax at 22%/24% bracket over the next few years isn't a bad idea. Taking out a mortgage would allow you some flexibility for Roth conversions by spreading out your taxable income needs. The Roth conversions would be a good strategy if the majority of your retirement funds are in tax deferred plans to minimize taxable social security and RMDs in the future. Roth conversions before becoming a MT resident to avoid state income taxes would have been ideal but it sounds like that ship has sailed.

 

[npaden]

Need to know what your expected withdrawals are going to be assuming you don't take out the mortgage.

The 12% bracket goes up to $89k so if your expected withdrawals are already going to be $75k or $80k there isn't much room to take the money out to pay the mortgage off early.

If you are expecting to only be withdrawing $50k or $60k then there is a lot more room to stay in the 12% tax bracket.

The next bracket is 22% that goes all the way up to $190k then goes up to 24% only at $364k. Something is up with your math if you are saying that pulling out $100k is going to jump you all the way from the 12% bracket to the 24% bracket.

Keep in mind that 12% is a one time hit, where the mortgage interest is going to be the gift that keeps on giving as long as you have a balance outstanding.

It's a pretty easy calculation if you have the amount you expect to withdraw if you don't have a mortgage.

 

[longbow51]

You can calculate your mortgage interest with any number of online mortgage calculators. If you are only borrowing 100K, doubt the interest deduction will exceed standard deduction, but your accountant could advise.

You could compare this with the net present value of 100K invested, at say 5-6% (Do you feel lucky? Well, do you kid?) over the same 15 years.

The tricky part is estimating inflation and tax increases. Inflation has been nil for many years, but now...

Net present value calculators are all over too.

Having said that, I think a CPA is your best bet. For one thing, you pay them for their services, they don't make money from your investments.

 

[2rocky]

Need to know what your expected withdrawals are going to be assuming you don't take out the mortgage.

The 12% bracket goes up to $89k so if your expected withdrawals are already going to be $75k or $80k there isn't much room to take the money out to pay the mortgage off early.

If you are expecting to only be withdrawing $50k or $60k then there is a lot more room to stay in the 12% tax bracket.

The next bracket is 22% that goes all the way up to $190k then goes up to 24% only at $364k. Something is up with your math if you are saying that pulling out $100k is going to jump you all the way from the 12% bracket to the 24% bracket.

Keep in mind that 12% is a one time hit, where the mortgage interest is going to be the gift that keeps on giving as long as you have a balance outstanding.

It's a pretty easy calculation if you have the amount you expect to withdraw if you don't have a mortgage.

Gotta love it when a Real CPA replies in detail like this.....

Also factor in State income tax in MT...



There are some Smart Fellers here on HT.....

 

[npaden]

Need to know what your expected withdrawals are going to be assuming you don't take out the mortgage.

The 12% bracket goes up to $89k so if your expected withdrawals are already going to be $75k or $80k there isn't much room to take the money out to pay the mortgage off early.

If you are expecting to only be withdrawing $50k or $60k then there is a lot more room to stay in the 12% tax bracket.

The next bracket is 22% that goes all the way up to $190k then goes up to 24% only at $364k. Something is up with your math if you are saying that pulling out $100k is going to jump you all the way from the 12% bracket to the 24% bracket.

Keep in mind that 12% is a one time hit, where the mortgage interest is going to be the gift that keeps on giving as long as you have a balance outstanding.

It's a pretty easy calculation if you have the amount you expect to withdraw if you don't have a mortgage.

I re-read this and I guess if you are at the absolute top of the 12% bracket already and took out just over $100k you would barely get into the 24% bracket. $100K of that would be at the 22% bracket and then whatever was over the $100 would be in the 24% bracket. You don't pay 24% on the entire amount.

If you really are that close to the top of the 12% bracket already there isn't any room to add anything. Would you be able to keep your income at $89k and still pay the mortgage so you stayed in the 12%? If you had to draw out the extra $ to pay the mortgage that would be at 22% too so it would all be a moot point.

 

[npaden]

Gotta love it when a Real CPA replies in detail like this.....

Also factor in State income tax in MT...



There are some Smart Fellers here on HT.....

I'm a real CPA but I don't do taxes (just my own). This is more of a math calculation than anything though.

 

[npaden]

Okay, so if you did a $100,000 15 year mortgage at 5.5% (just guessing) you would end up with a payment of around $10,000 per year for 15 years. That ends up with a total of $50,000 of interest paid over the life of the mortgage. Let's assume that you are able to keep your 401k withdrawals low enough to pay the mortgage payment and keep yourself in the 12% tax bracket.

If you paid $23,500 a year instead that would pay it off just under 5 years and only cost you $17,000 or so in interest.

The other thing that you would need to consider would be that $100,000 would still be in your 401k. I would normally assume a higher return than 5.5%, but since you are already at retirement you should have it invested fairly conservatively so that part may well be a wash. Whatever you are going to pay in interest will more than likely be offset by investment earnings in your 401k whether you pay it off over 5 years or 15 years.

To me it looks like if you just took it out and paid the lump sum that is going to cost you $12,000 of extra income tax. Of course if you don't take it out and that $100,000 continues to grow you will end up having to pay tax when you take it out but if you can keep yourself at the top of the 12% bracket that seems like you would still come out ahead.

This is assuming that you aren't itemizing and can't deduct the mortgage interest.

Long rambling way about it, but to me it looks like the mortgage would be the way to go if you could keep your income in the 12% bracket and make your mortgage payments. If you have to get into the 22% bracket to be able to make the payments then it would just be a wash either way.

 

[Bambistew]

I'm not a tax professional, nor do I know WTF I'm talking about... there is 5 different ways to think about this, but here is how I would approach it.

A 10yr loan for $100k (~$140k payoff 10yr at 7%). Assuming a fixed income you'd need $X dedicated to paying off the loan. If you assume a 5% return on your current investment, you'll need $125k right now to have ~$140k to pay off the loan over 10 years (if your return is higher it would be less money). This is money you cant' be used for anything else, AND...You are taking additional money out (income) to pay off the loan so you're taxed on it. Assume 18%? effective on $14k a year loan payment or ~ $2500 in taxes a year (~25k in taxes over the life of the loan). You're paying tax on top of interest. That 100k loan is going to cost you $150k over 10 years taxes, interest and principal.

Cash out
How much would you actually pay in tax in that $100k income, assume 20%? tax plus closing costs, you're probably looking at needing about the same $125k or less to pay it off.

Looks to me like you need to tie up the same amount of cash either way, but I'd go for cash out and be done with it.

 

[BigHornRam]

Throw in the loan origination fees, title insurance, appraisal, and all the other bullshit that is charged up front on a loan, too. Cash out, take the one time tax hit, and be done with it.

 

[MTHunter1321]

Throw in the loan origination fees, title insurance, appraisal, and all the other bullshit that is charged up front on a loan, too. Cash out, take the one time tax hit, and be done with it.

For a loan that small if those fees did apply wouldn’t come close to the tax hit. It’s likely that the appraisal would be waived, title insurance is typically paid by the seller, and origination is approximately 1%, so $1k. For $100k loan I think the absolutely MAX he’d be looking at for loan costs would be $2k worse case scenario. I’d rather pay that then $25k to Uncle Sam

 

[BigHornRam]

For a loan that small if those fees did apply wouldn’t come close to the tax hit. It’s likely that the appraisal would be waived, title insurance is typically paid by the seller, and origination is approximately 1%, so $1k. For $100k loan I think the absolutely MAX he’d be looking at for loan costs would be $2k worse case scenario. I’d rather pay that then $25k to Uncle Sam

Loan fees would be at least 4k. Unless it was a line of credit. Then interest would be higher than a mortgage, but if it was paid off in 2 years that wouldn't be a big deal. 24% tax rate is only on the amount above the 12% threshold, so maybe on 30k max would be taxed at an additional 12% ($3,600). I would hate to be living on retirement income and still paying a mortgage, so for piece of mind, I would pay it off a be done with it.

 

[SAJ-99]

Okay, so if you did a $100,000 15 year mortgage at 5.5% (just guessing) you would end up with a payment of around $10,000 per year for 15 years. That ends up with a total of $50,000 of interest paid over the life of the mortgage. Let's assume that you are able to keep your 401k withdrawals low enough to pay the mortgage payment and keep yourself in the 12% tax bracket.

If you paid $23,500 a year instead that would pay it off just under 5 years and only cost you $17,000 or so in interest.

The other thing that you would need to consider would be that $100,000 would still be in your 401k. I would normally assume a higher return than 5.5%, but since you are already at retirement you should have it invested fairly conservatively so that part may well be a wash. Whatever you are going to pay in interest will more than likely be offset by investment earnings in your 401k whether you pay it off over 5 years or 15 years.

To me it looks like if you just took it out and paid the lump sum that is going to cost you $12,000 of extra income tax. Of course if you don't take it out and that $100,000 continues to grow you will end up having to pay tax when you take it out but if you can keep yourself at the top of the 12% bracket that seems like you would still come out ahead.

This is assuming that you aren't itemizing and can't deduct the mortgage interest.

Long rambling way about it, but to me it looks like the mortgage would be the way to go if you could keep your income in the 12% bracket and make your mortgage payments. If you have to get into the 22% bracket to be able to make the payments then it would just be a wash either way.

You or anyone else know if he could take a loan from his own 401K (if that was the retirement account he was using)?