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Jesse Handel
Jesse Handel, Tax Preparer
Category: Tax
Satisfied Customers: 270
Experience:  10 years tax preparation. IRS Registered Tax Preparer.
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"Personal Finance"

Resolved Question:

Hello,


I am 62 years old and out of work on long term disability due to a serious medical condition.


I do not have any significant debt. My question is:


I have 2 car payments, one is $245 per month with 29 payments left. The other is $196 per month with 29 payments. I could pay both off for about $12,000.


I am contemplating withdrawing the $12,000 out of my retirement savings. I only have approx $185,000.


Would this be a wise decision, considering I have such a relatively small amount saved?

Submitted: 3 years ago.
Category: Tax
Expert:  Jesse Handel replied 3 years ago.

Hello and thank you for coming to Just Answer. We appreciate the opportunity to help you with your tax questions. I need a little more information in order to determine what I would recommend as your best option at the moment, if you don't mind answering a couple of questions.

  1. What kind of investment is the $12,000 currently placed in? Is the money in stocks, a savings account, a money market, a time deposit, or another investment? Will you be penalized in any way for removing the money? What kind of return on the $12,000 are you currently making?
  2. What interest rates are you paying on the two car loan? You don't need precise figures, just a general amount.
  3. Roughly, how much money would you need to live on for six months?
  4. What type of long-term disability are you living on? Government, former employer, or other type?
  5. Are your health expenses covered and by what or whom? What is the most expensive out-of-pocket expenses you have had to pay during your worst year since you were disabled?

Thank you for this information. It will enable me to advise you better.

Customer: replied 3 years ago.

Hello,

 

First, thank you for being so thorough...I appreciate it.

 

Now, to answer your questions:

  1. The $185,000 is with T Rowe Price. It is a blend of 50% stocks and 50% bonds. As you are aware, the market has been going up and down lately, so it is difficult to state just what type of return I am getting right now. The only additional expense I will incur on withdrawing $12,000 is that I will have to pay taxes on the money as it is in a IRA.
  2. I believe I am paying about 6 or 7% interest rates, as rates were higher a few years ago.
  3. Rough;y, we need about $24,000 to live on for 6 months, which is covered by what I receive in disability payments..medical costs are high.
  4. I receive $2,315.00 from Social Security and $1,900.00 from the plan sponsered by my employer for a total of $4,215.00 before taxes. The $1,900.00 will stop when I reach age 65 (Abour 2 and one half years) At that time I am planning to begin to make small withdrawels monthly from the IRA.
  5. I continue to be covered by my employers health plan. Particapation is expensive. $ I pay $457.00 per month in premiums to cover my wife and I. The largest monthly expenses are the healthcare ($457) and those 2 car payments ($442.00) The medical coverage will end when I reach age 65. I will then begin to particapate in Medicare.

Again, thank you...Very much for being so thorough...I look forward to your reply.

 

Sincerely,

 

Paul

Expert:  Jesse Handel replied 3 years ago.

Thank you for the information. In looking over your situation, I believe this question is outside of my area of personal expertise. My expertise is primarily in tax planning and I think your question falls more into the area of financial planning, which is a different specialty. I am sorry that I can't help you personally, but I want to make sure that you receive the best advice possible. In order to facilitate that, I will opt out of your question in order to open it up for another expert and have it moved to the financial planning category.

Again, I'm sorry that I can't help you, but I think this is the best way for you to get the most accurate answer. It has been a pleasure working with you.

Expert:  Jesse Handel replied 3 years ago.

Hello again. I am very sorry that none of the other experts have been able to answer your question. I want to help you and while I am not a professional financial planner, my profession requires tax planning, which is part of the issues you need to consider and I have significant financial knowledge. If you are willing to work with me, then I will be happy to advise you as best I can. You are not required to pay for an answer unless you are satisfied with it.

In reviewing your information I have a couple of additional questions whose answers would help me provide better advice.

  1. In the first information that you provided, I didn't notice that you were married. Does your wife work? Does she provide income to the household and, if so, how much? If your wife is working, how long is she planning to continue to work and when will she qualify for medicare and Social Security? When you reach age 65 and your medical insurance premiums are replaced by Medicare premiums, how will your wife's medical needs be covered? If she won't qualify for Medicare when you do, how much will you have to continue to pay for her health insurance? When you both are covered by Medicare, your premiums for basic medical coverage will be about $100/month, but you will have to pay for prescription drug coverage which can vary significantly depending on how many drugs you need.
  2. When you withdraw money from your IRA, the IRA administrators are required to withhold 20% of the withdrawal for federal taxes, so you will have to withdraw $15000 in order to receive the $12000. Hopefully, your tax rate will be low enough that you will receive most of that money back. Will $15,000 in income added to your other 2011 income cause problems with your Social Security Disability? Will your disability be reduced because of the higher income?

Thank you for the additional information.

Customer: replied 3 years ago.

Hello again,

 

Thank you...Very much for trying to answer this question. I do appreciate it.

 

I did some additional figuring myself concerning this. You are correct. When I figured what it would cost me to withdraw the money, it totalled more than what I will make in regular payments.

 

So...I decided to leave the money in the IRA. Hopefully, it will help it grow. Also, I will try to place a little towards the princapal of those loans.

 

Fortunatly, the payments are not a financial burden to us and they will end before the disability sponsered by my employer stops (Age 65.)

 

Again, I truly do appreciate your imput and would love to hear from you as to whether you think I made the right decision.

 

I am going to go ahead and pay you. However, I truly would enjoy hearing back from you with any comments/suggestions concerning my decision.

 

Very truly yours

 

Paul

Customer: replied 3 years ago.

Hello again Jesse,

 

Now I can't locate the link to submit a payment... Could you please send it when you reply to me?

 

Thanks so much!

 

Paul

Expert:  Jesse Handel replied 3 years ago.

Thank you very much. I wouldn't have expected payment since you have worked out your question mostly by yourself, but I appreciate it and I will try to provide worthwhile advice.

I think that your decision is very wise. Since some of your money is in stocks, selling those stocks now will lock in the losses you've probably experienced in the last few years. By keeping those stocks, you may be able to recover some of those losses.

The tax money that would be withheld from your IRA (the 20%) if you withdrew the money would be sent to the IRS to offset your 2011 taxes and you should get much of it back, but the money you withdraw would be considered taxable income and would increase your taxes this year.

Paying extra money on the principal of your car loans is very smart. You need to check and make sure that neither of the loan have an early payoff penalty, but, as long as they don't have penalties for early payoff, you can pay extra money on your loan payment, designated to be applied to the principal, and pay off your loan more quickly saving interest payments without paying any additional taxes. Make sure that you identify on your payment that the extra money is to go to pay the principal, otherwise some companies will apply that money to the interest. You may want to check with your loan companies on how to pay extra money toward the principal, so that they don't have any excuse to not put the extra money where you want it.

I think that keeping the lump sum of money available is safer than paying off your loans right now. It will cost you a little bit of extra money, but you're going to be dependent on your savings to pay your bills in a few years, and there is no way to get the money back once you use it to pay off the loans if an emergency arises.

If you had more resources or were in a situation where you could recover if something goes wrong with your finances, paying off the loans would make sense. But in your situation, I think that your decision to be conservative is very wise.

I wish I could have helped you more. You might look at some of the potential pitfalls with Medicare and your wife's health insurance. If one of you goes on Medicare before the other, you may be paying Medicare premiums and still paying health insurance premiums. My spouse is going on Medicare before I do, but our health care premiums through our employer aren't dropping even though only one of us will be covered.

Please let me know if you need any more information about this topic. It has been a pleasure working with you. Thank you.

Jesse Handel, Tax Preparer
Category: Tax
Satisfied Customers: 270
Experience: 10 years tax preparation. IRS Registered Tax Preparer.
Jesse Handel and 7 other Tax Specialists are ready to help you

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Jesse Handel
Jesse Handel
Tax Preparer and Chemist
146 Satisfied Customers
10 years tax preparation. IRS Registered Tax Preparer.