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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
Category: Tax
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Experience:  10 years experience
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I am 60 years old and just lost my job. My wife and I owe

Customer Question

I am 60 years old and just lost my job. My wife and I owe $160K on our home and we will not be able to make that payment within only a couple of months. We consider refinancing in order to drop our payment, but that of course spreads our payments back over a long period and put us back with paying mostly interest. We have played with some models of total pay-back including interest and made a model of us taking $160k from our retirement savings + 36% to cover the tax. So $217.6k. We have a well funded retirement and can afford to take that hit and I am thinking that our income will be at a low point for this year since I am unemployed and have no income.
Would it be smartest to take the $160K this year, pay off our mortgage. Then take the amount needed to cover the taxes on January so that is income in next year. I realize that would mean that I would need to cover the tax on that amount the following year. Is it best to just take it all and the tax hit this year, or spread it over a couple of years?
Submitted: 8 months ago.
Category: Tax
Expert:  emc011075 replied 8 months ago.

Hi. My name is ***** ***** I will be happy to help you.

Because you are 60, you will not be subject to 10% early distribution penalty as long as you take distributions from your own retirement plan so the only thing you have to worry is the income tax and tax bracket. You can start taking regular distributions enough to cover your living expenses and the mortgage.

It is never a good idea to take such a large distribution to pay off your mortgage. The taxes will be huge and your money will be tied up in home equity and not easily accessible if needed. People who do that often end up with a huge home equity loan or reverse mortgage because they run out of cash at 70 or 75. Another issue with paying off your mortgage using your retirement funds is that if you ever get in financial difficulties, the creditors can take your house but only IRS can touch your retirement account.

Expert:  emc011075 replied 8 months ago.

If you really want to do it, than spread it over several years. If you take a lump sump distribution you will be paying at least 15% in taxes if not more. I am pretty sure your mortgage interest is one third of it. If you take smaller distributions you could still keep it in 10% tax bracket.