Bringing up 401k govt seize question again
- Thread starter Chapdog
- Start date
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The Almighty
Yeah... it is a bad idea
Say you have a 100k IRA. Technically 75K is yours 25k already belongs to Uncle Sam. You cash it out... you give Uncle Sam his cut, plus 10% of the total account as early withdrawal penalty. Now you have 65k (minus whatever individual state taxes and penalties are).
Instead take the IRA... convert it to a Roth. If you can, pay the taxes outside of the IRA. You still pay Uncle Sam his 25k (plus any state taxes). But now you have 100k growing tax FREE.
If you don't want to invest in the market... I don't blame you. You can either put it in a public non-traded REIT or if you want complete security, put it into a treasury bond, CD or indexed annuity.
If you have a current mortgage of say $200k on a $400k home, refi that $200 if you haven't already done so. You will not likely ever see rates this low again. You can still make the same payments you are making now, yet you will pay down the mortgage faster due to lower rate. While paying off a home can provide peace of mind, it becomes a dead asset and harder to see a return on investment.
ex: If you have that $400k home with $200k mortgage you have $200k equity.
If the home goes up 10% in value, you gained 20% on equity
If the home goes down 10% in value you lose 20% of your equity
Where as it is a straight 10% up or down if the home is paid off. The decision here should also include expectations of future home price changes in one's local environment. If you believe they are going to be stable or increase then the refi and mortgage is typically the best route. If you think they are going to decline, then selling or at least paying off the debt may make more sense. But doing so from an IRA or 401k can be an expensive way to do that given the 10% penalty.
As Einstein said, 'the power of compounding is the eighth wonder of the world'
Add the tax free compounding and it only improves.
Bottom line... if you take the mtg tax deduction, you only have to average an annual return of about 3.8% to outperform the mortgage on a 30 year fixed. (much less if you follow a 10/15 yr amortization or refi with a 15 yr fixed rate)
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You should write about this subject more because it's the one thing you write about that I find interesting and that I think you're very smart about.
It's one thing I'm really masterful at.
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The Almighty
To make it the simplest calculation...
what is your current mortgage rate?
current 30 fixed is on average 4 1/8 (depending on credit it could be as low as 3 7/8 or 4)
For a rough estimate assume mortgage deduction on taxes knocks off 3/8. Meaning you need to earn 3.75 or better on average over the 30 year period to justify not paying it off early. You need to earn far less than that if you are taking the money out of an IRA or 401k due to 10% penalty.
I think you would be hard pressed not to be able to earn the 4 1/8 you are paying (without investing anything in the stock market), let alone the 3.75 on average over that time.
Again, their are valid reasons for paying it off.... (though still not as many when talking about doing so from an IRA/401k)
1) you think real estate valuations are going to decline
2) you think you can't outperform the 4.125% on average
3) you just want the peace of mind of having it paid for and thus only having to worry about prop taxes
If you want exact calculations, you can pm your exact situation (numbers only... no need for personal info) to me. I can then provide you with the numbers.
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The Almighty
yes, nothing better than a backhanded compliment, especially when the individual has some brass knuckles included... at no additional charge even.
Nooo, I was just joking. No brass knuckles.
I would have added "for chapdog only". You may start getting all kinds of hair-on-fire PM's from the righties here.
Help me SF, help me! Obama is gonna sieze my baseball card collection!
Help me Sf, Help me! My aunt's neighbor's cousin said Obama is coming for my commemorative pork rind collection! THe kind they don't make no more!
I dont know man. Let take an example. 300K in 401k. 200K mortgage over 30years at 4.5%. assume 5% 30year avg return on market investment.
300K at 5% over 30years is 1.3M. - 25% fed tax = 975K - 350k for mortgage = 825k net
or
300K early withdraw - 25% and 10% penalty = 195k. Zero house payment. now invest mortgage payment NET over 30years at 5% interest = 825K.
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The Almighty
Given your example, they will net out about the same given that the rate you are paying on mtg is about the same as ROI. It would magnify based on how wide that spread became.
Now the other factor we haven't discussed is tax rates. Odds are tax rates are going to be higher in the future, which would lead to an advantage to either paying the taxes now and paying off mtg. or paying taxes and converting to a Roth.
So maybe you are justified... especially being in the northeast and subject to higher cost of living etc...
You might think so, and I, too, hope it's so, but judging past betrayals by judges, I'm not so sure.
Let's all hope.
I worked for 401k company for 10years so i know what we sold to people about power of compounding and such and that its 100% yes to 401k versus anything else. Its almost automatic response from everyone you even ask in regards to 401k. HOWEVER as i stated I worked for a top retirement savings company and I know they spent Millions annually on lobbying for expansion of 401k using elimination of traditional DB pension as leverage. Then lobbying for allowing higher risk mutual funds into plans (aka higher fee funds), then lobbying for allowing paperless statements (aka less operational expense for them)
So bottom line is I wanted to prove a point that its not Black and White fool for thinking of cashing in 401k and when you do the math out its a little closer then you may think.. Same holds true for longer versus shorter mortgages.. why would mortgage company want you to pay uncle sam more instead of them? Of course they will sell u on the tax write off if they are gonna collect more interest.
One last thought: Your right that taxes effect the scenario but I would also add risk mitigation as another factor as well. If i lose my job and have a mortgage i may have to refinance, take out equity or credit cards with interest. No mortgage.. then Who gives a fuck the ball and chain is off.