A Little of This, A Little of That

I've got myself in quite a jam and I could really use some advice. About 5 years ago I took out a home equity laon to fix up the house. It was paid off but my wife and I agreed that we wanted to re-do the kitchen and bathrooms as well as adding a sun room. The house looks great now but with the slow economy both my wife's and my hours have been cut. We are both in our early 60's and need to work for several more years in order to pay off the home equity mortgage.

To compound things the house has probably dropped in value so re-financing is out of the question because of the appraisal value won't be high enough. The home equity line is still at $100,000. The home is probably worth only $125,000 or so now. We have about $200,000 in IRAs. Should we pull money out of those to pay off the line of credit? Help!

Phil

Dear Phil,

Let me introduce you to the principle of a little of this and a little of that. If you take $100,000 out of your IRA to pay off the mortgage it will cost you roughly $25,000 in taxes. (There will be no penalty because you are older than 59 1/2). However, if you take out the $100,000 over this year, 2011 and 2012 in a total of 17 months you can spread out the taxes over 3 tax years so that softens the blow somewhat.

However, mortgage rates are at an all time low and if you can preserve more of the IRA that will increase your opportunity to have more income or options once you do actually retire.

If you pay down the mortgage to $70,000 or so, you'll be able to get a different mortgage with a lower rate. If you take out $15,000 this year and $15,000 next year the tax bit won't be so bad. Of course, your IRA will drop to $170,000 but that beats taking it down to $100,000 or lower if you need to take extra money to pay the additional taxes.

If things get worse, you can take just enough of the IRA annually to make the payments or part of them. That way you have a chance to save most of your IRA which is the extra you'll need when you and your wife start to collect social security. Hopefully you both can wait until 66 to get the full retirement benefit.

Small planned out moves can pay off in a big way, a little of this and a little of that.

Paul D. Reasoner CFP, CIMA

These are the opinions of Paul Reasoner and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.

Compass Wealth Advisors, LLC is an advisor owned independent Registered Investment Advisory Firm. Registered Representative. Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, FINRA/SIPC. Cambridge and Compass Wealth Advisors, LLC are not affiliated.