Financial Question

I know internet advice is worth what I pay for it but I need some opinions. I have to make a decision on what to do with Jodi’s deferred comp retirement money. The easy button would be roll it into my account and pretend I'll make it to collect. Looking at it though there's enough there after taxes to pay off the Jeep, the new kitchen, and a bit left over for coke and strippers (she'd want me to be happy).  Almost everyone has told me not to touch the money since I'm paying my bills ok but I keep thinking the peace of mind of not having those debts would be nice. 
 

What would you do? 

If you think there will be a correction soonish, maybe cash in on half and roll over the other half. That way at least you spent some of it yourself. 

Its quite dependent on everyone's economic situation, but I would roll it over. 

If you paid off all the debts, would you be putting additional money into your own retirement account?

If not and you're doing OK financially, I'd roll it over - with the way costs for medical care etc are going up, you (IMHO) can't have enough money set aside for retirement, ever.

Of course, I'm one of those people who, thanks to a business failure, probably won't be able to ever retire...

So the question is: spend it now, or spend it in retirement, yes? 

Will your retirement keep your bills paid or do you need to beef it up to not have to drive FWD automatics in retirement? If you're on track, then use it how you see fit. If you'll need it in 5 or 10 or 30 years, roll it in and it will be there when you do need it. 

I like the idea of retiring debt, but are there tax considerations, penalties associated with pulling the money out of a retirement plan? 

Relevant questions here that I would want to know before dispensing advice on it: 

• Is the house paid off, and what is the rate on the mortgage if it is not?
• What is the rate on the car loan(s)?
• What is the rate on the Kitchen loan?
• What is the rate on any other loans/credit cards that you have outstanding?
• How much do you have in your emergency funds (i.e. how many months expenses)
• How close are you to the next tax bracket, for both state and federal?

My gut says, no, but until you put pencil to paper (or keys to the spreadsheet), it is hard to make a determination. It also doesn't necessarily have to be an Either Or, you can likely take some of it out and leave some in. 

You used the words "peace of mind." You are going through an insanely difficult and stressful time. If you can use the money penalty free, pay off debt if that is what makes you feel better. Use the Jeep payment money to keep adding into retirement. I is the same money going out of pocket, but if one way gives more peace, go that way. If there is a penalty (taxes mentioned), is the tax hit bigger or smaller than the total financed payout on the other items?

Retirement is good, but financing can be expensive. There is not a black or white, always right answer there. Ultimately, your peace of mind has a dollar value and it is big.

1988RedT2 said:

I like the idea of retiring debt, but are there tax considerations, penalties associated with pulling the money out of a retirement plan? 

 

The portion that was Roth, if any of it was, would be basically be tax free and penalty free. If it was Pre-Tax, it would probably be considered normal income, so it would be taxed at whatever tax bracket he's in (married filing jointly) or it puts him in. 

There is no early withdrawal penalty. NY State may have their own issues that need to be dealt with, but from a federal level, its just income.

You do you!

Paying debt early is "locking in" your return on that money. If your loan is at 5% and you pay it one year early, your money is guaranteed to make 5% over the next year no more no less. Locking in some solid earnings is NEVER a bad thing. And like you said, there is the simple headspace a loan takes up with making payments, knowing you owe someone something, etc etc. 

Paying a huge tax penalty though could change it. If you pay 10% extra tax to lock in a 5% earning that's not great financial math, but it could still make sense in the headspace department. How many people pay to have XYZ done not because they can't do it but because they don't want to think about it anymore. 

Finally, talk to a tax person. You may be able to offset a large chunk of taxes by donating to the right kind of organization. If you can make a donation instead of paying taxes, you might prefer to choose where your dollars go. 

I assume that since you were her husband (and therefore I assume the beneficiary) that inheritance taxes do not come into the equation.  Step One for me would be confirming that if you have not already.  Step Two would be investigating any penalties for taking tha cash out.  Those are usually pretty rough.

After that it gets nebulous, but I think both mtn and matthewmcl are putting you on the right track.

Getting rid of debt feels fantastic and you sure could use some peace of mind right now.  But the power of long-game compound interest is hard to beat, if you have a chunk of money you can leave invested.

Robbie (Forum Supporter) said:

You do you!

Paying debt early is "locking in" your return on that money. If your loan is at 5% and you pay it one year early, your money is guaranteed to make 5% over the next year no more no less. Locking in some solid earnings is NEVER a bad thing. And like you said, there is the simple headspace a loan takes up with making payments, knowing you owe someone something, etc etc. 

Paying a huge tax penalty though could change it. If you pay 10% extra tax to lock in a 5% earning that's not great financial math, but it could still make sense in the headspace department. How many people pay to have XYZ done not because they can't do it but because they don't want to think about it anymore. 

Finally, talk to a tax person. You may be able to offset a large chunk of taxes by donating to the right kind of organization. If you can make a donation instead of paying taxes, you might prefer to choose where your dollars go. 

It should not be a penalty. It should be counted as income. 

mtn (Forum Supporter) said:

Relevant questions here that I would want to know before dispensing advice on it: 

• Is the house paid off, and what is the rate on the mortgage if it is not?
• What is the rate on the car loan(s)?
• What is the rate on the Kitchen loan?
• What is the rate on any other loans/credit cards that you have outstanding?
• How much do you have in your emergency funds (i.e. how many months expenses)
• How close are you to the next tax bracket, for both state and federal?

 

My gut says, no, but until you put pencil to paper (or keys to the spreadsheet), it is hard to make a determination. It also doesn't necessarily have to be an Either Or, you can likely take some of it out and leave some in. 

The house is about 20 years away from paid off at around 4% interest

The car loan is 2.99% for four more years 

The kitchen is 6.88% for five years

No other credit cards or loans. I have about two months of emergency money left after the past few months.

I don't know how close I am to changing tax brackets I'd have to find out. I'm not too worried about retirement.  Best case I retire with 30 years of service at almost 60% of my salary.  Worst case it's a job I could physically do for ever with little trouble and I've been putting almost 10% of my pay into a retirement fund for the last 20 years and am hoping to keep that up.

Wally (Forum Supporter) said:

mtn (Forum Supporter) said:

Relevant questions here that I would want to know before dispensing advice on it: 

• Is the house paid off, and what is the rate on the mortgage if it is not?
• What is the rate on the car loan(s)?
• What is the rate on the Kitchen loan?
• What is the rate on any other loans/credit cards that you have outstanding?
• How much do you have in your emergency funds (i.e. how many months expenses)
• How close are you to the next tax bracket, for both state and federal?

 

My gut says, no, but until you put pencil to paper (or keys to the spreadsheet), it is hard to make a determination. It also doesn't necessarily have to be an Either Or, you can likely take some of it out and leave some in. 

The house is about 20 years away from paid off at around 4% interest

The car loan is 2.99% for four more years 

The kitchen is 6.88% for five years

No other credit cards or loans. I have about two months of emergency money left after the past few months.

I don't know how close I am to changing tax brackets I'd have to find out. I'm not too worried about retirement.  Best case I retire with 30 years of service at almost 60% of my salary.  Worst case it's a job I could physically do for ever with little trouble and I've been putting almost 10% of my pay into a retirement fund for the last 20 years and am hoping to keep that up.

 

Based on this information, and note I'm not a CPA or a fiduciary, I would definitely be looking at paying of the kitchen.

I may also be looking at what I could do in terms of a refinance, potentially with money down from Jodi, because you could likely put yourself into a 15 or 20 year and get below 3%.

I personally would not be considering paying off that car loan early, but that is something you'll have to weigh yourself - how much does it drag you down? If you explore a mortgage refinance, it would make sense to do the calculation to figure out if it makes sense to do a partial cash out vs. smaller down payment to get rid of the car loan. 

You should contact a CPA to determine what it will do to your taxes this year, it may be possible to spread it out over 2 tax years (do one distribution now, and one in January). But at 7% interest on the kitchen loan... I agree, it makes sense to get rid of that one. 

Money really only has two uses: 

1. Utility. Buying stuff you need to live, either right now or in the future. 

2. Enjoyment. Fun stuff. You really can buy a bit of happiness every now and again. 

If 1 is taken care of, then look at 2. 

My in laws came to visit a while ago and I realized that I was just about the same age as my father in law was when I met him. I feel about the same as I did then, but he's older and there are things that he can't do any more. My dad is even further down the health problems pipe and doesn't do much at all. Take care of tomorrow Wally, but make sure today Wally is gets his fair share. 

mtn (Forum Supporter) said:

Wally (Forum Supporter) said:

The house is about 20 years away from paid off at around 4% interest

The car loan is 2.99% for four more years 

The kitchen is 6.88% for five years

No other credit cards or loans. I have about two months of emergency money left after the past few months.

Based on this information, and note I'm not a CPA or a fiduciary, I would definitely be looking at paying of the kitchen.

I may also be looking at what I could do in terms of a refinance, potentially with money down from Jodi, because you could likely put yourself into a 15 or 20 year and get below 3%.

I personally would not be considering paying off that car loan early, but that is something you'll have to weigh yourself - how much does it drag you down? If you explore a mortgage refinance, it would make sense to do the calculation to figure out if it makes sense to do a partial cash out vs. smaller down payment to get rid of the car loan.

I don't know taxes, but for the loans, I fully agree with mtn, who's orders of magnitude better at this stuff than I am.

It is outstanding that you don't have any revolving credit card debt. 

I would pay off the kitchen if possible, then look at refinancing the house, not with an eye towards getting any equity out of it but in terms of reducing the length, interest, and monthly payment of the mortgage.  At a very rough guess I would bet you can get a 15 year loan to pay off the balance of this one, lower your interest rate, reduce your monthly payment, and cut 5 years off of the term compared to what you have now.  That will save you a little money in the short term plus a substantial amount of money in the longer term.

I will HIGHLY suggest that you, at some point in the near future, use at least SOME of it for coke and hookers...

...just blow some to have some fun...

...don't worry about it, you deserve it.

Now, coke and hookers may not be the best options, but I am sure some here can make some more rational suggestions.

You said Deferred comp.  Was she a State or Federal Employee? 

Check what tax advantages if any transfer to survivors on deferred comp plans.  

I know in Illinois if you have a State Deferred comp plan all money withdrawn is never taxed by the state.  If there is a similar advantage in NYS and both your's and her plans offer that consider that in your decision. 

I'm guessing you are allowed to access the money with no penalties since Deferred Comp is not the same as a retirement account, however it will be taxed federally as Income (I think unless because the transfer is initiated by death of the account holder).   This is worth checking your tax bracket because it will be taxed on your 2020 1040 as Income (You will still be using the MFJ or whatever tax status you used for 2019 so use that tax table to check).    

It may have a large impact as all money you take out of the defered comp plan that gets viewed as income by the Fed.   Depending on where you are in the tax brackets this could be big or not (MFJ AGI tax <78K is 12%, 78K to 170K is 22%). 

I normally don't like "Financial Planners" but I think given your situation overall you may want to have a check in with a fiduciary before you move anything around.   It sounds like you are ~10 years away from considering retirement so developing a 10ish year plan with someone to get you to Debt Free and ready to enjoy 60% pay Forever would probably be a good idea.  

Otherwise I always choose get rid of Debt.  We only have the House payment and it is for ~30% LTV.  Debt free if possible is emotionally great.  I know it financially isn't always the most logical (Over the years I probably could of squirled away 100K to invest or so but I would be still servicing that debt so it's a tradeoff).  Good luck wit whatever you do.  

Duke, thanks for the vote of confidence. 

nocones advice is very solid here - I was assuming standard retirement accounts. I don't know about Deferred Comp, or how it is structured.

If 2020 has shown anybody anything.....it's that you don't know what the future will bring.

If it was me I'd enjoy life while I could and use the money towards not only happiness but stuff that makes your life better.

There will always be more money but there's never ever more time

I take the approaching as follows: find the post-tax rate of return you need to equal the cost of your debt and then choose to pay it off or keep it.

If I had your debts I would:

Refi my house into a new, super cheap mortgage.

Keep the car loan, because it's cheap debt.

Pay off the kitchen, because it's expensive debt. I can't count on earning 7%/yr in a retirement account.

The rest stays invested.

In reply to Duke :

When we got married we had a lot of trouble with credit cards. Once we finally got it cleared up we got rid of them and paid for everything else except the cars and kitchen.  I found out today that I'm getting back what Jodi paid into the retirement system plus a small insurance policy so I can probably roll the other money into my account and still be ok. 

I suggest finding a fiduciary, as opposed to a financial advisory, as they are required by law to act in your best interest.

My fiduciary has never mention coke or hookers, unfortunately. 

Look at maybe a 15 yr mortgage on the house.  The rates should be cheaper and you should be able to roll the kitchen refi into it and improve the monthly cash flow situation.  Plus you'll have everything paid off by the time you turn 60, then.  I'm a believer in borrowing as much as you can for as long as you can, with the caveat that I'd like to be as debt-free as possible going into retirement. 

Roll the retirement money over and start taking distributions as soon as you feel comfortable, IMO. 

The only danger to retiring existing debt is that it increases the temptation to take on more debt in the future because you now have "extra" income.

If it was me, and that gives you the value of this advice, I'd take as much money as possible without incurring a monster tax bill, and use it to pay as much debt as possible, then continue making the payments, but into some sort of interest bearing or tax deferred account.  

If something life changing happens, I figure having no debt means my savings can take me further down the road, since I don't have a mortgage or loan payment.  If nothing bad happens, my stuff is paid for, and I continue saving.

I'm a pretty cautious guy when it comes to retirement and long term savings.