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Author: jmbellv One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75381  
Subject: Pension withdrawal for new home Date: 5/9/2001 1:12 AM
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At age 55, we want to withdraw the entire pension account to buy a new home. At that time, the interest payments to the pension will stop, so we want to roll it over or use it. We have 4 years to go til age 55, and full retirement is planned at age 60. The pension account is from a previous job. We feel we don't need this money for retirement since we have a large 401K.

There will be enough, along with a small amount of the money from the sale of our present home that is mortgage-free to buy a house outright (without a mortgage.) Of course, income taxes will have to be paid on the pension money.

Question 1: Does it make sense to buy a house outright after paying all the taxes?

Question 2: Is it possible to roll over the money to an IRA or something else to avoid paying income taxes at the time of the rollover? We are wondering if then there is the possibility of taking out a loan for the house, paying monthly payments to the lender from the ex-pension money in the IRA, and then paying income taxes on the ex-pension money as we use it for those payments. This may also allow us to itemize since we'll have interest payments to the lender, but there may not be enough additional deductions to do that. At the present time, we do not itemize.

We're not sure how all of this works, what types of accounts may be available to allow the idea in question 2 to work, or if the question 2 idea is even allowed.

I would appreciate any factual input on this subject.

jmbellv
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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29564 of 75381
Subject: Re: Pension withdrawal for new home Date: 5/9/2001 6:45 AM
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Greetings, Jmbelly, and welcome. You asked:

Question 1: Does it make sense to buy a house outright after paying all the taxes?

That is a personal issue ruled as much by emotion as by economics. Some would run an analysis based on the area in which you live that would "prove conclusively" you should carry the largest mortgage you can. Others would say there's nothing like a completely paid-up mortgage to give you a feeling of security in retirement. Still others would say you shouldn't buy at all. Rent instead because it will be cheaper and you won't have the maintenance headache.

Under different sets of circumstances, all of the preceding arguments are correct. Therefore, you should really do that which makes you most comfortable in your retirement.

Question 2: Is it possible to roll over the money to an IRA or something else to avoid paying income taxes at the time of the rollover? We are wondering if then there is the possibility of taking out a loan for the house, paying monthly payments to the lender from the ex-pension money in the IRA, and then paying income taxes on the ex-pension money as we use it for those payments. This may also allow us to itemize since we'll have interest payments to the lender, but there may not be enough additional deductions to do that. At the present time, we do not itemize.

Yes, you could have the lump sum payment transferred to an IRA to avoid immediate taxes. BUT -- Once you do, you cannot take any of the money free of an early withdrawal penalty until you reach age 59 1/2 unless you do so under one of the authorized early withdrawal exceptions. You possibly qualify for one exception, and definitely for another. One is a withdrawal subject to a $10K lifetime limit for the purchase of a "first home." The other is the use of an annuity payment through "substantially equal periodic payments" that must continue for the longer of five years or until you reach age 59 1/2. You will find the first-home exception explained in IRS Publication 590 (Individual Retirement Arrangements) available for download at http://www.irs.ustreas.gov/forms_pubs/pubs.html. SEPP are discussed in my article "Getting the Money Early" at http://www.fool.com/retirement/manageretirement/manageretirement9.htm.

Under the first-home exception, you can't take more than $10K, and under the SEPP exception you may or may not end up with enough to cover the monthly mortgage payment. If you take and keep all or part of the pension plan lump sum at age 55, then you must pay income taxes in the year of receipt, but you won't have to pay the early withdrawal penalty. Because of your age, you won't be eligible for any type of forward-averaging to minimize the taxes on that lump sum. Those apply only for those who were born in 1935 or earlier.

Regards..Pixy




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Author: WPatch Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29612 of 75381
Subject: Re: Pension withdrawal for new home Date: 5/11/2001 1:39 AM
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Pixy: If you take and keep all or part of the pension plan lump sum at age 55, then you must pay income taxes in the year of receipt, but you won't have to pay the early withdrawal penalty.

WPatch: But since Jmbeely left the previous job earlier than 55, he/she no longer qualified for the age 55 exemption from the 10% penalty.

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29615 of 75381
Subject: Re: Pension withdrawal for new home Date: 5/11/2001 7:25 AM
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WPatch writes:

Pixy: If you take and keep all or part of the pension plan lump sum at age 55, then you must pay income taxes in the year of receipt, but you won't have to pay the early withdrawal penalty.

WPatch: But since Jmbeely left the previous job earlier than 55, he/she no longer qualified for the age 55 exemption from the 10% penalty.


That's correct. You must be employed in the job that has the retirement plan and be in the year you will reach age 55 when you leave that job to take advantage of the age 55 proviso. I missed the fact the money was coming from a prior job. That being the case, the age 59 1/2 rule pertains regarding an early withdrawal penalty.

Good catch!

Regards..Pixy

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Author: jmbellv One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29653 of 75381
Subject: Re: Pension withdrawal for new home Date: 5/12/2001 12:34 PM
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TMFPixy,

Thank you so much for all your help. Your SEPP article was a wealth of information - I printed it out and am now in the process of reading it.

jmbellv

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