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Author: CornFarm Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76395  
Subject: Tax Liability and House Payoff Date: 6/28/2001 8:05 AM
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Fools:

From all that I have read here on the forums, I have concluded that IF I were to retire (presently 44), that I could safely pull 4%/year from a properly invested nest egg (say in an S&P-500 fund) without drawing my funds down to $0 later in life. With that in mind...I have two questions:

1) If I were to take a 4% distribution annually (from funds/stocks that has been invested for over 2 years), what are my tax liabilities at the time of withdrawl? Do I still pay FICA, etc? Is my Federal tax capped at 20%? What about State (VA) taxes? Is there an advantage to getting a part-time job?

2) If the 4% withdrawl is a good assumption and I have a $250K mortgage with annual payments of $30K, should I not pay off the mortgage (25 years left) since the $250K would only generate about $10K long term? This would allow me to withdraw less than 4% annually since my salary requirements would be reduced drastically.

Thanks.
RIF

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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 30464 of 76395
Subject: Re: Tax Liability and House Payoff Date: 6/28/2001 10:24 AM
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In what type of account is your retirement money invested?

If it's in a regular, taxable brokerage account, you will owe capital gains taxes on your sales. For securities held more than a year, the federal rate is currently 20% of (the current price minus the price you bought it at). You may need to make quarterly estimated federal tax payments. Your state may impose additional taxes.

However, if it's in a retirement account (IRA, 401(k), or some other company sponsored pension plan) you may have some trouble because you are not yet at the "official" retirement age. But check out http://www.retireEarlyHomepage.com for more information.

You do not owe FICA, Social Security, or Medicaid taxes, since these only have to be taken out of salary and wages (that is, what an employer pays you for working). Investment income is not salary.

The advantage to a part-time job is that it keeps you busy and earns you money. I don't see any tax advantage there.

2. What is the interest rate on your mortgage? Yes, paying off your mortgage now will decrease your living expenses, but money usually grows faster when it's left alone. Paying off your mortgage is equivalent to buying a tax-free bond at the same interest rate.


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Author: ogrecat Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 30465 of 76395
Subject: Re: Tax Liability and House Payoff Date: 6/28/2001 10:25 AM
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1) If I were to take a 4% distribution annually (from funds/stocks that has been invested for over 2 years), what are my tax liabilities at the time of withdrawl? Do I still pay FICA, etc? Is my Federal tax capped at 20%? What about State (VA) taxes? Is there an advantage to getting a part-time job?

No FICA from investment income.

Federal tax will vary:
From Roth Ira - none
From IRA, 401K, and similar - regular income tax rates
From non-sheltered stocks and stock funds - capital gains rules

Each state has its own rules.

Advantage of part-time job dependent on many variables.


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Author: tsouth Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 30472 of 76395
Subject: Re: Tax Liability and House Payoff Date: 6/28/2001 1:44 PM
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1) If I were to take a 4% distribution annually (from funds/stocks that has been invested for over 2 years), what are my tax liabilities at the time of withdrawl? Do I still pay FICA, etc? Is my Federal tax capped at 20%? What about State (VA) taxes? Is there an advantage to getting a part-time job?

2) If the 4% withdrawl is a good assumption and I have a $250K mortgage with annual payments of $30K, should I not pay off the mortgage (25 years left) since the $250K would only generate about $10K long term? This would allow me to withdraw less than 4% annually since my salary requirements would be reduced drastically.

....................

Just a couple of thoughts: Any interest in moving to a less expensive cost of living area in a state with no income tax? Also, have you considered selling your house and moving into something smaller/less expensive. In general, I would think a few changes in lifestyle might help for early retirement.

Having said that, how you spend your money and time is entirely your decision.

Congrats on the ability to consider early retirement!

Teresa

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Author: CornFarm Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 30475 of 76395
Subject: Re: Tax Liability and House Payoff Date: 6/28/2001 3:25 PM
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Thank you for your response!

Answering your questions, the present investments are not in a tax deferred account though I do have a 401(k) that I would not touch.

The interest rate on the mortgage is 7.5%. Thinking about this a little more, I could always not pay off the mortgage and just see how it goes...it's not like I need to make that decision immediately. I just thought it would be nice not to have to worry about that.



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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 30541 of 76395
Subject: Re: Tax Liability and House Payoff Date: 7/2/2001 12:17 PM
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If you have any low-risk income investments [i.e. savings accounts, money market funds, bond funds] that are earning less than 12.5% (which would be 7.5% after taxes) it makes sense to sell your low-risk investments and pay off the mortgage with the cash.

It doesn't make any sense to sell off stocks, though.

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