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re: Pension Lump sum question
Posted on 10/20/23 at 3:55 pm to AUTimbo
Posted on 10/20/23 at 3:55 pm to AUTimbo
You are aged 60, which means you can get your IRA's or 401K's without a penalty.
If I were in your shoes, I would roll the pension over to an IRA. Right now you could leave it in a money market fund and get 5% plus. Then, I would look at what my highest marginal tax bracket is and, if it makes sense, take out enough money from the IRA or 401K to make accelerated house payments without getting too much of that money taxed. In other words, if the money is going to be taxed at 32% or higher, I'm not doing it. I would pay the house off slowly and take comfort in the fact that I have enough money to do it if I want to. Since you plan to quit working in a few years, you may be able to have a year with no or very low income in which you can withdraw a lot more money from your IRA/401K to put towards the house.
It's not always about the math though. Sometimes you just want to be free of the debt.
I will be in a similar situation in 2025. I am already retired (more like just quit going to work) but there is a big chunk of retirement funds that I won't get until early 2025, which is also when I turn 59.5. Depending on the situation, I might accelerate payments on the house or I might just keep paying the payments but structure my assets so that I can minimize the taxes. In particular, I might do Roth conversions for a few years to pump up the Roth in order to pay off the house without bumping up into a higher tax bracket in about 2030-32, depending on stock market returns between then and now.
My interest rate is 2.625%, and although it isn't just about the math, I'd rather funnel as much money into an HSA as I can until I reach 65.
If I were in your shoes, I would roll the pension over to an IRA. Right now you could leave it in a money market fund and get 5% plus. Then, I would look at what my highest marginal tax bracket is and, if it makes sense, take out enough money from the IRA or 401K to make accelerated house payments without getting too much of that money taxed. In other words, if the money is going to be taxed at 32% or higher, I'm not doing it. I would pay the house off slowly and take comfort in the fact that I have enough money to do it if I want to. Since you plan to quit working in a few years, you may be able to have a year with no or very low income in which you can withdraw a lot more money from your IRA/401K to put towards the house.
It's not always about the math though. Sometimes you just want to be free of the debt.
I will be in a similar situation in 2025. I am already retired (more like just quit going to work) but there is a big chunk of retirement funds that I won't get until early 2025, which is also when I turn 59.5. Depending on the situation, I might accelerate payments on the house or I might just keep paying the payments but structure my assets so that I can minimize the taxes. In particular, I might do Roth conversions for a few years to pump up the Roth in order to pay off the house without bumping up into a higher tax bracket in about 2030-32, depending on stock market returns between then and now.
My interest rate is 2.625%, and although it isn't just about the math, I'd rather funnel as much money into an HSA as I can until I reach 65.
This post was edited on 10/20/23 at 5:16 pm
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