3.25 years...

[IOBA]

Looking for suggestions, ideas, and advice.

DH and I decided yesterday to make some serious changes.  

1.  DH gets paid every two weeks, for a total of 26 paychecks per year.

2.  We will live off of 12 paychecks per year (one a month.)

3.  The other 14 paychecks will be applied to the mortgage, as an extra principle payment.

We have no debt, other than the mortgage.

We have approximately 10k in savings/CD's.

We have one adult child still in college.  (Mostly paid for, might need to cash supplement here and there.)

To make this happen, I took the must have expenses (things we have to have, like taxes, insurances, utilities, etc.), deducted it from the one paycheck  we will live off of.  I took the mortgage (normal payment) and deducted it from the one paycheck we will live off of.  What was left has to be used for medicine, gas, food, and other incidentals.

We will not be able to "save" any money.  We will not have any extra money to cover emergencies, other than the $450 in savings that can be accessed immediately.  (The rest of the funds are in CD's.)

I have redone the budget several times.  The numbers vary a little bit, but are always close to each other and doable.  I accounted for inflation for next year. 

DH has job security for maybe another two years.  It's hard to tell with the gov't having budget issues and DH having the years in service to be eligible to retire.  (It's been suggested that all who can retire need to retire so they don't have to do layoffs.)  We can't access retirement funds for another er, 2 years?  (See below.)

Besides TSP, DH has an IRA opened in 2009, 2011, and 2012.  Each account has between 5-6k in them.  I believe the IRS rules say that each IRA must be aged 7 years before funds can be accessed, in addition to the age requirement of 59.5.  So by the time the first one "matures" in 2016, we can access it.  I had brief thoughts of cashing it out - it's tax exempt - and applying it to the mortgage to get it paid off that much faster.  I am sure 5k will help.  

We get paid in two weeks and plan to start game plan effectively immediately.

*** the reason this is a possibility of doing now, is because we have we paid off a zero percent loan and decided not to be putting money aside for travel, personal, gifts, etc.

What have I forgotten?

Oh - the retirement folks have instructed us to have 2 years worth of savings in the bank just in case.  Some people I know retired and there was never a glitch in their pay.  Others I know went without income for 15-18 months.  TSP is admistered by a different department and we might be able to receive tose funds within 2 months of retirement.

Did I forget something?

ps - the other thing is that we have been stockpiling sick leave (it gets cashed out when you leave service) and will be stockpiling the maximum annual leave (120 hours) that we can carry over year to year (it gets cashed out when you leave service).

[nightglider]

Ok, I haven't had much to eat today, and I haven't read the IRA rules recently, but I'll give this a shot.

You say your IRAs are all tax-exempt so I will assume they are Roth IRAs. The 'vesting' period is actually 5 years beginning with the first taxable year in which a contribution was made. This means that (assuming you're already over 59.5) you can actually withdrawal from the '09 account now. In addition, you should be able to transfer the balances of your '11 and '12 IRAs to the '09 IRA (though you may incur fees to do this). If I'm not mistaken, this would allow you to access all the funds in the time it takes to transfer them.

http://www.irs.gov/publications/p590/ch02.html#en_US_2013_publink1000231061

This is what I have off the top of my head, and remember I'm just a guy on the internet.

[IOBA]

Thank you so much for your reply and link.

The bank that holds the IRA's said seven years or there is a penalty from them (the bank.)

DH is not age eligible to make a withdrawal or a cash out yet.  But when he is, I am wondering if we should do a cash out and put the 5k towards the mortgage to get it paid off sooner?

[nightglider]

I hesitate to give advice on mortgage payments due (partially) to not having my own. I will say that if, at the time you have access to the IRA funds, you're satisfied with the progress you're making on your mortgage, you might want to allow the IRA funds to keep growing tax-free.

Note that I have my own reservations regarding the use of retirement funds for non-retirement purposes (as my posting history will tell you), however I'm not having any problems of my own, so I might not have the correct perspective for someone else.

As for the IRA, did your husband open up a separate IRA in each of those years, or did he only contribute in '11 and '12 to the IRA opened in '09? If it's separate accounts, he may still be able to transfer the newer two into the first (maybe even without a fee since it's all one bank).

[compassion101]

Can I ask what is the interest rate on your mortgage? Are you visiting a financial advisor? Sutting expenses is wonderful but it seems there would be better options to do with money rather than pay off a low interest mortgage.

[IOBA]

The interest rate on the mortgage is 3.2%.  Technically, it's an ARM, but it hasn't even waved at us.  So not worried about that.

Have 401k, making 5% contribution to it, matched by employer.  Have several independant IRA's (Roth) opened on the side.  The bank that holds two of them is admant that they will not release the money - even if it's to combine to one account - with severe financial penalties until DH reaches the age of withdrawal, or 7 years has passed, whichever happens later.  Ironically, both will coincide within a few months of each other.

I spoke to two and a half financial advisors today.  (Half = advisor running into the boss's office, getting advice, returning to me, repeating what was said, then running back to boss's office...repeat, repeat, repeat.)

First advisor said use 401k funds to pay off the mortgage.  

Second advisor said yeah, use 401k funds to pay off the mortgage.

The second and half advisor said, yeah, but you will be bumped into a higher tax bracket and have to pay 12% more taxes.

What was super disturbing was that ONLY I brought up the tax responsibility.  Number one was not concerned about it.  Number two was not concerned about it.  Number two.five had a casual attitude about it, like "oh yeah...taxes."

I did the math on it using a variety of resources on the net.  The bottom line is that if I use the 401k (withdrawal) to pay off the mortgage, I will be paying half of the mortgage balance in taxes.  (Not real numbers, but same devasting effect.)  For example, if my mortgage is 200k, I withdraw 200k, then I have a tax liability of 100k!  My debt grows from 200k to 300k.  So the answer to that is NO!  My tax bracket actually MORE THAN doubles.

Now, the ROTH IRA's I can access time appropriate and use them to pay down the mortgage.  There is no tax liability for using those.  None.

At least one of the ROTH IRA's would be left intact to grow.  It won't "mature" in time to be used on the mortgage.  The other two do mature during the mortgage pay off time line.

So at this time, it looks like the plan will be tighten up the belt a lot more and focus on putting every extra cent on the mortgage. 

[IOBA]

Just realized I missed a question.

He opened up a ROTH IRA in 2009 at one place.

He opened up a ROTH IRA in 2011 at the same place, but did not add it to the existing IRA due to an incentive to opening a second one.

He opened up a ROTH IRA in 2012 at a different place.

2009 and 2011 have a bank imposed 7 year hold.  

2012 has an IRS imposed 5 year hold.

[compassion101]

I don't understand why you need to pay off the mortgage so badly when it is 3.25%.

But as much as I don't understand that, it's totally beyond me how a financial advisor could advise you to use IRA funds to pay off your mortgage. It seems like telling a diabetic to eat apple pie for dinner. Am I missing something about the story?

I am not a financial advisor but I do work with money and risk and budgeting all day. Based on the story you have given it sounds like the financial advisors are purposefully trying to screw you.

[IOBA]

Personal paychecks.

Both advisors would make a nice amount of money if the 401K was moved to their company and invested.

I don't know what exactly was going through their minds.  A desire to help me achieve my goal?  Their personal paycheck?  Who knows?

I decided not to move the 401k and do a withdrawal to pay off the mortgage.

The personal desire to pay off the mortgage super fast is becuase that is one of the last obstacles between, well - surviving and not.  If DH gets laid off/forced into retirement, we'd have a super hard time making ends meet.  The savings wouldn't last long.  It's a bit tougher for older folks to get another job.  I think it took close to 11 months for DH to get his current position?  

If he gets "laid off" I think he can apply for unemployment, but that is only about $1200 a month before taxes.  The mortgage payment is higher than that.

I pick up what odd jobs I can, here and there, but due to health reasons, I am unable to work outside the home.  If there was a job I could do at home, even part time, I am definitely interested!

Anyways, it is a desire to get us in a better position for the uncertain future.    

So forgetting about early withdrawal from 401k, how does the rest of the plan sound?  Did I leave anything out of the planning process?  You mentioned working with money, risk, and budgeting daily.