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Nov 2 2009 12:00AM

Question


My husband is thinking about retiring. His employer has an Employee Share Ownership Trust (ESOT) account where they made yearly contributions on his behalf. We get dividend checks every quarter; which we roll into an individual retirement account (IRA). If he retires at 55 the money will be made available to him right away. The value of his ESOT today is about $600,000 (before penalties and taxes). We have about $10,000 in savings plus a couple IRAs, a Roth, my 401(k) and we both have pension plans.  We owe $67,000 in our mortgage which has an interest rate of 4.8 percent. The mortgage will be paid down in 106 months. We will, however, have future college expenses. Our son is 13. I turned 40 this year and have a good income that will cover our living expenses. If my husband decides to go through with retirement, is it wise to just pay off a big chunk of the mortgage or should we continue making payments as scheduled? What about tax deductions? All I currently have as itemized deductions are property taxes and mortgage interest.

Answer


According to FPA member Bernie Fiedler, CFP®, of Waukesha Bank it's best to seek the advice and counsel of a financial planner and other qualified professionals when contemplating such aspects of your financial plan.

That said, he offered the following thoughts: "Based upon your age and contemplating continued employment with a good income, I would recommend not paying off the loan. The fixed rate you currently have on the loan is an excellent rate and is tax deductible."

"Your job will undoubtedly have some pay increases to address inflation while your mortgage will be fixed and the dollars you use to pay it will have less 'real' value each year the mortgage continues with inflation," Fiedler said. "In addition, your son will be starting college in five years and you may find that you need money that would be tied up in the home's value, if you've paid off the loan early."

Of note, he said that your state of residence does have a state tax deduction for 529 plan contributions that you could put aside for your son's education. "I would take advantage of that each year in planning for his college expenses," Fiedler said. "This would be additional help in conjunction with your qualified plan deferrals." Learn more about planning and saving for college.

Also, Fiedler said you should contact your husband's company about the cost basis of the company stock held in his ESOT. "In some cases, company stock can be distributed 'in kind' to the participant and they only have to pay income taxes on the cost basis of the stock," Fiedler said. "When the stock is then sold, the participant would pay capital gains tax on the difference between the sale price and the cost basis. This could result in a significant tax savings."

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