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Oct 25 2010 12:00AM

Question


I have $30,000 in Individual Retirement Account (IRA) and I need to pay off my son’s $9,000 in financial aid. Should I wait until I retire to get this money? My income level would be lower. I am 61, owe $67,000 on my mortgage and have 11 years of payments left on that loan. I’m also paying 6.5 percent. Should I refinance now too?

Answer


“There are several questions that should be answered before one can make a solid recommendation,” said FPA member Thomas Dumas, CFP®, of Consolidated Planning, Inc. For instance,

  • What is the interest rate on the loan of $9,000? 
  • How long do you plan to stay in the home? 
  • Do you have other liquid assets, such as money market funds, savings, and the like?

“Interest rates are at historically low levels,” Dumas said. “So, depending on your credit, the value of the home and your other assets, you may be able to save significantly on this rate. You may consider looking at rolling the financial aid into the refinance of the home. This could leave the IRA in place in order for you to take distributions when you are in a lower tax bracket. In addition to this, your cash flow may not change significantly with the refinance of the home.”

“Consider looking at a 15-year mortgage to keep the pay-off timeframe close to the current,” Dumas said. “Then once you retire and are potentially in a lower income bracket, you could take distributions from the IRA to pay down the mortgage to get it back to the 11-year projected payoff.”

FPA member Richard Pugh CFP®, MBA, RFC, CEA, of Financial Security Management, Inc. also suggested that several questions must be addressed. Those include:

  1.  What type of IRA is it? For instance, is it a rollover IRA, a traditional deferred IRA, or a Roth IRA? If it’s a Roth IRA, is it more than five years old and is any of the $30,000 growth? If it’s a rollover IRA or traditional IRA, what would the tax implications be if you were to liquidate it? “That is to say would the $30,000 change your tax bracket or even the $9,000 to pay off loans?” Pugh asked.
  2. What other savings, emergency funds do you have? Are there alternatives to pay off the student debt?
  3. Do you have sufficient retirement or pension money for your remaining life or will you possibly need the IRA assets later?
  4. With regard to your son’s financial aid, is this your responsibility or his? “If it is in fact your responsibility, then what is the present interest rate and does it have a time limit to pay it off?” Pugh asked.
  5. Depending on the above, Pugh said a home equity loan may be in order to pay off the student loan. “The interest then would be tax deductible,” he said. “You indicated your income is higher now so assume you may still be working and need the tax deductions.”
  6. With regard to refinancing, there are several questions and issues to address: a) Do you plan on staying in the home? b) If so, what are the costs to refinance? c) Take the difference in principal and interest payments between the present loan and new loan and that is the monthly savings. Divide that into costs and you will get the cost recovery time. D) What terms would you be looking at to refinance? “Our feeling is to give the bank as little as possible,” Pugh said. “For example, get a 30-year fixed loan and pay as little as possible.”

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