Smart Money: Variables dictate whether to pay mortgage with retirement funds

Dear Bruce: I am 58, and my husband is 62. He is drawing his retirement for one career, which covers our household expenses, and he is also working full time. Our individual retirement accounts are intended to pay off the mortgage. We would be able to pay it down to about $25,000, although there would be an early penalty for me – but not for him – to make withdrawals. Is this a good idea, even though we would be giving up our main tax deduction? —H.K., Exton, Pa.

Dear H.K.: The variable here is the interest rate on your mortgage, how much of the IRA you can withdraw without penalty and how much it is earning as reflected in terms of growth and interest. If the growth exceeds the cost of the mortgage money, leave it alone. If it does not, you might consider withdrawing it – but recognize that if this is a traditional IRA, taxes will have to be paid.

Since your husband is still working, this might not be the appropriate time for an IRA withdrawal, because you will most likely be in a lower tax bracket when he completely stops working. As to the penalty involved, it’s almost never to your advantage to take the money out early – unless absolutely necessary.

Saving for new wheels

Dear Bruce: I have a new car fund of approximately $20,000 that I plan to use in three years. Where is the best or most profitable place for me to stash this money? Money-market funds, stocks, certificates of deposit or another option? —P.H., Unionville, Pa.

Dear P.H.: There is no “best” or “most profitable” investment. Unhappily, these are the things that you discover at the end of the investment, not the beginning. If you are prepared to take a degree of risk, mutual funds are a better choice than money-market funds that pay relatively modest interest. Stocks, of course, entail some risk, but there is always the reasonable expectation that stocks are chosen prudently for growth. CDs are quite safe but earn only a small amount of interest. Decide the degree of risk, pick the investment vehicle, and then pay the money.

Necessary disclosure?

Dear Bruce: I am unemployed. I asked my lender whether I could defer my mortgage payments. The company’s application form requests my investment portfolio. Is it necessary for me to divulge my investment portfolio? What does this have to do with deferring my payment? —M.P., via e-mail

Dear Bruce: When you request a change in your mortgage, the lender has every right to ask about your assets. With a lot of people unable to keep up with mortgage payments these days – not to mention the fact that you are the one asking for the lender’s help – you should simply provide whatever financial information is requested. The lender can’t force you to use your investments to pay, but it is not required to cut you any slack, either.

Inheritance issues

Dear Bruce: I have been named executor and beneficiary of my cousin’s estate. There is a large amount of money involved, approximately $500,000. Do I need to claim on my federal income-tax return the net money after all estate-inheritance taxes are paid? I’ve been told that I only have to claim earned income on my return. I am retired and on Social Security. —Reader in Pennsylvania

Dear Reader: Unless your cousin has already claimed against his lifetime exemption, there will be no federal income tax because there is a $1 million exemption. The estate may have to pay some money to the state, but you’ll have no tax responsibility as an heir. All taxes in estate matters are to be paid by the estate before the money is distributed. Once the money is in your account, any interest or other income that it earns is taxed at whatever the marginal rate. If you collected a fee as executor, you would be taxed – but in this instance, that would be foolish.

A helping hand for mom

Dear Bruce: My 83-year-old mother is $20,000 in debt. She raised us as a single parent and couldn’t buy property or save a lot of money. At this age, she lives solely on Social Security and money that I give her. She doesn’t want her credit affected, so I’ve been making payments to her creditors for her. My brother seems to think I’m throwing my money out the window and I should not pay her debt. He says creditors can’t do anything to her. Is that true? —F.D., via e-mail

Dear F.D.: Technically, your brother is correct, because your mom has no assets and Social Security cannot be attached. While the creditors could get judgments against her, they would not be collectible. On the other hand, you’re allowing your mother to hold her head up and meet her “obligations.” Why she is concerned about credit at this intersection is difficult to understand. With only the Social Security income and the current debt, it’s unlikely that anyone would extend another nickel’s worth of credit. That said, you are helping her do the honorable thing – and being honorable never goes out of style.

Bruce Williams is a national radio talk-show host and syndicated columnist. He can be reached at bruce@brucewilliams.com.