AboutWillard R. Brumbaugh, LUTCF Expertise I have answered many questions regarding 401ks, IRAs and annuities as well as life insurance.
I have been counselling against most Qualified Plans since 1994.
Experience Ranked in the top 5 in retirement catagories at Askme.com most of its last 2 1/2 years. Organizations I belong to:
National Association of Insurance and Financial Advisors-California
Inland Empire Estate Planning Council
Education/Credentials Life Underwriters Training Council Fellow
Question I refinanced my Michigan home in April 2008 and I took a buyout from Chrysler in Oct. 2008 (14yrs). I left my 401K with the employer in the Chrysler Stable Value Fund Class A (MAGXX)through Merrill Lynch. 401K = $134,000, Loan Balance = $24,000 (primary residence purchase). I am paying monthly towards the loan. I would like to do a direct transfer into a Bank IRA, but I want to default on the loan part, pay the income tax and 10% penalty (ouch) then put that money toward extra principles on the mortgage. I am presently getting my MBA full time. Mortgage balance is $102,000, I will be 50 years old Jan. 2010. I need your advice because I don't want it to sit. I want to be free of Chrysler and Merrill Lynch.
Thanks for your help.
Answer Dear Joana,
I don't blame you for wanting to get out. However, I think that you may want to re-think your desire to apply extra payments on your mortgage loan. You might need that money later. And as you have seen, there is no certainty that paying down the loan will actually increase the equity that you will have in your home. Meanwhile the interest on your mortgage is tax-deductible.
Instead of incurring an additional Premature Distribution Penalty, you might think about converting some of your IRA into a Roth IRA. You would be taxed on the transfer, but from that point on the interest earned in the Roth would grow tax-deferred till age 59 1/2, and then become tax-free.
Unless there is the possibility of borrowing $24,000 to pay off the 401(k) loan, I would concur with your plan to do a direct transfer of your remaining account value into an IRA. I think that you might get better value with your IRA funds if you were to re-direct half of the funds into a Fixed Annuity. Bank interest rates are about 60% of what you could get through any competitive life insurance company. And a proper annuity will be free of any stock market risk.
Willard R. Brumbaugh, LUTCF
www.willardbrumbaugh.com
