Mortgage and 401k
Hi Terry,
I’m just recently divorced and am waiting on a $200,000 check from my ex-husband’s 401k. My brother wants me to invest the whole check but I wanna pay off my mortgage ($118,000) because I’m on disability with MS and only make $2,800/month and my mortgage payment is almost $1,400 (3.25% interest rate). I know that I would then be responsible for paying my property taxes and homeowners insurance. I guess too I need to find out if I’m gonna have to pay the 20% taxes ($40,000) on that money if I don’t roll it over. It would be so nice to not having my mortgage hanging over my head. Again, I don’t make a lot of money considering all of my other bills, i.e., utilities, medical bills, dental, groceries, gas for car, insurance, cellphone, etc. I have no credit card debt. A friend thinks I should pay off my mortgage too because she said then l’d be sitting pretty because my new 2025 car is paid off too (I paid cash). What should I do? I’m so confused.
Terry Says
OK, this is a big picture issue — and I don’t have the big picture. For starters, I don’t know your age!
But let me give you some ideas.
My first question is why you want to continue living in that house. Is this maybe the time to find a better living situation, and put the money from the equity in the bank? (I’m assuming the house is in your name, and there is some equity there.)
If you’re staying in the house, that low-rate mortgage is truly a gift. You don’t want to pay it off — even to simplify your monthly payment situation.
Then you need tax advice. I’m assuming you are allowed to roll this 40l(k) distribution into your own IRA. There the money will grow tax-deferred until you really need it at retirement. So the optimum thing is to roll it over. Why give the govt $40k now, just to simplify your monthly bill payment??!!
Read this for info on how to do the rollover so you don’t pay taxes:
https://www.terrysavage.com/rollover-now/
IF you do the rollover, there is absolutely no reason for you to take a lot of risk with the investments. Your bother wants you to “invest” — but where. My suggestion is to do a direct rollover to Fidelity or Vanguard, and for the moment put it all in a government securities money market fund. You won’t get rich — but you won’t get poor either!
Then depending on your age, you might move 30% into their equity-income fund, a conservative stock market investment. I can’t give more specific advice now, without knowing your entire financial situation.
And speaking of the entire financial situation, you could get more advice from a trusted fee-only FIDUCIARY financial advisor if you read this article: https://www.terrysavage.com/pam-krueger-wealthramp/
Pam will ask about your situation and match you with someone you can trust to review your entire situation — someone not trying to sell you stuff!
This is a big moment in your life — you get to start over. Make sure you do it with competent, trusted advice — not emotions or relatives nudging you! Glad you wrote me.
