My husband and I are in our early 40s. I am a stay at home mom, we have three kids, ages 1, 2 and 3. We have $190,000 in retirement funds (IRAs and Roth IRAs). We have $160,000 in mortgage debt (3.75% 15 yr term). We have no emergency savings account, no other debt. My husband’s job is in the homebuilding industry, while we are concerned of a layoff in the next 12 months, we are concerned about the longer term employment prospects given the current economy.
Should we liquidate enough of our retirement funds to pay off our mortgage? It is tempting because if my husband loses his job, we’d have to withdraw our retirement funds to cover expenses. If he did lose his job, it would most likely be as a result of the economy tanking and in all likelihood our retirement accounts would be down as well. We would be forced to withdraw AFTER the market has crashed. I am very concerned the market is going to drop and we won’t be able to leave the funds in to wait for a recovery. We’re tempted to cash out now and at least have our home paid for.
Here is the problem with that strategy. Let’s say you do that and things don’t turn around. You find yourselves running up debt because you have no savings to cover you in case of an emergency.
Without replacement income it is possible that a bankruptcy might be in your future. In that case the house would be sold, creditors repaid and any balance given back to you. That balance would be much less than what you had after paying taxes and penalties from withdrawing the money.
As long as those funds remain in the retirement accounts they would be protected from your creditors even if you found yourself facing bankruptcy.
Besides, cashing out the accounts would cost you a ton of money in income taxes and penalties. By my calculation you’d only be left with about $130,000 or so after all that.
If you think cashing out the retirement funds is still the way you want to go, meet with a local tax professional to fully understand what your liabilities would be, first.
A better option facing this situation might be to fire sale the house, protect the retirement accounts by leaving them alone, and downsize your living arrangements, even consider renting.
Please update me on your progress by posting updates here in the comments section of your question. I’m very interested in how this works out for you.