Using annuity cash to pay off mortgage
I owe $123,000 on my mortgage and have no other debt. Would it be
a wise move to withdraw money from one of my annuities to pay off
the balance? A $100,000 annuity would be $94,000 after penalties,
and I am under age 59. I'd like to think I am saving a lot of money
in interest that way. Or is it better tax wise to carry a mortgage?
-- Shelley Serial
There's a difference between surrender charges on an annuity and
the penalty tax due on withdrawals prior to age 59 ½. If
you owe both surrender charges of 6 percent and a penalty tax of
10 percent, then the economics of cashing in the annuity to pay
off the mortgage change quite a bit, with $16,000 in penalties in
cashing in a $100,000 annuity instead of $6,000. Talk to your tax
professional about applicability of the penalty tax.
A qualified annuity is purchased as part of an employer-sponsored
retirement plan or an individual retirement arrangement. A nonqualified
annuity is not part of an employer-sponsored retirement plan. A
nonqualified annuity is funded with after-tax dollars, but taxes
aren't due on investment earnings until they are withdrawn. I'm
assuming your annuity is nonqualified.
Being able to use the mortgage interest deduction
on your income taxes does reduce taxes paid but it isn't, in and
of itself, a reason to keep your mortgage. That's especially true
in the later years of a mortgage, when most of the monthly payment
is going toward the repayment of principal and less and less money
is paying interest expense. You can input you loan balance, interest
rate and remaining loan term in Bankrate's
Mortgage Calculator and have the calculator run an amortization
schedule that will show the remaining interest expense and the interest
expense year over year.
My rule of thumb is, if the expected after-tax return
on an investment exceeds the after-tax cost of debt, then it doesn't
make sense to pay off the mortgage. In your case, I don't know what
rate of return the annuity is earning, but I do know it will cost
6 percent to 16 percent to cash out the annuity plus any taxes due
on the investment returns. I'd hold off on cashing in the annuity
to pay off or pay down the mortgage.