What should I do with this money?

[Chalco]

My tax sheltered annuity just passed 100,000. I'm 59. At 59.5 I can take out money with no penalty, I think I have to pay taxes on it but no penalty. Should I leave it in the TSA which earns something like 3.5%, or should I roll it over into something else, or should I use it to pay off my home equity which is at about 65,000 for 8%. I still have a mortgage. I am on a pension. My husband pays the mortgage.

Any thoughts?

[A HERETIC I AM]

1. You will definitely pay taxes on any distributions you take....

Here is a link to IRS Publication 571 which discusses 403(B) plans;

http://www.irs.gov/publications/p571/index.html

I would assume you were a teacher or worked for a school district or some other non-profit, yes?

You have the option of rolling your 403(B) into an IRA account. Doing this will give you more flexibility with the investments available to you. Depending on how you feel about risk, you could easily double the return you are getting. You could easily get 7% yield from any number of Closed End Funds, for that matter. Rolling your 403(B) into an IRA is something you should carefully consider. This is a non-taxable event and an IRA has identical distribution rules that the 403(B) has.

Regarding paying off the loan, I don't think it is prudent to suggest a particular course of action based on the info you gave. There isn't enough to go on.

For instance;
How many years till the $65,000 would be paid off at the current schedule?
Presumably you are deducting the interest on this loan from your taxes. What is the effective interest rate then?
How much are the current monthly payments?
How much is left on the Mortgage?
Are your Mortgage and Home Equity loan payments easily managed under your current situation?
Is there any other significant debt?
I imagine your husband still works. What is his retirement savings picture like?
Does he have a pension waiting for him?
You say you are "on a pension". Is that your only income or are you otherwise employed or is there other income?
Do you have any other retirement accounts?
Does your husband?


At the $100,000 level, investors begin to have many more options available that aren't available at lower funding levels. Separately Managed Accounts, Unit Investment Trusts, etc. often have higher minimum account thresholds.

Your 403(B)/IRA type accounts should be considered the last savings you want to touch, primarily because of the tax deferral. The longer you can leave them alone, the larger the account will grow. You might just be retired for a very long time indeed.

[Chalco]

2. Thank you. I'll give a little more info

I worked for a school system, yes.

My husband is still working but has no retirement plan. We have property in Florida with no mortgage, but property we live in that has a mortgage (115,000) and a home equity (60,000). We have no trouble paying it off, except that I don't like living paycheck to paycheck. I was the higher breadwinner until I retired. Now he is. There is no more significant debt, although he just had to buy a new car and will have a debt of about 10,000 from that. I also have a 529 for my daughter's education already saved up. She is in 9th grade.

From what you are saying it would be better for me to roll over the TSA into a more profitable account and leave it alone rather than pay off the home equity for now.

The other info is that I do have some other income which is variable but does free me up a little. My husband works very hard, but he doesn't have any retirement with the exception of a valuable piece of artwork.

[A HERETIC I AM]

3. From a long term perspective, i think it is hard to justify dipping into the tax deferred savings...

The thing with this type of account - an IRA, your TSA, a Roth, 401(K)..whatever...is you have to have earned income in order to add to them. If your other income is for instance from (Pardon me, but i may be making a huge assumption here; I had a look at the website on your profile and i am assuming you and/or your husband are artists) production of and sale of artwork or homebuilt or studio made commissioned pieces, and if this is not set up or established as a business, you might consider doing so. If it is, you should be aware that the IRS rules allow several options for setting up a retirement plan for such a small business. Even if your income is variable, as you say, some plans allow rather generous contribution limits. There are some rather interesting tax advantages to such plans as well. Here is a link to the IRS page that has several links in this regard;
http://www.irs.gov/retirement/article/0,,id=108975,00.html

Otherwise, if you no longer have "Earned Income" you may not be able to further contribute to your tax deferred savings.

Having said that, prematurely depleting an account that may be difficult or impossible to further fund would seem to be, in my opinion, ill advised. As i said in my previous post, you might just be retired from a wage paying job for a very long time and having as large an amount set aside to supplement your pension and Social Security is important. I think you would agree.

Once an individual no longer works or has income that satisfies the IRS definition of "Earned", the avenues for tax deferred growth are limited to things like annuities and variable life insurance products. Tax deferral is not the be all to end all of course, but not having to pay taxes on gains made on an annual basis does indeed help your money grow faster.

From what you are saying it would be better for me to roll over the TSA into a more profitable account and leave it alone rather than pay off the home equity for now.

Yes. I think most Financial Planners would agree with that sentiment, so long as the rest of your income/financial picture does not leave you too stressed. Reducing debt is absolutely important but your $100,000 is one hell of a nice chunk of tax deferred change. Put it to work in such a way that you are comfortable with the level of risk and able to gather the most potential gain from it. That hundred grand will double in just over 9 years if you are able to average 8% annual growth. As an example, there are many, many Mutual Funds that have that kind of track record, even through the Bear market of 2000 - 2003.

There may be others who have a different opinion. You should absolutely take what i have written with a grain of salt as i don't know you or your financial situation completely enough to suggest a definite strategy suitable for you. I've tried to be as generic as possible, but i hope what i have written has been of some help.

on edit to add "prematurely" (and by that i simply mean earlier than you would otherwise dip into it, like in another 10 years or so.)

[Chalco]

5. Thanks, a little more info

I probably do have some earned income. My art "business" doesn't make much money but post working for the school system I set up a consulting business and have been making money from that which I've been applying to the home equity. So I assume I have "earned income". The consulting business is only part-time and on average I make about $1000/month from that which may increase as the business grows.

Your input has been very helpful. I've been resisting my husband's request that the TSA money be rolled over into something more profitable once it hit the 100,000 mark but now I understand why it would make the most sense.

[2Design]

4. can you make more money on the money by not paying to use someone else's money

also, school retirement plans are invested in some of this mortgage mess - so maybe moving out into a traditional ira or roth ira - or into a regular ira and take a deduction for that - there are online savings plan paying 5% that are fdic insured - capital one and FNBO direct

so diversity of your funds out of one that could go down the tubes might be in your best interest.

[pscot]

6. Open a Vanguard account

and put the whole thing in intermediate or long term treasuries. There's no commission, service fees are very modest, and you can set it up so that withdrawals go right into your checking account. Right now the 30 year treasury would pay you around $400 a month. You can let it compound, and if you need cash it's as near as your computer keyboard.

[trof]

7. I agree with others, IRA rollover, BUT...

I highly recommend an IRA Brokerage Account.
Not with some mutual fund company.
Gives you a lot more flexibility and choice as to what you can invest in.

Also, the amount of tax you'll have to pay on withdrawals depends on your bracket for that year.
I assume that you and hubby filed jointly?
Use his income as the base and then add what you want to withdraw that year. See what percentage bracket that would put you in.

Sometimes you can save quite a bit in taxes by taking some out at the end of one tax year and the rest that you need at the beginning of the next. Keeps you in a lower bracket.
It gets tricky.
Good luck.