Getting money out of an IRA

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Topic Author
ThatGuy
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Getting money out of an IRA

Post by ThatGuy » Thu Jun 04, 2015 10:40 am

I have a relative who is not good with money despite having a well paying job. The issue is that they will be losing their job in a technology field at the end of the year, and at 60+ the odds of getting something else are not great. The main cause for concern is that this relative currently has a mortgage and a HELOC. They have been paying interest only on the HELOC for several years now, and the HELOC is about 60% the size of the mortgage. The mortgage plus the HELOC is about 50% of the assets saved in retirement advantaged accounts. This person was recently turned down for a refinance of the mortgage to cover the HELCO + remaining balance due to too much debt and having close to zero liquidity .

They will have two pensions, one very small, the other not as small, but together they will cover basic living expenses other than the mortgage. I would expect the HELOC to be called when the financial institution somehow finds out that the relative is no longer employed. So my questions are:

1. How would a financial institution find out about a job loss, is this by credit report or some other method? Knowledge of the the method yields knowledge of time frame.

2. Is there a way to get funds out of a traditional IRA to pay off a HELOC without that money being counted as taxable income? For reference, the mortgage + HELOC debt is equal to about 33% of the total value of the home.

Please do not discuss things that they "should have done" in the past, nor pass judgements on other financial behaviors. This has been a source of stress for me for awhile, and there is not anything I can do to change their financial behavior. I only seek constructive comments on how to address the HELOC, and to a lesser extent the mortgage, in a way that allows this person to not lose their house. Selling and moving is not a viable option in the near term; see the previous comment about not losing their house.
Work is the curse of the drinking class - Oscar Wilde

RadAudit
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Re: Getting money out of an IRA

Post by RadAudit » Thu Jun 04, 2015 12:00 pm

ThatGuy wrote:I would expect the HELOC to be called when the financial institution somehow finds out that the relative is no longer employed.
Your expectation may be in error. I am retired and have a HELOC. The bank doesn't seem to care what my employment status is as long as there is money in the checking account to cover the required automatic withdrawal / payment every month.

Now, what they are going to do when your relative can't make the payment is a question I don't know the answer to.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.

stungerz
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Re: Getting money out of an IRA

Post by stungerz » Thu Jun 04, 2015 12:52 pm

1. I was gloriously unemployed for about 1/2 a year and had a HELOC. The bank did not call it. As long as you can pay, the bank probably doesn't care. However, during the real estate crash of 2007, some banks did freeze the HELOC or reduced the amount.

2. There is no free lunch! They'll have to pay taxes when they withdraw from the IRA but they can minimize it. If possible withdraw as much as you can to stay within the 15% tax bracket. If the pensions put you over the 15% try to stay within the 25%.

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Sheepdog
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Re: Getting money out of an IRA

Post by Sheepdog » Thu Jun 04, 2015 12:55 pm

He can certainly find a job not in his field, but a job which can make the payment necessary to save the home. Earn enough to make the payment. Don't let pride get in his way.
Withdraw from IRA, if necessary. Taxes will be due. There is no way that I know of to get around that.
Why is selling and moving not an option? That, and downsizing, may the the only option to get out of their predicament.
Just because it isn't your fault doesn't mean it isn't your responsibility....Josh Reid Jones

Topic Author
ThatGuy
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Re: Getting money out of an IRA

Post by ThatGuy » Thu Jun 04, 2015 1:19 pm

I should clarify, the pensions will cover day to day living over than the mortgage. The tax-advantaged retirement savings will more than cover the mortgage, either in a lump sum or paying the standard monthly amount for the duration of the loan.

The concern is that lump summing the HELOC will incure tax obligations which together, may endanger a stress-free retirement. This family is not destitute by a long shot, just really bad with long term financial planning. I am purposefully not giving a full financial picture here, please stay within the guidelines set in the initial post.
Work is the curse of the drinking class - Oscar Wilde

FuzzyButtons
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Re: Getting money out of an IRA

Post by FuzzyButtons » Thu Jun 04, 2015 2:21 pm

2. Is there a way to get funds out of a traditional IRA to pay off a HELOC without that money being counted as taxable income? For reference, the mortgage + HELOC debt is equal to about 33% of the total value of the home.
No, there is no way to get funds out of a traditional IRA without it counting as taxable income. That's the whole point of deferred taxation - you don't have to pay tax when you put it in, but you have to pay when you take it out. This isn't a penalty that can be avoided. Taking that money out as taxable income to meet needs in retirement is exactly it's purpose.

Now, as stungerz says, there's no reason to take it all out in a lump sum and pay off the whole loan now. The HELOC is unlikely to be called. Just take out what is needed each year to pay the mortgage and HELOC bills, and that will spread it out over years to keep from jumping into a high tax bracket all at once. They won't be putting more balance on the HELOC, since you say their income will cover their expenses outside of these two bills. So they should be fine.

Yes, it can be nervous going into retirement with debt, but most Americans do it. Just keep paying the bills as they come, and it will all work out. No need for stress. :happy

Jack FFR1846
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Re: Getting money out of an IRA

Post by Jack FFR1846 » Thu Jun 04, 2015 3:23 pm

Even if he can't get a job in his field, there are plenty of Wal*Mart/lowes/food service jobs out there. $10 an hour is better than zero an hour
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