Ah George, it does make a difference that you can take the money from taxable accounts and can manage the taxable amount to some extent (and not pay ordinary income tax rates but better capital gains rates). As I said in an earlier answer, there are usually two ways to look at it. There is a technical answer that would say it is very likely you would make more in an investment account, even a conservative one, than the mortgage is costing you (3% is still a delicious rate). But the good answer might be that you would rest easier and be more resilient in market downturns if the mortgage was paid off. In my experience most people want to go with the good answer in their hearts. When you work with your accountant, see how much gain (or IRA distribution ) you could take without going into a higher bracket. Then pay it off over a few years if needed.
Bruce, that is one way you could do it; however, what if there are no gains? Do you live off previous year's gains? Or do you add money back if you had a negative return? The important thing is to have a plan and stick to it. In bad times, you may have to make adjustments.
Bruce, you have to remember the tax consequences (larger gains could mean bigger withdrawals in good years..and perhaps a higher tax bracket under your plan). You also have to remember RMDs as you will have to take that much out whether you have gains or not once you are 70.5.
Lief, You void the tax. You can roll it to another inherited account, but that doesn't avoid the distribution requirements. If you're single, you can have up to $37,650 taxable income before you jump to the 25% bracket. If you're married, it's $50,400. Whatever the left over distributions are try to keep yourself from jumping brackets. You can also make a distribution AND contribution to a traditional IRA, assuming you have earned income. This and extra 401k contributions could lower your taxes as well. But I don't know all your situation.
Matt, if you are only making 15-20K why not just use a regular IRA? You don't have to do all the calculations as needed with a SEP and could contribute up to $5500 (6500 for age 50 or older) which is already more than 25% of your earned income. You may be thinking that you could deduct some of the SEP contribution from your business income for the purpose of self employment tax but that kind of advantage is very limited for a small business owner (and the 25% isn't really 25%...more like 20% when you run it through a contribution calculator). Also, do you have other earned income and already participate in a retirement place at the other job? If so there is a limit on your total contributions in ALL plans. It would be worth it to check with your CPA/accountant on this before you move forward. As you are a new business owner, they could provide great general business advice as well. Once the personal extensions are over on 10-15-16, they will have more time until year end to work with people on things like this. Good luck.
Matt beware of the deductibility of traditional IRA contributions if you do have another job with a retirement plan. In that case you might consider a ROTH IF you earn less that the income limits on Roth contributions.
Rick, unfortunately, no, the IRS considers that a distribution and the amount will be included in ordinary income and you'll incur a 10% penalty if you're under age 59 1/2. That shouldn't stop you from opening the 529 plan though! It's still a great way to save for college if it makes sense for your situation. Just don't count on the IRS letting you move money from your IRA to the 529 without Uncle Sam taking his piece of the pie.
@ Cristophe: Bobbie is having some connectivity issues, but here is her answer to your question: Both are great funds but very different. One is all equities and one isn’t. I would make the decision part of your overall investment allocation…a part of one big picture. If you want it as a stand alone then I like the balanced fund or a Vanguard target date fund.
And, that's a wrap! Thank you to everyone who asked questions today and all of the advisers on hand to answer.
Join us December 15 for our next Maximize Your Money chat!