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Vivid_Fox617 OP t1_j6mv66q wrote

Reply to comment by PlumCrazyVee in Mortgage vs withdrawal with income tax hit for home purchase by Vivid_Fox617

Wouldn’t we need to quantify 7 years of mortgage payments and compare it against this tax?

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yes_its_him t1_j6mvmi9 wrote

Well not really. You are concerned about the 'overhead' on your principal. For the retirement distribution, that's the taxes. For a mortgage, that's the interest payments.

The principal matters as well, but you are going to pay that in either scenario, and ultimately you would be taking money from the IRA in any event.

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Vivid_Fox617 OP t1_j6mxkzu wrote

So we would want to quantify 7 years of interest payments and compare it to the extra tax

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yes_its_him t1_j6mycmm wrote

Basically yes, if we ignore time value of money.

6% of 200,000 would be about $12,000 annually. It's likely that it would take several years for that to work out to the extra tax from taking the money sooner, but that depends on a bunch of parameters.

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ghalta t1_j6nptiz wrote

To re-explain what the other response means for "time value of money"...

The extra tax would all be at once, right now, while the interest is paid over time. That means the interest you pay in year 7 costs you less in 2023 dollars thanks to inflation.

Meanwhile, presumably your remaining 401k balance continues to generate returns even as you draw it down. So, the 6/7ths of your mortgage balance you don't withdraw this year and instead let grow for a year, the 5/7ths the following year, etc., will go up in value each year, even if you just put it in an ultra-low- or no-risk investment product during that time.

These time effects on money converge, meaning the value of the money you have goes up over time, while the value of the money you owe goes down over time. Put them together, still ignoring any potential impact from bumping up your incremental tax rate, and the cost of 7 years of interest payments could be much less than simply calculating the interest due via spreadsheet.

Then throw in the potential for extra taxes if you liquidate the 401k all at once, and you might tip the scales over in favor of getting a mortgage.

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