Sometimes things just don’t fall into place perfectly so we try to come up with ways to force it. In my experience, that usually doesn’t work well. It’s especially true when fighting institutions. They generally win. We try to explain that our individual situation doesn’t fit the mold. That our personal story is different. We feel that if we could only find that one person who can make an exception all would be fine. Together you’d make it work. Unfortunately, we usually can’t get to the person who has the authority to make that exception.
I remember trying to take advantage of the low mortgage rates by refinancing our home. Because my wife and I had reduced our working to part time, our income was no longer sufficient to qualify for the mortgage amount we needed. Isn’t that ironic? We were already managing to pay the higher amount. A refinance would reduce our payments. Yet lenders wouldn’t lend to us. So we had to come up with a creative way. And we did. Our retirement accounts were well funded and we were over 59 ½ so there would be no penalty for withdrawing funds from those accounts. So we agreed with our lender that we would take monthly payments from our IRAs. The lender counted this monthly withdrawal as income and, therefore, made our total monthly income enough to qualify for the loan.
But we went one step further, which ultimately saved us a lot of money. The fact is, we really didn’t need the income because, as I said, the refi reduced our mortgage payments. So as soon as we closed on the loan, I put a halt to the IRA withdrawals. We had never told the lender we would continue the withdrawals and, in fact, we even told the lender we were stopping them. They were fine with that. Furthermore, because the loan closed within 60 days of the first withdrawal, we were able to redeposit all the money we had withdrawn right back into our IRA with no penalty, as if the withdrawal had never happened. That saved us a great deal in our tax liability.
We were different than most borrowers trying to refinance their home. And institutions don’t always adjust to square pegs. We had assets but lower income. We didn’t need more income and didn’t want to reduce the amount in our IRA. So we managed to fit that square peg into the institutional round hole. We won by reducing our mortgage rate, and the lender won because they got to finance the loan.
Having cut back from full-time to part-time at his company, Jeff decided that he needed to take out some money from his retirement account. He currently has only a 401(k). When he spoke with the plan administrator of his 401(k), he learned that when he withdraws funds they are required to withhold funds to pay for federal and state taxes. But because Jeff has significant tax deductions, he didn’t want to have any of the funds withheld – he calculated that even with the income from the 401(k), he’d still be getting a tax refund. Jeff also learned that if he withdrew funds from an IRA, they are not required to withhold funds to pay taxes. So Jeff opened an IRA at that same investment house and rolled over the funds from the 401(k) to his IRA. He even kept the money in the same funds. When he withdrew money from his IRA, the withdrawals were not subject to withholding.