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What Should I Do With My Money?

I'm retired and would like to use my 401(k) funds to buy a home. Will I incur penalties?

–Randall, Florida

First, I think home ownership can make a lot of sense for retirees. In addition to the tax deductions for property taxes and mortgage interest, owning a home can help you control your housing costs as opposed to being subject to the whims—financial and otherwise—of a landlord. As you probably know, this is a good time to be a home buyer, since housing prices and mortgage interest rates are both very attractive right now.

But tapping into a 401(k) or other retirement plan to pay for a home can be problematic, because you'll have to pay income taxes on the amount withdrawn (but not a penalty if you are over age 59 1/2). The taxes can be burdensome.

For example, if you need $25,000 to fund the down payment, closing costs, and moving expenses, and you withdraw the money from a retirement plan, you'll probably need to take out about $35,000 in order to pay the taxes due on the withdrawal. But don't necessarily let this discourage you. Instead, look for ways to get into a home at a low cost. Your state government may have programs that help low- and moderate-income home buyers with limited resources.

All in all, I encourage you to pursue your dreams. Here are some other issues to consider:

• Do older home owners have any local tax breaks?

• Does the community offer public programs that you may want to use?

• Is the home convenient to transportation, shopping, and recreation?

• Is the general neighborhood declining or improving?

• How expensive are property taxes, and have they been rising at a rapid rate?

• What advantages and disadvantages would the type of housing you're considering give you? Old houses may be less energy-efficient and may require ongoing maintenance. Newer homes may be expensive and of inferior construction. Condos and co-ops may have less storage space, and some have inadequate soundproofing.

• Do you plan to live in a home for the rest of your life or only for the next few years? If you anticipate spending only a few years in the neighborhood, try to pick a home that will be easy to resell.

• Most important, compare the cost of a new home (after deducting the income taxes you'd save) with your current rental cost. You may be pleasantly surprised to find that home ownership doesn't cost a whole lot more. But if it does, you need to realistically assess whether you can indeed afford to buy a home.


I have $2,000 to spend/save. Should I put it into my IRA or pay down on my credit card balance?

– John, Florida

Conventional wisdom suggests that paying off high-interest credit cards should be your number-one priority, before putting any money away for the future in retirement accounts. The reasoning for this guideline is financially sound. Why put money into an account that will probably earn less than 10 percent when you're paying interest on a credit card that's approaching 20 percent or perhaps even more?

I often encourage a somewhat different and controversial approach to the pay-off-the-credit-card-versus-save dilemma. Do some of both.

Here's my reasoning: First, there is a no joy forthcoming from making payments against outstanding credit card loans. It is often a monthly reminder of past spending sprees. Depending on the extent of the indebtedness, you might be looking forward to years of paying down the loans without making much, if any, progress toward a brighter financial future. On the other hand, putting some money, even a little bit of money, away for the future is always good for the soul, particularly for those souls who don't yet have much in savings.

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