Tax efficient way to use pension payout to pay off home.

[v10viperbox]

I am a MediumFire sort of guy. 40 years old. USA in California

I have ~1.9 million saved currently. Current split is 600k in a pension, 500K in 401K, 700K in property, 100K in Cash.

I owe ~700K on my current home which has a a value around 1.4 million. The goal is to pay it of rent it out and travel rather extensively for the next several years then possibly come back and work another 5-8 years. If I leave my current job I can only take the pension payout not the monthly payout.

Is it possible in a tax efficient manner (Say under 15%) to take a bulk poayout and use in on a mortgage pay-off. Or am I better off rolling it into all into a IRA, renting out the home and pulling form the IRA in terms of taxes.

[cpa cat]

There is no tax efficient way to take money from a pension prior to retirement age and pay off a house.

There is also no tax efficient way to take distributions from a traditional IRA in smaller chunks prior to retirement age.

If you had several years to plan, you could transition some of the money into a Roth and then get it out without penalty after 5 years.

In any case, you should Google "Roth Conversion Ladder" because your problem is that you're rich only in tax-deferred retirement plans and poor in cash.

Tax-wise, it's highly likely that you should simply sell your house and buy a new one later. Free up any equity you have and avoid taxes on the funds you need for the payoff. Secondarily, tax-wise, it makes more sense to keep a mortgage on a rented house due to potential tax losses.

What you're proposing has the double whammy of tax-pain.

1) You'll pay taxes on any current year distributions from you retirement plans, plus penalty.
2) You'll be renting a mortgage free house and thus pay taxes on rental income because you just eliminated one of your primary deductions (mortgage interest).

In other words, what you are proposing is a terrible idea.

[v10viperbox]

I agree that it is a terrible idea. I just did not know if there was a legal workaround that was setup to make it slightly less idiotic. Having a that much in a retirement account at my age just seemed counter intuitive. I can always just focus on post tax investments moving forward.

I think selling the home which was my first thought really is for the best. I can always get back into the market when I return. Thanks for the quick response. 

[SeattleCPA]

I am a MediumFire sort of guy. 40 years old. USA in California

The goal is to pay it of off, rent it out and travel rather extensively for the next several years then possibly come back and work another 5-8 years. If I leave my current job I can only take the pension payout not the monthly payout.

Is it possible in a tax efficient manner (Say under 15%) to take a bulk payout and use in on a mortgage pay-off. Or am I better off rolling it into all into a IRA, renting out the home and pulling form the IRA in terms of taxes.

You might be able to turn it into a short term rental and thereby sidestep the passive loss limitation rules. If you then did a cost segregation study, you could really load up big depreciation deductions on your returns over a short number of years.

You could in this way, e.g., possibly shelter a very large withdrawal from tax deferred accounts. You would still pay the early withdrawal penalty. And you would have depreciation recapture to deal with when/if you someday sell.

This blog post explains: Vacation Rental Tax Shelters

BTW, the other idea would just be to sell the home, possibly take advantage of the Sec 121 exclusion of gain, and not have all the wealth tied up in a single asset.