Hands off funds for retirement

Dear Liz: We’re in the process of buying our first house. My wife and I plan to liquidate some of our investments in order to make a 10% down payment.

Our investments include one 403(b) retirement account, one 401(k) account, one Roth IRA and several mutual funds held in taxable accounts. The majority of our money is actually in those taxable accounts.

What is the most tax-efficient way to tap those assets? Should we use our nonretirement money before touching the Roth, 403(b) and 401(k) money? Can you help us make sense of all the rules and tax implications of taking money out of those accounts?

Answer: Here’s a good rule of thumb to follow: Leave retirement money for retirement.

Sure, there are ways to pull money out of retirement plans for a home down payment that avoid penalties. But you’d usually have to pay ordinary income taxes on any withdrawals.

Loans from your workplace retirement plans can turn into withdrawals if you lose your job and can’t pay the money back quickly. By contrast, you would pay much lower capital gains taxes on profit from the sale of any mutual fund shares you’ve held for at least a year.

In addition, any money you pull out of tax-advantaged accounts -- even by borrowing -- is no longer working for your retirement.

You can make penalty- and tax-free withdrawals from your Roth as long as you don’t withdraw more than you’ve contributed over the years.

But again, it’s better to leave that money alone so it can grow for your retirement. Every $1,000 you withdraw now could mean you’ll have $10,000 less 30 years from now (assuming 8% average annual returns).

The rules and tax implications of retirement plan withdrawals are far too complex to be summarized here.

If you don’t have enough in your taxable accounts to cover the down payment you want, you can check out the Nolo Press book “IRAs, 401(k)s & Other Retirement Plans: Taking Your Money Out” for a tutorial.

You also should consider consulting a tax pro.

Medical bills and bankruptcy

Dear Liz: You recently wrote that “if you avoid credit card debt, maintain a substantial emergency fund and adequately insure your life, health and property, you should be able to withstand the financial pressures that often send people to U.S. Bankruptcy Court.”

Ms. Weston, you are either very naive or simply possessed of colossal gall. Apparently you and your family have never been hit by a catastrophic disease or a lifelong chronic illness.

As a survivor of Crohn’s disease, which I have had for over 40 of my 52 years, I have been precluded from having a “regular” job because of illnesses and hospitalizations, thus leaving me at times without any insurance coverage whatsoever.

Bankruptcy was indeed my only choice over a decade ago. Millions of people in this country are told that they are “doing something wrong” when hit by catastrophic or chronic illness; that kind of finger-pointing isn’t accurate or helpful.

Answer: You may think we disagree, but your letter actually proved my point.

People who can’t or don’t adequately insure their health are at much greater risk of bankruptcy than those who are properly insured. That’s not a value judgment or “finger-pointing”; it’s just a fact.

About half of consumer bankruptcies involve medical bills, according to a Harvard study, and three-quarters of those filers had insurance at the beginning of their accident or illness.

The Census Bureau tells us there are 45 million uninsured people in the U.S. and millions more are underinsured. Until those folks are adequately insured, they remain at risk for Bankruptcy Court.

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Liz Pulliam Weston is the author of the books “Your Credit Score” and “Deal With Your Debt,” both published by Prentice Hall. Questions may be sent to 3940 Laurel Canyon Blvd., No. 238, Studio City, CA 91604, or via the “Contact Liz” form at www.lizweston.com. Distributed by No More Red Inc.