@Terri wrote:
So, is it better to take this big tax hit in 1 year, then go back to a 'normal' monthly draw from my retirement account or take the continued larger monthly draws to pay a mortgage.
Looking only at that question (and you really should see a financial planner for the big picture) I would consider these factors.
1. What return do you expect on your 401K, compared to the mortgage interest rate? Your return depends on the risk tolerance of your portfolio and the performance of the economy and the markets. If you expect a higher return on the 401k than the interest rate you would pay, then you are better off leaving as much money in the 401k as you can. (And, if you are able to deduct your mortgage interest as an itemized deduction, that reduces the effective interest rate by 12-22%, so a 6.5% mortgage today will actually cost you 5.72%. Can you make more than that in your 401k?
2. I assume your 401k is diversified and you have a mix of investments with different exposure to market risk. Your 401k is probably fairly liquid as well, you can get money in a couple of days if you need it. If you pull money out to make a larger downpayment on a house (or buy it outright), then you have a lot of money tied up in an investment that is not liquid and not diversified.
Other the other hand, real estate may appreciate more than stocks. If you can get 7% in the stock market and pay 5% on the mortgage but the house will gain 5% in value each year, then the 401k is -3% instead of +2%; that would suggest putting more money into the house. But, it is still not diversified and not liquid. You would really want to look at buying in a quality neighborhood that holds its value.
