Q: My wife and I are retired, ages 64 and 63. Our gross monthly income sources include $2,440 Federal Civil Service monthly check, $1,835 from my wife’s state teacher pension, and $1,050 from social security. I also have a 403(b) plan that has about $500,000 in it. I withdraw about $1,000 per month. We have another $40,000 in savings that’s invested in mutual funds.

We own a house that’s worth about $100,000. It’s completely paid off. My wife and I are thinking about selling it and buying a new house that would cost somewhere around $150,000 to $175,000.

Given our income and our lack of deductions, we have not been able to itemize on Federal income tax for at least 10 years.

Here’s my question: If we decide to trade up, would it be better to withdraw from the 403(b) account and pay cash for the difference between the new house or should we get a mortgage and finance it?

I realize the 403(b) withdrawal would be taxable at 25 percent, and it might be necessary to make part of the withdrawal in one year and part in the next to avoid going into the next tax bracket. I would probably prefer to not have another mortgage.

Thanks for any advice you can give me

A: Let’s run through the numbers. You have approximately $6,300 per month in income with no housing expense except for real estate taxes, insurance and maintenance and upkeep. That gives you plenty of cash for all the other things you might like to do in retirement, like travel, see your family, and perhaps go skiing or golfing.

When you sell your home, you’ll have approximately $100,000 in equity. When you buy your new home, you’ll need to take out a mortgage of $50,000 to $75,000 or withdraw cash from your retirement account.

But you’ve already realized that withdrawing from your retirement account means you’ll get hit with a hefty tax of 25 percent. That’s going to hurt you in the long run, and there’s really no need to pay out that kind of cash.

Right now, mortgage money is as cheap as it has been in about 40 years. If you borrow $75,000 to purchase your new home, you’d pay $425 per month for a 30-year loan with an interest rate of 5.5 percent, or $602 per month on a 15-year mortgage, assuming the interest rate is about 5.25 percent. You also have to figure on paying 2 percent for real estate taxes, or $3,500 per year ($300 per month).

Spending $700 to $900 per month on a mortgage and real estate taxes when you have more than $6,000 per month coming in shouldn’t be much of a stretch — and it will allow you to preserve your cash in case you need it for something else.

Also, instead of paying a 25 percent penalty on all that cash, you’ll pay 5.25, which will help preserve your wealth. While you may still not be able to itemize on your federal income tax form, you will still be saving the taxes you would have paid on the withdrawal.

If you’re dead set against having a mortgage, then you’ll have to bite the bullet and pay the taxes. But if you don’t mind the monthly expense, you’ll be far better off keeping control of your cash.

A good place to start shopping for rates is bankrate.com.

Dec. 19, 2004.