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Mortgages & Refinancing

Retire Your Mortgage?

Kimberly Lankford gives advice on claiming the dependent-care tax credit, converting to a Roth, choosing to pay off a mortgage or invest in stocks, and more.

I'm 64 and my income will drop from $50,000 to $30,000 when I retire in a few years. Does it make sense to use more than half of my savings to pay off a $160,000 mortgage balance rather than let the money languish in the stock market? I have a 4.875% fixed-rate loan, and I pay $1,055 a month. -- B.G., Sunnyvale, Cal.

From a purely financial standpoint, it might make sense to pay off your loan if your mortgage rate is higher than the after-tax amount you could expect to earn on your investments. And being debt-free in retirement is an admirable goal -- but I don't recommend wiping out more than half of your retirement savings to do it. You'd be tying up most of your assets in real estate, which could leave you in a bind if you need cash fast.

Plus, if you use money in a traditional IRA to pay off your loan, all your withdrawals will be taxed at your ordinary rate. That would boost your federal income-tax rate and could trigger a higher premium when you become eligible for Medicare next year.

I suggest you consult a financial planner to review your entire situation. You might want to continue to work part-time, think about downsizing once the housing market rebounds, or consider a reverse mortgage in the future.

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Insurance for boomerang kids

My son can't find a job and is about to move back home. What should we do about car insurance? -- J.M., Towson, Md.

If your son recently graduated college and doesn't have his own car, your auto-insurance coverage may change very little. If you had been getting a discount because he was living more than 100 miles away while at school, the discount will disappear, but he won't need to get a new policy and he'll be covered when he drives any of the family cars. But if you excluded him from your policy while he was in college, you'll have to reinstate him, and your premium will probably increase.

If your son has his own car, then he probably has his own policy. The good news is that if you both have coverage through the same insurance company, you may qualify for a multicar discount. That could lower your rates by as much as 20% to 30%. (Read more about insurance for boomerang kids.)

Tax break for child care

Does after-school care qualify for the dependent-care tax credit? -- K.B., South Milwaukee, Wis.

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It might. You can claim the dependent-care tax credit if your children are younger than 13 and they're receiving child care so that you can work or look for work. You must have earned income to qualify for this credit and, if you're married, you and your spouse must either have a job or be looking for one, or be a full-time student.

Before-school and after-school expenses qualify if they're deemed to be primarily for care rather than for education, says Mark Luscombe, principal tax analyst with CCH, a tax-publishing company. Fees for an after-school program, as well as money paid to a nanny or baby sitter to watch your kid after school, can qualify for the credit. But the cost of tutoring, for example, would be considered an educational expense and therefore would not count toward the credit.

Skip the credit insurance

I just bought a new house, and I've been inundated with mailings from companies offering me credit insurance. Should I buy it? -- S.H., Washington, D.C.

In most cases, credit insurance is a bad deal. These policies, which offer to pay off the outstanding balance of your mortgage or loan if you die, tend to be very expensive for what you get. Plus, they limit your heirs' options; they may have financial priorities other than paying off the mortgage.

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Most people can get better coverage at a lower price by shopping around for a regular term-life insurance policy. A healthy 40-year-old man can buy a 20-year, $500,000 term-life policy for less than $400 per year (a woman the same age could pay less than $360) -- and his heirs would be able to determine the most important uses for the death benefit. You can get price quotes from dozens of insurance companies at www.accuquote.com or www.lifequotes.com (see How Much Life Insurance Do You Need? for more information about buying life insurance).

If you have medical issues, however, and are unable to qualify for life insurance, credit insurance might be one way to get a policy.

Roth-conversion steps

Now that there are no longer income restrictions to convert a traditional IRA to a Roth, what do I need to do to make the conversion? -- D.K., Steamboat Springs, Colo.

Most IRA administrators make it easy for you to convert your traditional IRA to a Roth. Some (including Fidelity, T. Rowe Price and Vanguard) also offer handy tools on their Web sites to help you calculate your tax bill before you make the switch. (Use our Should I Convert My IRA Into a Roth IRA? calculator to crunch your own numbers.)

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You'll need to open a Roth IRA account if you don't already have one. Then you'll fill out a conversion form to switch money from the traditional IRA to the Roth (some firms let you open the account and move the money on the same form). Specify how much money you want to convert, how it should be invested and whether you want taxes withheld from the amount you move to the Roth.

It's best if you can say no to tax withholding and pay the tax bill out of non-IRA funds. If you dip into the IRA to satisfy the IRS, you'll owe tax and, if you're younger than 59, a 10% early-withdrawal penalty on the amount.

My thanks to Mary Beth Franklin for her help this month.