What are the advantages and disadvantages of using my IRA to pay off my mortgage?

junieboy
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What are the advantages and disadvantages of using my ira to pay off my house mortgage? Tax ramification and all of that I would like to know. Thanks.

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What a great question! And congratulations for working hard to reduce debts in your financial life.  As a financial planner, I'm quite keen on reducing and even eliminating debt whenever you can.  It's a great idea to get all the facts so you can make the best decision for you and your family.  Utilizing any asset or account to pay down mortgages has benefits and potential costs.  

 

First, let's look at the IRA.  Keep in mind there are a few types of Individual Retirement Accounts (IRAs) out there to choose from.  I'm assuming we are discussing a Traditional IRA in which the money in the account today would be mostly taxable to you when you take the money out to pay down your mortgage.  So when you take out money to spend, keep in mind that you can't spend all of it.  Save some to pay the resulting income taxes at the end of the year, or you can have some of your withdrawal "withheld" to cover the taxes for you at tax time.  In addition to the taxes owed on the money taken out, you may owe a "penalty" of 10% if you are under 59 1/2 years of age.  Remember that in return for the tax sheltering benefits of the IRA, the money was intended to be used for your retirement.  So, if you're raiding the retirement cookie jar a bit early, you'll owe an extra slice of "penalty" tax on top of your income tax amount.  Assume the total amount of your IRA were a dish on the Thanksgiving table. It would be sitting in the middle on that very large serving platter. When you take the money out of the IRA to spend it, you'll have to carve off the taxes and penalties and put that on the salad plate, to your left, that you were never going to touch anyway.  The rest of it fits nicely on that dinner plate in front of you.  So you may not have as much to pay down the mortgage as you may have thought initially, because of the penalties and taxes.  

 

As for the mortgage itself, let's look at whether it is helping you or hurting you.  Yes, some debt can help.  First compare the interest rate on the mortgage, to what you "may" be able to earn in the IRA.  If you're earning more in the IRA, you may want to consider staying the course and finding other ways to more aggressively pay down the mortgage rather than simply liquidating the IRA.  The one time pay off is tempting, but make sure you're not damaging your future for the ease of the present.  You can also consider refinancing options for the mortgage as well.  Also, the mortgage may be offering you the advantage of itemized tax deductions for the interest paid that could assist your annual tax bill.  It's best to discuss this with a qualified tax professional first to discuss your individual situation.  Think about how long you're planning to stay in this home.  If you're planning on selling in a few years, it may be best to keep those retirement funds in the proverbial cookie jar for later.  

 

So let's review.  Reducing debt is great.  Learning the facts and how they affect you in your individual situation is key.  There are tax issues when dealing with retirement accounts and the ultimate decision is whether the benefits of freedom from the mortgage debt outweighs the cost of the taxes and possible loss of retirement funds in the future.  Do you need the IRA funds in the future more than you need to be debt free today?  In short, get some personal advice from qualified folks and professionals you trust.

 

Give our team of advisers a call to go over your situation in full.  And check out this earlier question regarding a similar question with a Roth IRA that may also interest you.  Should I use some of my Roth IRA to pay down my mortgage?

 

As always, thanks for your question and for trusting USAA!