Should I Use My IRA To Pay Off My Mortgage?

6 Answers

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  +1 Votes 1  0

  JoeTaxpayer on May 29, 2010

  Marty, did you look at the Fairmark link I posted in your other question?

  First, without knowing your wife’s income (or 2008 AGI) the question cannot be answered to the penny. But assuming you straddle the 15/25% line, the first $70K is taxed at 25%+10% penalty net, $45.5K, the next money is taxed at a total 38%, so to get the 55.5K you need, you must withdraw $89.5K, total $159.5K to net that $100K.

  But, going back in, you may easily drop to the 15% bracket again, so every $100 going in costs you $85. So it will cost you $135,575 moving forward to replace those funds. At 8% return per year,the original $159.5K would earn you $12.76K/yr. The IRA max is only $5000/yr per person, so the answer is you *never* catch up. Ever. If you are good with spreadsheets, you can prove this to yourself.

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  +1 Votes 1  0

  JoeTaxpayer on May 29, 2010

  Marty – I just ate a very lagre sandwich, which always gets the right brain cells moving.

  Above, I showed you would need to withdraw $159,500 to net the $100,000 to pay off the mortgage.You are predicting an 8% return, so the amount you would have in 9 years is 159.5*1.08^9 = $318,841.

  This is a simple time value of money exercise. FV = 318841 (duh?) r = 8/1200 (8%/12 mo/yr) Nper = 9*12 = 108.  The PMT you must deposit each month is $2025.29, which will cost you about $1721.50 net of taxes. Is your current mortgage payment that high? I doubt it.

  I know you are not looking for the reasons not to do this, but consider, the market has already dropped. A lot. Is this the time you want to take so much out?

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  0 Votes 1  1

  Pinyo on May 29, 2010

  martyg, you can ask the same question again, but I doubt you will find too many people who are willing to agree with you. Assuming you go through with your plan regardless:

  1. Your Roth IRA values drop by about $160,000 right off the bat. Assuming you used to contribute $5,000 to your Roth and you’ll continue to do so over the next 30 years, the decimated Roth IRA will have about $800,000 less at the assumed 8% rate of return.
  2. Since your mortgage will be paid off in 9 years anyway, the real difference for your 401k is only your contributions for the first 9 years. You said you contribute 6% now so that’s about $4,200 per year instead of $16,500 (current max). Assuming 8% rate of return, you’ll end up with about $400,000 more in your 401k.

  In the end, this is $400,000 that you’ll lose out on, not to mention:

  1. You’ll be paying taxes on 401k withdrawal; instead of having $800,000 tax free.
  2. You can’t deduct your mortgage interest, thus resulting in higher annual income taxes — but this is balanced out by higher 401k contribution.

  You can even flip things around and use 401k & Traditional IRA to pay off the mortgage. The result won’t be that much better.Lastly, you never mention your mortgage interest rate. If paying a high mortgage interest rate is prompting you to think about this, then I suggest that you refinance your mortgage instead.

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  +1 Votes 1  0

  donspillane on May 29, 2010

  You really don’t supply enough information. Tax bracket? Mortgage payment? House value? Basis etc etc  Is your anticipated rate of return at 8% before or after tax?

  This is one of the problems associated with answering this type of question. You provide only some of the information and expect a full and accurate solution.

  As an aside, I would point out that you are involved in 2 strategies which defer taxes to a future date. As soon as you start to live on these savings during retirement, you will pay taxes. The idea of a tax deferred vehicle is that you put the money in at a high bracket and take it out at a lower bracket. In today’s economic environment where the Government has stated its intention to increase taxes, this is a questionable strategy in itself.

  This question is answerable with all the correct information. Otherwise it’s a guessing game and do you really want to base your investment and retirement decisions on a guess?

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  +1 Votes 1  0

  Ryan on May 29, 2010

  You state your Roth IRA, Trad. IRA, and 401k currently have a total of $250k. Assuming an increase of 8% per year, that is an increase of $20k the first year. Over nine years, you are looking at doubling the value of your retirement accounts to $500,000.

  The gap between what you contribute now versus the increased contributions would need to be very large to make up for a $250,000 gain. But it’s possible depending on the size of your mortgage payments and the amount of money you are putting away now versus the amount of money you could put away if you were to pay off your mortgage and use those payments for retirement contributions.

  A full analysis would require more information than you gave. Your current salary, current contributions to retirement accounts (Roth IRA, 401k, Trad. IRA, etc.), current tax bracket, anticipated future tax brackets, mortgage rate, amount of interest paid on mortgage (to compute tax savings), and possibly additional information would need to be taken into consideration.

  Good luck if you decide to go this route, but it is not one I would recommend unless the math makes it so far in your favor that it is worth taking on the additional risk.

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  +10 Votes 10  0

  TOM HAMPTON on Jan 11, 2011

  Everyone on this thread seems to agree that paying off a mortgage with an IRA is not the best idea and back it up with facts.  My concern is that the stock market is so shakey that one could lose half of ones investement very quickly as we saw in 2007/08.  Remember the old “A bird in the hand is better than two in the bush”.  If you pay off your mortage you may have less in investments but you have an asset paid for.

  Anyones thoughts?