Can someone please advise me?? I really do know the answer to this, but would still like to ask anyway.?

Question

I make very little money a month. I have an IRA worth 150,000 dollars and a townhouse worth 240,000. I have a mortgage of 65,000. No other debt or car payment. Since my divorce, my salary has gone way down 20,000 a year. I have two girls in private colleges. Their dad, however, pays a big chunk of college. I worry about this every day. I want to know what you think about taking 65,000 from my investment account to pay off my mortgage. I know I would get hit with the penalty - it would ease up my finances considerably. My mortgage is 470 per month. Opinion please???? Thank you for your time.

Thank you for all the wonderful answers so far - you all have the best advice. Smart people.

Thank you Rick L - your answer was excellent.

Answer 1

Its not worth the 10% penaly IMO. I would look to cut back in other areas. I would however stop funding the IRA and pay off the debt as an alternative.

Another thought is since your girls are in college, do you need a town house? I am not sure where you live...but could you sell the TH and take the 150-175K in equity you have after a sale and buy another property free and clear or rent for a while untill your income gets back up. Look for extra income...ie second job. The IRA is a quick fix and not a long term solution. I would avoid it at all cost. You don;t want to be sitting in a paid for TH eating ALPO cause you have no retirement. 470 isn't much a month...its very do able....look for other places to save the money you already have each month...make every last dollar scream for you!!!

Answer 2

Other than the obvious penalty issue, my biggest concern would be how much you'd be able to put into the IRA each month to build it back up, and how long you have til retirement. What is the interest rate you're earning on your IRA as compared to your interest rate on your mortgage?
But the bottom line is... if you are having a hard time paying the mortgage, having an IRA won't help when the home goes into foreclosure. So if making the monthly payments are THAT rough, you don't have much of a choice, and will have to take the money out of the IRA.

Answer 3

There is an automatic 20% tax withholding when you withdraw funds from an IRA and you're not yet eligible for withdrawals (age 59 1/2). To pay off the mortgage, you'd have to withdraw $81,000, which will bring your 2007 income to $100,000+, and will increase your federal and state taxes by a lot. There is also a 10% penalty for doing so, so add $8,100 to your federal tax bill, in addition to the taxes on $101,000 (the actual taxable income will be less once exemptions and deductions are factored in).

Pros and Cons:

Pro - no mortgage payment releases $470 to be used for other things.

Con - reduces retirement account by a large percentage (half!), although with no monthly mortgage you may be able to start adding more to your retirement account each month.

Con - loss of mortgage interest deduction if you itemize deductions on your income taxes, which may affect your ability to itemize. If you do itemize your deductions each year, losing the mortgage interest deduction may affect your tax deduction strategy, but if you're a borderline itemizer now, it'll make taxes easier to file.


If you had asked this question a couple of months ago, my answer would have been to pay half of the mortgage in 2006 and the rest in 2007 to spread the tax bite over 2 years instead of one.

Using 2006 tax forms and assuming single with no dependents, standard deduction and nothing else, the federal taxes on $20K income and $80K early IRA withdrawals is $27,959 (including penalty).

Using 2006 tax forms and assuming single with no dependents, standard deduction and nothing else, the federal taxes on $20K income and $40K early IRA withdrawals is $13,451 (including penalty).

Spreading the IRA distribution over 2 years (and assuming the same salary) would save $1,057 in federal taxes.

To lessen the tax bite, AND to lower your mortgage payments, could you pay half of the mortgage and then refinance? You could then pay off the mortgage completely in 2008. A $35,000 30-year mortgage at 7% APR comes to $232, although if your current monthly payment ($470) already includes tax and insurance escrow, adding those items might bring the payment back up to $400 (not enough to bother).

Whichever way you go, there will be no earned income tax credit to ease the pain because the credit is lost completely for single parents with incomes over $36,000.

Answer 4

If you do that, you are robbing yourself out of a good retirement. If you don't have debts and car payment you should be able to afford a $470 a month mortgage. Right now, you can deduct your mortgage interest in tax return and if you paid it off, you won't be able to. You're not only going to get hit with a penalty, you will also be taxed on the money you take out....that mean, you have to take more than the $65k for the mortgage payoff. You need to do a financial statement on your finances and see where all your money go..

Answer 5

How much will this leave in your investment account?

How trustworthy is your ex-husband with continuing to pay for your daughters' educations?

I would hesitate to pull that amount of money from your investment account to pay off your mortgage (even though your property is an excellent investment and could be resold at some future date, if need be). The penalty would likely be steep. If you want to lower your mortgage, why not take half of your stated amount and put that towards your principle? Either that or make weekly mortgage payments (a lower amount may help you budget better).

Did I answer correctly???? :-)

Answer 6

I just heard Suze Orman say not to do this. She said the interest rate most people have on their mortgages is good and that more money can be made investing instead.

Answer 7

My concern is I don't know where you live, but, if you take from you're investment account to pay off you're mortagage, your basically putting all of your eggs in one basket. What happens if Something happens in your area, like what happened in Louisianna and Mississippi, these people lost everything, their homes are in ruins, and they cannot afford to rebuild. This is you're retirement you're talking about cashing in, just please weigh all of you're options. Good Luck