Pay Off Mortgage And Delay Retirement

Added March 22, 2007 by Ilyce R. Glink

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Summary: Sometimes you may feel you no longer want to make your mortgage payments and just pay off your mortgage with other assets such as money in an IRA or 401(k) plan. But is it a good idea to pay off a mortgage with retirement money? If you're under 59 1/2, you'll have to pay extra taxes on the money that you withdraw from your IRA or 401(k).

Q: I have $60,000 in an IRA that has not been managed well since 1998, but that's a question for another time.

Here's my situation: I owe $30,000 on my house with an interest rate of 6.785 percent. The loan will be paid off in about 7 years. I would love to get out from under the house payment of $730 per month and put an additional $500 per month into my 401(k) plan at work.

What do you think about taking $30,000 out of my IRA to pay off my house loan. I know I'll pay taxes and perhaps a penalty on the money, but in my view, the end justifies the means. Would I be able to retire earlier?

A: I don't think much of your plan because if you crunch the numbers, you'll see that robbing your IRA to pay off your current loan isn't going to make it easier to retire -- it's going to put it off longer.

Cashing out your 401(k) to pay off a low-interest home loan makes no sense at all. You'll pay up to 35 percent in federal tax, plus state taxes, plus a penalty of 10 percent if you're under 59 1/2 years old.

All in all, you'll have to cash out just about your entire $60,000 in retirement savings to pay off a $30,000 loan that's at a relatively low interest rate -- and by the way, you're basically done paying interest on the loan so you're only repaying principal at this point.

And then what's your plan? You're going to repay your 401(k) plan $500 per month, or $6,000 per year? It'll take you 10 years just to get back to where you are today, and in the meantime, your $60,000 could have grown to $120,000 if you earned a return of just 7.5 percent per year on your money.

I'd advise against tapping your IRA for anything other than life-threatening emergencies. And by the way, if your IRA isn't being well-managed, then you should do some research at Morningstar.com and find some better investments.

March 22, 2007.

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