Withdrawn IRA Money Subject To Income Tax

Added March 10, 2009 by Ilyce R. Glink

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Summary: Should you withdraw money from a traditional IRA to pay off your house? In light of the struggling economy, does the federal government offer any tax breaks if you take money out from an IRA in 2009? And if you're over age 70 1/2 do you have to withdraw money from your IRA this year and in many cases lose money in the process? What factors should you consider if you're debating whether to pay off your house with IRA money?

Q: I am 75 years old. If I withdraw $25,000 from a traditional IRA to help pay off my house, do I add this to my regular income and pay the tax? Or is there a break this year if the money goes to pay off house?

A: Many investors speculated that Congress might have given them the opportunity to withdraw money from an IRA given the state of the economy and the reduced value of many IRA accounts. However, the only major new tax break for homeowners, at the moment, is an $8,000 tax credit for the purchase of a first house. The tax break is good for properties purchased through December 1, 2009, and you may file for the credit on your 2008 tax return.

If you withdraw money from a traditional IRA, those funds should be subject to taxation. The only news here is that the mandatory withdrawal requirement for those who are at least 70 1/2 years old has been suspended for 2009. It's actually the reverse of what you would like. The recent legislation gives people the ability to keep their money in their IRAs in hopes that their IRA accounts will increase in value over the next year.

But if you withdraw the cash, you pay the full freight owed. In your case, you might want to determine what the impact of an additional $60,000 will do to your federal income taxes. If your current income along with the IRA funds would kick you up a couple of notches in the tax brackets making it more costly for you, you might consider taking a smaller amount out this year and more next year to meet your goal of paying off your mortgage.

Finally, you didn't mention what your loan balance is on your mortgage or the interest rate you're paying. If the amount you still owe on your mortgage is small, you took out the loan many years ago and the interest rate is low, you may not really benefit by using IRA funds to pay off the loan.

However, if the interest rate on your loan is high – say 10 percent – or you recently took out the loan and still have a high loan balance, paying down the loan balance may have a bigger impact on your monthly payments.

Sit down and work through the numbers to determine whether paying off the loan at this time makes sense.

March 6, 2009

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