Q: I would like to pay off my mortgage with an IRA distribution. A friend told me that you have some advice on your website about the best time of the year to do this. The amount on my condo is about only about $40,000, but of course my IRAs and regular mutual funds are shrinking daily.

Can you tell me if I should do something before the end of the year or should I wait until next year? Thanks for your assistance.

A: I don’t think I’d pay off my mortgage with an IRA distribution for a few reasons. First, when you withdraw cash from your IRA, you’ll pay income taxes at your marginal tax rate on the distribution. If you’re under the age of 59 1/2, you’ll pay a 10 percent tax on the distributed amount on top of the taxes.

How much do you need to withdraw to pay off the house? Assuming that you need $100,000 in order to pay off the house, it will look on your federal tax return as if you added that amount in income, which is likely to push you up to the highest federal and state tax rates. It’ll cost you another $10,000 if you’re under 59 1/2.

That means you might have to withdraw as much as 45 to 50 percent more than you need to pay off the loan, or $145,000 to $150,000 from the IRA.

Next, if you withdraw this cash from your IRA, you’ll be selling assets at their lowest price in years. Unless you think that the U.S. and world stock markets will never recover or won’t recover for many years to come, you’ll be selling at a low point and miss out on the gains you’d earn back as the stock market rises.

Refinance If You Can’t Afford Mortgage

If you can’t afford your mortgage payment, you should certainly consider refinancing your mortgage. If you can’t refinance (perhaps because the house is worth less than your mortgage amount), only then consider using an IRA distribution to pay off the mortgage loan.

Lastly, you have to really decide why you would want to pay off your mortgage in this manner. If you are able to refinance today or in the coming weeks, interest rates on home loans appear to be heading lower. If you are able to refinance at 5 or 6 percent, that interest rate is quite low and you would be able to preserve the money invested in your IRA for future use during retirement.

If you’re bound and determined to withdraw the cash, you should do it in smaller amounts so that you’re less likely to add to your income tax burden the following April 15. Also, if you withdraw your money early in the year, your obligation to pay any tax on that money won’t occur until April 15 of the following year. The company holding your IRA will, in any event, withhold the 10 percent penalty (if you owe one) at the time of the withdrawal. Your tax preparer or accountant can guide you further.

Dec. 20, 2008.