Paying off home mortgage with IRA is 'financial suicide'

Question from a reader: I’m 52 and currently unemployed. Should I cash out my IRA to payoff my house? I owe about $158,000 on my home; I have $310,000 in IRA.

Answer: Most financial advisers agree that cashing out an IRA to pay off a home mortgage is not a good idea. While multiple reasons were given, one of the main ones is the tax hit and 10 percent penalty that will have to be paid.

Chad Waddoups, vice president of Investment and Insurance Services for Mountain America Credit Union, said keeping the IRA could be more important than paying off the mortgage.

“I would recommend you don’t pay off the mortgage,” Waddoups said. “If you have other assets outside of an IRA that would make sense, because you’re not incurring those costs and not adding to your tax liability to do so. If your only asset base is your IRA, then it would not be wise to take a large chunk to pay off a mortgage."

The loss that will come by withdrawing five-and-a-half years early is calculated by investment adviser representative Amy Herrick, ChFC. If a person is single and only minimal deductions are taken without state income tax penalties, to pay $157,872 on the mortgage the IRA withdrawal would have to be $250,000; the IRS taxes would be $92,028.

“The whole idea of using an IRA to pay off a house to me is voluntarily 
committing financial suicide,” Herrick said.

Herrick and Waddoups both agree that if there are absolutely no other options, then a small portion could be taken out to make a payment. Using IRA money is very expensive, though.

“In a situation where you’re unemployed, it would make sense perhaps to take out just enough of the IRA to make your mortgage payment if you have no other way to make it, but you want to take out as little as possible so that the taxes and penalties are also as little as possible,” Waddoups said.

Having debt on an asset that appreciates in value, like a home, is not as dangerous as having debt on a car, which depreciates. Waddoups also points out that it doesn’t make much sense to cash out all of an IRA where you will pay 10 percent penalty on it in order to pay off a mortgage that has 3 or 4 percent.

EMAIL: alovell@deseretnews.com