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Paying off home mortgage with IRA is 'financial suicide'

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  • K Mchenry, IL
    Feb. 27, 2013 6:35 a.m.

    VST what financial advisor earns you. $50,000 a year?

  • sammyg Springville, UT
    Feb. 26, 2013 5:59 p.m.

    viejogeezer

    "You could take out monthly payments in the amount of your mortgage and possibly have no tax consequence at all."

    Seriously WRONG advice.

    There is not an IRA (qualified plan) on the planet that avoids ordinary income taxes at distribution.

    What you might be eluding to is the ability to take a stream of payments through the 72t provision that can avoid the 10% penalties if structured correctly. An annuity is often used as an alternate financial vehicle to do this from as withdrawals (depending upon the product and carrier) may be allowed.

    Tax-deferred plans do not avoid taxes, you simply defer paying your taxes to some unknown rate when you take distributions.

    Why on earth would anyone participate in these plans when the common thought is that we will pay higher taxes in the future is something to seriously consider. There are tax-free alternatives.

    For all we know paying ordinary income taxes today with a penalty might be a steal compared to future tax rates.

    In any case avoiding the 10% penalties through a 72t provision would be a wise strategy if the income stream was sufficient for the need.

    And yes... I'm licensed.

  • sally Kearns, UT
    Feb. 26, 2013 5:55 p.m.

    Even if you do cash in your IRA, you still need to cover the taxes and insurance or you will lose the home. You might be better off selling the house and buying a smaller less expensive home. You need to do some financial analysis to decide what would be best. Some of it will depend on how much equity you have in the home. You need to visit a good tax accountant.

  • coleman51 Orem, UT
    Feb. 26, 2013 5:19 p.m.

    Although it may be costly to pay off an existing mortgage with an IRA, the other option is far worse. If someone is unemployed and has the possibility of paying off their home, the 10 percent hit is far less costly than losing that home. Financial advisers look at the issue from a tax standpoint. However, the human side of the equation would tell anyone that the home will provide far more security than any IRA which will be taxed at any time you take it out. If you are homeless with an IRA, that does not bring much comfort when you consider the cost of human suffering. With no home, you would have to rent with no possibility of paying off the rent and the rent would likely be as expensive as a home payment. With no job, making rent payments makes no sense either.

  • JimInSLC Salt Lake City, UT
    Feb. 26, 2013 4:54 p.m.

    For those that are saying to use the IRA dollars while they are worth something. Sure $300,000 dollars may only get you a loaf of bread a few years from now, but the balance due on the mortgage is based on the dollar value at the time the mortgage was taken out. So when the IRA money is taken out, though it will not buy a loaf of bread, it will be more than enough to pay off a fixed mortgage and use what's left for toilet paper. (note: get payment in small bills, you'll get more paper.)

    So, As this article points out keep the money in the IRA until it can be withdrawn without penalty and interest.

    When I worked at Quest I accepted a layoff package which gave a few months wages as severance. The company reported it to the IRS as a savings withdrawal. I reported the money as earnings when I filed taxes. I got a major tax ding for that. Thank you very much Mr. Nacchio. How's the karma, Joe? Enjoying the big house?

  • bluebullet94 ,
    Feb. 26, 2013 4:46 p.m.

    Paying off your mortgage should be a priority, but not at the cost of 10% penalties and income tax. My advice would be to take a withdrawal from the IRA equal to 6 months of payments just to give yourself some breathing room while unemployed. But remember that your IRA will earn it's greatest returns in the last years before retirement so it would be foolish to empty it out now, when just the interest earned on the principal balance 10 years from now could pay for most of your house.

  • viejogeezer CARLSBAD, CA
    Feb. 26, 2013 4:39 p.m.

    Paying 50% tax and penalty seems an unreasonable hit, however if you need the IRA to subsist, maybe thing about annuitizing it. If you take out payments substantially over your lifetime you can avoid the penalties and minimize the tax consequences, especially is your current taxable income is low. You could take out monthly payments in the amount of your mortgage and possibly have no tax consequence at all.

  • stuff Provo, UT
    Feb. 26, 2013 4:12 p.m.

    To each his/her own. If that works for you, then go ahead with confidence. If not, then don't do it.

    The stock market and anything invested in it, including 401ks, IRAs, personal brokerage accounts, will soon be worth zero. Better to use it for something good now than have nothing to show for it. A bird in the hand is worth two in the bush.

    Too bad we can't use our own money as we see fit. Taxes are one thing, but penalties on retirement account withdrawals are criminal.

  • USAlover Salt Lake City, UT
    Feb. 26, 2013 3:48 p.m.

    I paid off my mortgage at age 40...on my birthday, as a present to myself. The teller at the bank didn't know what to do. She said she had worked there 14 years and no one had ever come in to pay off their house. I got a handshake from her and the bank president who had to come show her what to do.

    I've also funded a small IRA and chose instead to use other chunks of money to pay off my mortgage. My IRA is about where it was 10 years ago plus the principle I added. Very little interest gained.

    Owning my home has brought more financial peace of mind than any single thing...EVER! I'm now free to invest more aggressively than ever because nobody can take away the one thing we need everyday...somewhere to sleep.

  • Herbert Gravy Salinas, CA
    Feb. 26, 2013 3:41 p.m.

    When did the truth become "fear-mongering"? This economy is shakier than Elvis' hips, and getting worse by the minute. The greatest "fear-monger" is at the helm trying to scare us all re sequestration, etc. We now have a "house of cards" which must surely fall. This economy cannot be sustained or corrected with the current policies being employed. Good luck to all of us!

  • American First Merced, CA
    Feb. 26, 2013 2:20 p.m.

    @atl134

    So you agree that Government spending is what's boosting the stock market right now? That's my point, Government is broke...it's all political, fake...anyone who doesn't see that Obama has pulled a 'watch what my other hand is doing' while he's used government to buy up and subsidize the US economy needs to leave the movie theater. Remember the good ole' days when American consumer confidence actually drove the markets? America will never be China or Europe, socialism is as foreign and toxic to the Free Market economy as influenza is to the human body.

  • toosmartforyou Farmington, UT
    Feb. 26, 2013 2:02 p.m.

    Ok, folks: Pres Hinckley said once "Get a modest home and get it paid for. Then if something unforseen happens to the world financil markets, your wife and children will have a roof over their heads." Then he went on to say that he wasn't predicting "gloom and doom" but that his father had given him that advice and he found it to be good.

    Look around you and see how many people have anything but a "modest house." The castle's they've mortgaged to live within own them, not the other way around.

    As always, do what is best for you in your own situation. What is right for one person is not right for another. I can assure you, however, from personal experience that paying off the mortgage brings a feeling of peace and security that debt never will, regardless how much future earnings you think you are earning for retirement. Be smart!!

  • UteMiguel Go Utes, CA
    Feb. 26, 2013 1:50 p.m.

    I don't agree with the alarmists saying that the dollar will soon become worthless. But let's assume for a moment they are right. Why would you cash out your IRA to pay off a debt that will soon become trivial (who cares if you owe 100k if the dollar is worthless)?

    If the doomsayers are right, it would be better to cash out your IRA and invest in gold or foreign currencies (or food and guns).

  • Twin Lights Louisville, KY
    Feb. 26, 2013 1:33 p.m.

    Kellie Wood,

    I think you may be confusing LDS church council with that of Dave Ramsey.

    The pamphlet One for the Money shows savings as part of the budget right along with debt payments.

    It counsels:

    "With the exception of buying a home, paying for education, or making other vital investments, avoid debt and the resulting finance charges."

    AND

    "Beyond the emergency liquid savings, families should plan for and utilize a wise investment program preparing for financial security, possible disability, and retirement. Avoid all proposals for
    high-risk investments and get-rich-quick schemes."

  • one vote Salt Lake City, UT
    Feb. 26, 2013 1:19 p.m.

    Better to buy gold and hope bubble bursting will no go below $900.00.

  • Shamal Orlando, FL
    Feb. 26, 2013 1:12 p.m.

    Floyd

    To answer your question, I don't know that any guidance from church authorities has been that specific, but President Hinckley did refer to paying interest as bondage and gave the example of President Faust paying off his Mortgage quickly despite favorable interest rates and the sense of piece(content) that came from doing so.

    I've seen some get zealous and put everything they can scrape together to do just this and put themselves into a stressful liquidity(lack of) problem.

    An interesting thought that may be obvious to some- Homeowners are in a far better position when the market drops than borrowers. If the need arises, not owing the bank enables you to sell at whatever the depressed value of your home might be and buy someone else's under the same depressed market prices.

  • justired Fillmore, UT
    Feb. 26, 2013 1:07 p.m.

    the lds church has never counseled me to pay off my mortgage first, especially not by cashing in my IRA or 401k, and i've been going regularly for over 70 years. that is false, dangerous, and jumping to unwarrented conclusions.

    i agree with the statement in the article, cashing out before full retirement age, is financial suicade (like getting your exercise by jumping off a cliff).

  • xscribe Colorado Springs, CO
    Feb. 26, 2013 1:06 p.m.

    Why cash out the Roth? It's tax free!

  • atl134 Salt Lake City, UT
    Feb. 26, 2013 11:35 a.m.

    @American First
    The market probably will go down the next week or two but because of sequestration spending cuts, not any of that other stuff you railed against.

  • Nancy L.V. Las Vegas, NV
    Feb. 26, 2013 11:35 a.m.

    Sadly, I agree with American First that our county's financial system is on the verge of collapse. In view of that, using your dollars to pay off your mortgage while the dollars are worth something makes very good sense. I always say follow your "gut level" feeling. As for me, I've cashed out my 403b and Roth IRA!

  • Floyd Johnson Broken Arrow, OK
    Feb. 26, 2013 11:00 a.m.

    Kellie

    Who exactly in the LDS Church has counseled to delay retirement savings until after a mortgage is paid off? Decades ago, retirement did not exist as it currently does. The previous model was an employer sponsored pension and mortgage rates were 18%. Under that model, paying off a mortgage was clearly a priority. With mortgage rates at the level of inflation (mine is 2.1%) it is very reasonable for some individuals to make prudent deposits into a personal retirement account.

  • American First Merced, CA
    Feb. 26, 2013 10:21 a.m.

    DON'T LISTEN TO THE OBAMEDIA! Get your money out of the stock market NOW while it's high! The entire market is being falsely sustained and manipulated by government spending and money printing, true indicators such as GDP, housing prices and Unemployment tell the real story about the state of the U.S. economy. It's just a matter of time before Obama's hostile takeover of the U.S. Free Market will collapse the entire system. It's sabotage!

  • Shamal Orlando, FL
    Feb. 26, 2013 9:32 a.m.

    Isn't there some portion of your 401k/IRA that you are aloud to put towards a home without paying a penalty? $10,000 seems to ring a bell. Not sure on the stipulations. Someone else can google it:)
    I don't disagree with the math argument of which option will cost you more, but equity in your home is an investment towards financial security as well and reducing that bill that you have to reconcile every month counts for something.
    I envy those who have eliminated their greatest monthly expense..

  • K Mchenry, IL
    Feb. 26, 2013 8:03 a.m.

    They aren't getting any money coming in. They have to take out from the Ira anyway. How much in interest would she be paying if she paid off the mortgage the remaining life of the loan?

    There will still be some money remaining in the account. It will be easier to meet the rest of the bills with the mortgage gone.

    When they are employed again they can use the money they would have spent on the mortgage to build up the retirement.

  • Max Charlotte, NC
    Feb. 26, 2013 6:35 a.m.

    Kelly,

    Paying of a mortgage is sometimes good idea (but sometimes not. Leverage can be a useful tool if you know what you are doing) but not at such a ridiculously high cost. The LDS Church would never encourage such a thing. To incur the taxes and penalties would indeed be financial suicide. Also, if you wait until you have paid off a mortgage to start saving for retirement, you have lost precious time for your money to be compounding in a retirement plan.Albert Einstein called compounding the eighth wonder of the world and the most powerful force in the universe. John Maynard Keynes called it magic. Time is your best friend when saving. Also, if you pay off your mortgage with your IRA, WHAT DO YOU LIVE ON IN RETIREMENT? Your house can't feed you. At that point, your only options would be to sell your house and buy a smaller one and this may not leave enough to live on or you could do a reverse mortgage which should typically used as a last resort, not part of a financial plan.

  • Kellie Wood Orem, UT
    Feb. 25, 2013 1:49 p.m.

    The LDS church for decades has counseled that we should pay off our mortgages asap. THEN we can invest in other retirement options besides the basic monthly savings that are ongoing. If I were this family I would pay off the entire mortgage now. The dollar isn't going to be worth much when oil countries switch from the dollar to the Yen or other currencies for payment of Oil. That could happen in 2016. Better to count their losses from the IRA now then to count their losses from a worthless IRA in 2016.

  • tdwds South Jordan, UT
    Feb. 25, 2013 12:59 p.m.

    IRA's, 401K's, ANY government sponsored tax lien like these are dangerous to invest in, in the first place!! Get educated people, there are much better, less costly options for retirement planning.