Nickel answered a reader's question Friday on using a Roth IRA withdrawal to pay off a mortgage. The question:
I’m 43. I’m looking to payoff my mortgage. Can I withdraw from my Roth IRA to payoff my house without penalty? I have $52K in a Roth IRA. My mortgage payoff would be $77K. I have enough in savings to make up the difference. Can I withdraw without a penalty. Is it wise to do so?
Nickel's answer, which was well thought-out, revolved around a few main observations:
- Roth IRA tax contributions and seasoned Roth IRA conversions can be withdrawn without penalty, but Roth IRA earnings have stricter conditions for withdrawal.
- Though the Roth IRA contributions can be withdrawn, the Roth IRA cannot be re-funded any faster than if the withdrawals were not made. (Once it's out, it's out.)
- Paying off the mortgage trades one enviable position for another (being debt-free vs. having a fat retirement account).
I'd like to add another few observations to this situation:
- Payments on fixed-rate debt will likely get cheaper with time. Cheaper in real terms, that is. Say the payment on his 5 7/8% 30-year fixed rate mortgage is payment is $1,000. It will remain at $1,000 for the remainder of the mortgage term. However, it's just about certain that we'll continue to see inflation (reduction in purchasing power) of the dollar, so that $1,000 payment will be less of a cut on his monthly expenses as time goes on. This would be an argument against paying off the mortgage.
- The mortgage interest is tax-deductible — now. It may not be deductible forever. Laws are passed, and laws are repealed. Think “prohibition.” If the mortgage interest deduction goes away, carrying that debt will become more expensive. This would be an argument for paying off the mortgage. Best to kill the debt monster before it gets uglier.
- The Roth IRA is very tax-friendly — now. Again, the rules can change on these accounts at any time. What's tax-friendly now may not be so friendly in ten years, in a year, or next week. This would be an argument for paying off the mortgage.
I had thought about paying off my house not just with my Roth IRA but with my 401(k) money as well. (I didn't.) My reasoning was to put as much of my wealth in my control as possible. I don't feel that tax-advantaged accounts are all upside and no downside. To get the benefits, one has to give up some control of the money. The rules governing how one can get at the money are out of one's control. What's restrictive now could become more restrictive later. So, why not pull the money out when I know what the restrictions are to purchase something of value instead of wait until later, and take whatever rules are in force then?
So, the reader's original question is a good one, and it's not an easy one to answer. It's not really clear to me how to answer it. There are many factors to consider and many opportunity costs to weigh. But hopefully this post will add to the reader's confusion a little more. 😉
