Comments on: Cash Out Roth IRA to Pay Off House?

By: Mark

Mark — Tue, 03 Mar 2009 23:45:25 +0000

I read about a few of the Dems who are considering a “one-time tax” on those with large 401k accounts. I’ll probably be laid off later this year and I’m almost positive I will knock off 50k of my remaining 90k mortgage in 2010. I’ll knock out the remaining 40k within 2 years by upping payments. I got into a cash account early into the crash and have 230k remaining, but still lost 80k within weeks. I don’t trust this market or this gov’t, and I can’t even begin to imagine how liberated I will feel without the threat of losing my home. I can see myself taking a few risks I would never consider at this point. I don’t have the luxury of a trust fund or an upcoming inheritance to look forward to. I’ll be putting my money into things I control from now on. Has anyone even considered how much of an effect on the market all these automatic deposits have been making? Prices have risen because people have been programmed to contribute throughout the cycles that the traders have been participating in and profiting from.

By: Glenn

Glenn — Sat, 07 Feb 2009 15:00:20 +0000

It is interesting to read all the advice in this thread back 2007. I wonder what they think now? I would have told him to sell, pay off the house and save money to buy real tangible assets. Probably still a good idea.

By: nickel

nickel — Tue, 13 Jan 2009 16:17:39 +0000

Ken: What do you plan on doing if your house is damaged/destroyed after you ditch the insurance?

By: Ken

Ken — Tue, 13 Jan 2009 16:13:49 +0000

Well im thinking of paying off a 46k mortgage with ira money so i wont have to pay my homeowners insurance which is over 2k now. Im also unemployed. I cant think of a way to take it out with out penalty and taxes. The insurance is linked to the loan. any help would be appreciated. Yes im under 59-1/2. The homeowners insurance is high because it is coastal property and as a matter of fact the state is the only one offering insurance at a very high cost.

By: Sean

Sean — Mon, 15 Dec 2008 14:40:06 +0000

How much would the penalty be on cashing out a $10,299 6 Month Fixed IRA CD? Might be going throught the big “D”.

By: Fred

Fred — Thu, 09 Oct 2008 16:51:20 +0000

Well. Nobody looks at news or worries about thieves are running our financial system.
If I would have withdrawn my 401k in June, I would have been able to pay off my house and have more than twice cash as my present 401K value.
Paying the house off is a great idea

By: denise ducharme

denise ducharme — Wed, 19 Mar 2008 16:07:20 +0000

im going to snowball debt, what i want to know is should i start the snowball effect with secured debt or unsecured debt

By: jay

jay — Fri, 14 Sep 2007 01:35:03 +0000

I say do it. You don’t know if your going to be alive tommorrow. pay off the house and live stress free for a while!!!

By: David Neubert

David Neubert — Wed, 01 Aug 2007 18:40:24 +0000

Glad to hear you’re not pulling the money out of the IRA. Financial flexibility is a valuable asset unto itself.

By: Creditnine.com

Creditnine.com — Fri, 08 Jun 2007 03:16:46 +0000

actually thats an interesting one we just wrote an article on cashing our your retirement nest egg and ways to do it without penalty

By: Court

Court — Tue, 05 Jun 2007 17:16:07 +0000

I appreciate all the advice…

I was the one who asked the question in the first place. I wanted to know if it was wise to payoff my mortgage without being penalized for withdrawing from my Roth. I’m not desperate nor have I gotten an inheritance. Its more like wanting to just get out of debt. The only other outstanding loan that I have is a student loan at a whopping 2.77% I just figured that being out from under the mortgage (even though I do get a good tax break every year) was being financially responsible to my family. And the fact that my daughter will be starting college next year as a premed student did have a driving factor.

Rest assured that I won’t be pulling the money out!

By: nickel

nickel — Tue, 05 Jun 2007 12:44:06 +0000

Vive and pf101: You are correct about the $10k limit. I didn’t go into further details here because that doesn’t apply to this case.

pf101: You are likewise correct about the 60 day ‘rollover’ period during which he could put the money back into a Roth. Given that he’s planning on putting the money into his mortgage, however, that won’t be an option unless he turns around and refinances his home to get the money back out such that he’d have the cash on hand to put it back in. That’s why I didn’t address that here. However, you have a valid point.

By: nickel

nickel — Tue, 05 Jun 2007 12:42:10 +0000

thc: I actually did ask about why he was interested in doing this, although I didn’t spell it out here. I’m paraphrasing here, but… He’s heard a number of pundits warn of a coming market correction (”bubble burst” in his terms) and was thinking of liquidating his holdings killing off his mortgage. My response was that, even if he was totally convinced that getting our of the market and moving to cash was a good idea (note that I’m *not* saying that it is), then there’s no reason he has to go the additional step of pulling the money from the Roth to pay off the mortgage. These are two separate decisions, and there’s no reason to necessarily link them. So… In my opinion, this is a very bad idea. I’d also argue against the notion of liquidate his stock holdings and moving to cash, but that would be far better in my view than cashing out the Roth entirely.

By: pf101

pf101 — Tue, 05 Jun 2007 07:27:40 +0000

I would have to go with the majority that this is probably a bad idea but it’s hard to say a firm yes or no without knowing the whole story. It would be hard to think of a good reason to do this though.

A couple other points:

1 – Nickel you CAN replace money taken out of a Roth IRA, IF you do it within 60 days. After 60 days, then it’s gone for good.

2 – Vive, you are correct, there is a $10k limit.

3 – THC, several people asked why he wanted to pay off the mortgage and I doubt most people here want to be FPs.

By: Vive R Horowit

Vive R Horowit — Mon, 04 Jun 2007 23:31:59 +0000

“first-time homebuyers can withdraw IRA funds to help finance their purchase”

I believe there is a $10k limit on this.

By: Q at $1 Million to My Name

Q at $1 Million to My Name — Mon, 04 Jun 2007 20:57:22 +0000

OMG NOOOOOOOOOOOOOOOO! Don’t do this! Having your house paid off does not equal freedom! NOOOOOOOOO!!!!!!!

By: Mike

Mike — Mon, 04 Jun 2007 05:54:19 +0000

I’m pretty sure the rate he would be getting the IRA will be more than the rate he is paying on his mortgage. Combined with the tax advantages of both his IRA and being able to write off interest on his mortgage, it seems a no brainer.

Don’t touch the money if you don’t absolutley need to.

By: thc

thc — Sun, 03 Jun 2007 16:55:51 +0000

It’s interesting that so many folks are quick to offer advice without understanding the circumstances. No one thought to ask the obviouse question, “Why is it important to you to pay off your mortgage?” You’d never make it as financial professionals.

By: J at Home Finance Freedom

J at Home Finance Freedom — Sat, 02 Jun 2007 18:30:38 +0000

Paying off the mortgage with the IRA funds could be a good idea but we do not have enough information to answer the question without mortgage details and income and tax bracket estimates stretching into retirement.

By: Debbie

Debbie — Sat, 02 Jun 2007 14:44:12 +0000

Yep, we need to know why he’s “looking to pay off” his mortgage. If it’s just the peace of mind of knowing that the house cannot be taken away, then maybe he can have that just by knowing that he has enough to pay it off at any time.

But if he pays it off, that’s all he can do. If he leaves the funds in the IRA, he has the flexibility to use the money for something else later, if something else becomes more important.

Also, I want to point out that once your house is paid off, you still need to pay taxes on it (yes, it can still be taken away from you) and you still have to pay for upkeep and repairs. Life is not perfectly secure.

I’d hang on to my flexibility and make sure those IRA funds are invested properly for my needs–most in broad index funds for growth, some in bond funds to help him feel secure.

On the other hand, if he’s a spendthrift and just inherited this IRA and is going to cash it in immediately if at all possible, either to pay off the house or to add a pool or buy a BMW, then all of a sudden I think paying off the house is an excellent idea.

By: BigDon

BigDon — Fri, 01 Jun 2007 23:00:32 +0000

No way would I touch that money!

This happens more times than a lot of people realize. They take their eye off the ball for what appears to be short term gains.

Don

By: Special Ed

Special Ed — Fri, 01 Jun 2007 19:49:01 +0000

I have to agree that this is a terrible idea. I wouldn’t touch any of that money. Hopefully, this isn’t a desperate situation.

By: Tim

Tim — Fri, 01 Jun 2007 15:53:46 +0000

not sure the reason for paying off the mortgage early. That would be the driving factor behind answering the question. just to pay off the mortgage makes no sense. remember equity in a house only appreciates if the market in the area is appreciating and if you are going to sell; otherwise, it is depreciating at least the rate of inflation and at worst the opportunity cost. to pay off the mortgage when you can earn money off the money doesn’t seem worth it unless you feel more comfortable without a mortgage. taking away from your retirement savings and putting it into your house has no value unless you are planning on selling the house, and you can earn a profit from the house, when you retire. you still need to live somewhere though. so you will be living in a paid off house, without any retirement savings or far less of retirement savings.

By: Blaine Moore

Blaine Moore — Fri, 01 Jun 2007 14:35:00 +0000

I agree with everybody else; I wouldn’t do it. Especially given the interest rate he has.

But yes, he could do it. He just shouldn’t bother.

By: Easychange

Easychange — Fri, 01 Jun 2007 13:54:52 +0000

This is a horrible idea. He is just about getting to critical mass on this money. He will make way more than 50k by leaving it in the account for the last 20 years. In fact, he will probably be making about 100k on that money even if he doesn’t touch it a bit.

By the simple rule of 72, we know that if he gets an average 10% return and leaves it in there for 14.4 years, he will double his money twice. This means that 50K will be 200K and it will be completely tax-free.

At age 43, it is quite reasonable to think that he will be working for another 20 years.

In my opinion, if he is really concerned about the size of his mortgage and the volitility of the market, he can hedge his bets by reducing his annual contributions to the roth a little bit and pay down the principal of his mortgage, but leave the existing money alone.

But you also have to consider the fact that he could easily live 40 more years. And if he doesn’t touch very much of that money, he could easily use it to pay off the rest of his mortgage at some point in retirement with tons to spare.

By: jim

jim — Fri, 01 Jun 2007 12:18:23 +0000

Touching retirement funds = not good unless you’rein dire straights.
Touching retirement funds to pay off a low interest rate debt = not good period.

By: Karen

Karen — Fri, 01 Jun 2007 11:43:59 +0000

I don’t think it’s a great idea either.
But stranger things have happened. Like my MIL liquidating her 401K funds (with penalty and losing the death benefit) in order to bail her other son out of credit card debt…..again.
I advised against it for her, and I’d advise against it for this person too. But if this writer is as stubborn as my MIL, he’ll do it anyway.

By: plonkee

plonkee — Fri, 01 Jun 2007 11:05:06 +0000

I’m of the opinion that he almost certainly shouldn’t take the money out.

Possible exceptions include having sufficient funds for retirement anyway and being confident that he won’t live until retirement.

Its all because the contributions are so limited that makes this a bad idea. You can’t just replace the money quickly with the house payment money if your mortgage payments are more than $333.33 per month. So whilst generally its not great financial sense to pay off cheap debt, in this case its even worse.