Yesterday afternoon I received the following question in my inbox:
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?
There are a couple of questions here, so let’s take them one at a time…
First off, can he do it? As it turns out, first-time homebuyers can withdraw IRA funds to help finance their purchase. As far as I’m aware, however, you cannot withdraw funds to pay off a house that you bought previously without incurring a penalty. That being said, you can withdraw Roth IRA contributions at any time, without taxes or penalty. Moreover, as long as the funds are properly “seasoned” you can also withdraw Roth IRA conversions (typically five years after the conversion event) regardless of your age. But the same is not true of Roth IRA earnings, so be careful or you might wind up having to pay the piper.
Next, should he do it? Without knowing the full details of his situation, it’s hard to say with certainty. However, my view is that it’s pretty much always a bad idea to willingly pull funds out of an account with such favorable tax treatment. There are also those that argue you shouldn’t pay off your mortgage any earlier than absolutely necessary. While I don’t adhere to such a hardline view myself, one thing is certain… Once the money is out of the Roth, it’s out, and you can only put it back via regular annual contributions (currently at $4k/year). While being mortgage-free is an enviable position to be in, having a shortage of retirement savings is a decidedly unenviable position in which to find yourself.
Update: His mortgage rate is a very competitive 5.875% (presumably on a 30 year mortgage).