Don’t Cash Out IRAs to Pay Off Mortgages

Ed Slott & Company

Thinking of cashing out your IRA to pay your mortgage? Don’t do it.

Posted June 17, 2010

By Ed Slott & Company

You will generally pay income tax on amounts distributed from a traditional IRA, plus a 10% early withdrawal penalty if you are younger than 59½. Certain withdrawals from a Roth IRA may also have tax and penalty consequences, depending on how long you have had the account and the age at which you make the withdrawal.

Having to add an IRA withdrawal to your other income might push you into a higher income tax bracket. In some cases, a sufficiently large enough IRA withdrawal could result in full or partial loss of your home mortgage interest deduction.

If a major portion of your retirement assets are tied up in the equity of your home, you could have a future problem similar to what we are seeing now. The value of your home could have declined or it could be a buyer’s market at the time you need to realize the proceeds from your home. A home could be on the market for a long time.

Additionally, the money you cash out of a retirement account will not be able to grow for you over time. A traditional IRA grows tax-deferred, while a Roth IRA grows tax-free, provided certain conditions are met. Given the recent volatility of the stock and housing markets, you just might have to accumulate as much money as you can in tax-advantaged accounts for your retirement.

Ed Slott and Company has been called "The Best" source for IRA advice by The Wall Street Journal, and "America's IRA Experts" by Mutual Funds Magazine. Ed is a widely recognized professional speaker and author. Get more IRA information from America's IRA Experts.