Mortgage or IRA?

Q. Does it make sense to pay off my mortgage with money from my traditional IRA? Should I? — M.B., Bixby, Oklahoma

A. Think the decision through carefully. If you’re younger than 59 1/2, withdrawals from a traditional IRA will be taxed at your ordinary income tax rate — and you may also face a 10% early withdrawal penalty. Also, the sum you withdraw will increase your taxable income, which might bump you into a higher tax bracket. Meanwhile, wiping out your mortgage debt means you’ll lose mortgage interest tax deductions you might have claimed.
Compare your mortgage interest rate to the growth rate you expect for your IRA holdings. Paying any of your mortgage off early saves you from paying interest on that sum for the remaining years. If your mortgage is charging you, say, 4% interest, and you’re hoping for a return of 6% or 8% or more on your IRA investments, you could lose ground. Cashing out your IRA also means that money won’t be able to grow for you over time. That’s a big deal, as most of us need to be saving for retirement.

You might consider keeping your IRA and making extra payments on your mortgage whenever you can. A few extra payments each year could shave years off of the loan and save you thousands of dollars in interest payments.

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