Early IRA withdrawal to pay off mortgage

[68bucks]

I have been having an internal debate about taking an early withdrawal to pay off my mortgage. I understand the penalties and the income tax implications thus the expensive nature of using that money. I'm 52 and owe about $180K on the house, worth about $300K, on year 2 of a 15 year loan. I have about $325K in the IRA and about $2.8MM in an employer account (cash and company stock). I am getting about 5% rollover distributions yearly now that I have been putting into the IRA.

I think if I pay off the loan with IRA funds I would save more in interest than the cost of the taxes and penalties. The lack of a mortgage would free up a ton of income cash for me and I could easily build $25K in savings in a year, probably more.

My roadblocks to ER are two fold as I see it. First the mortgage raises my required income to a point I have to keep working because I can't withdrawal early for the next 7 years, at least practically. Second is when I leave the job the payout plan from the employer is probably going to be a 10 year deal, 8 at best. So I wouldn't have all the money in one place for sometime so I don't think I can generate sufficient cash flow from a 72t at this point.

I think if I paid off the mortgage now and really put the cash away for a couple years that I might be able to have a go at ER and use my savings outside the IRA and employer plan to get by until the first 2 or 3 distributions were out of the employer plan. At that point I might have enough in the account to have decent cash flow from a 72t. I'm also not completely opposed to some part time work for a while either.

Bottom line I was looking for comments on the idea of using IRA money this way and if anyone here has done anything similar.

 

[Animorph]

I assume your mortgage interest rate is 3% or lower.

Heck no, don't do it! That's using just about the most expensive money you have (taxes and penalties due!, permanent loss of tax deferred savings) to pay off just about the cheapest money you have (3% tax deductible). You can expect your investments to return more than 3% over 13 years, so with a little luck you are making money from the mortgage loan.

If you hate being in debt, pay extra on the principal with that money you want to plow into investments after paying the mortgage. Won't cost much in interest and there are no penalties.

 

[ERD50]

So it will cost you $180K to pay off the mort, and then you can save $25K per year?

That means you have not really saved anything for over 7 years. All you did was replace the money you took out to pay off the mortgage. That doesn't seem to help you get where you want to go.

If a 72t can't do it for you, are you really ready? Have you run these scenarios through FIRECALC?

-ERD50

 

[Texas Proud]

NO NO NO NO NO NO...

It is not smart to do what you ask... heck, I would even say it is stupid...

It is not a roadblock... you would be in the same position before and after if you paid it off...


As mentioned, we are assuming you have a low rate... if not, then why


If you can save $25K per year, then why not put that money toward paying off the loan... you will have it paid in short order (in mortgage terms)...

PS... you do not have ANY money that is not in a tax advantaged account That is a bad idea also...

 

[RunningBum]

It sounds like your goal is to try to build up funds outside of a retirement account to bridge the gap between ER and when you can start tapping the IRA penalty-free, and also tapping this employer account.

I don't understand the "5% rollover distribution" you mention but rather than put it in an IRA, why not put it in a taxable account that you'd have access to anytime? Are you eligible (not above the income level) to contribute to a Roth? Once you've had a Roth for 5 years you can start pulling back out the contributions you've made, so that's some money you'd have in ER while letting it build tax free.

Another thought might be to refinance the mortgage for 30 years. You'd be paying forever, but a lot of those payments will come after you have access to your other money, and meanwhile the payments will be lower.

I just don't see how the math can work that you'd come out ahead paying taxes and a 10% penalty on an early IRA withdrawal, and it certainly makes no sense at all to contribute to an IRA while at the same time taking a penalty to withdraw from it. I'd find another way to try to bridge the gap, or at least wait until you get to the point where you are really in need of the money and only withdraw enough to bridge the gap and take a smaller penalty if you have to.

If you're already cash poor outside of retirement, it really doesn't make sense to me to take a penalty to withdraw enough to pay off the entire mortgage. If anything, it seems to me like you'd want to keep debts until you have funds free to pay them off, without penalty.

 

[heeyy_joe]

Defer your decision. Save that $25k annual money for five years and then make up your mind. See if your company offers ROTH 401K. You can sock away $17K annually if so.

 

[akck]

I was going to do something similar, once I reached 60, but I refinanced and the rate is so low, that I figure my investment return will on average, beat it. So now, I'm planning on letting the mortgage go to term.

 

[frank2009]

I can understand the reason you'd like to do this, but it is a VERY expensive solution. Remember you will pay taxes and penalties on 180K plus your current salary. How high a tax bracket is that? I'd use the 72t to bridge the gap until reaching 59 1/2. Maybe pay your mortgage down after that in smaller increments for tax purposes.

 

[68bucks]

Thanks for the comments, that's about what I figured the responses would be. My P&I payment is about $1300 and I already pay an extra $750 a month extra on the principle so I'm working on the early payoff as some have suggested. The extra $25K I could save a year would be possible if the mortgage was gone not in addition to what I'm saving now. The 5% rollover yearly is part of the company plan. As you know you have the ability to diversify up to 25% of an employer plan at age 55 but my company allows 5% per year starting at age 50 with a true up at 55.

The whole concept is to bridge to age 59-1/2 so I could retire early. Without the large mortgage payment my living expenses would be really small and I think I could retire about any time I want. One other point almost all the responses assume is that the IRA is actually making money. Two years ago when I lost 6% I would have been better off paying off the mortgage. I pay $3000 a month toward the mortgage (P&I, taxes, etc). If I would have paid it off back then I could have saved probably $60K in cash, outside any tax deferred plans, plus any interest that might have made.

I have better than $3MM in assets but the way the money flows from my employer once I leave and my age make it difficult to figure out how to retire early. If I could manage a couple years after leaving the job I would easily have $600K in an IRA and that would be worth doing a 72t on. Thanks for all the comments.

 

[Alan]

I don't understand the "5% rollover distribution" you mention but rather than put it in an IRA, why not put it in a taxable account that you'd have access to anytime? Are you eligible (not above the income level) to contribute to a Roth? Once you've had a Roth for 5 years you can start pulling back out the contributions you've made, so that's some money you'd have in ER while letting it build tax free.

These days anyone can contribute to a ROTH. If your income is too high to do it directly then contribute to a traditional IRA (no income limits for an after-tax IRA). You then do a rollover to a ROTH as soon as the money arrives in your tIRA.

 

[jclarksnakes]

Thanks for the comments, that's about what I figured the responses would be...................................

I have better than $3MM in assets but the way the money flows from my employer once I leave and my age make it difficult to figure out how to retire early. If I could manage a couple years after leaving the job I would easily have $600K in an IRA and that would be worth doing a 72t on. Thanks for all the comments.

Folks here should be able to figure out a way for you to retire sooner rather than later with 3 million in assets. Of course it depends on how much you need to spend in retirement. There really are some sharp people posting on this forum. If you are willing to lay out your details they can probably come up with how you can use your assets to retire early. That is what this forum is about.

 

[mickeyd]

on year 2 of a 15 year loan.

Just curious 68bucks why you incurred the loan in 2011 and now want to pay it off so soon. I get the idea that no mortgage during retirement is a goal (I don't have one and it is great) but taking a major hit to your retirement assets is something that you need to tread softly on when making future plans. If your funds came from taxable accounts, I might agree to the idea but not IRA funds.


As always, it's your call.

 

[68bucks]

Just curious 68bucks why you incurred the loan in 2011 and now want to pay it off so soon. I get the idea that no mortgage during retirement is a goal (I don't have one and it is great) but taking a major hit to your retirement assets is something that you need to tread softly on when making future plans. If your funds came from taxable accounts, I might agree to the idea but not IRA funds.


As always, it's your call.

The loan was refinanced in 2011 from a 30 year and lower rate 20 year. I know the cost is high. A coworker of mine did more or less the same thing and I've been telling him he's nuts for a long time. I just know that without my fat mortgage payment I could live pretty cheap.

 

[ronocnikral]

First, I really think taking a non-qual distribution from an IRA is a stupid plan. Especially under the circumstances you propose here.

Second, Are you hear to seek approval for doing something you know is hardly efficient or would you like us to discuss some alternatives? If the latter, we need more details. For instance, if by employer plan you mean 401k, and they won't make you roll it over when you separate, you could just keep plugging away and separate once you're 55 and take withdrawals penalty free. If you want to rollover into IRA, you could make a little account and initiate a 72t to cover you mortgage payment. You could also do roth conversions and then you can get at the money in 5 years.

There are plenty of options. The one you propose is probably one of the worst, if not the worst.

 

[RunningBum]

I still think you are overly focusing on the mortgage and not the more general issue that all you really have to do is cover expenses until you are 59 1/2. Your required mortgage payment is 1300. The extra $750 doesn't have to be paid now, and unless you can pay it off, it makes more sense to me to defer it until you have access to all of your money. You mention $3000 for P&I, taxes, etc, but the taxes will still come whether you have a mortgage or not, and I don't know what etc is, but insurance will still be needed.

I would take another look at a 30 year mortgage and 72t. P&I would probably drop to ~$900/month. A 72t on $350K is probably around $10K/yr. That pretty much covers the mortgage. You already said that if you can lose the mortgage you can make it, so there you go, if my guesses on those numbers are correct.

As for losing money in the IRA, that's in the past. I bet you didn't lose 6% last year, and you're not going to lose 6% annually going forward. Except that you are going to lose 10% on whatever you take out early.

Like others have said, you can do what you want, but if you are looking for someone to give you support for taking a 10% penalty on a large sum, I don't think you'll get it, because it is a bad idea.

 

[harley]

If it was me, although it wouldn't be because I'd never not have any after tax money, I'd refinance again back into a 30 year mortgage. At an average 3.4% that would be $790/month PI that you'd have to come up with. If you can save $25K/year you can certainly cover that. When you do retire, you'd probably be able to cover it with your 72-t. Even if your $2.8M takes 10 years to complete, that's still somewhere in the range of $280K/year. In 7 or 8 years that $790/month will be like beer money due to inflation (not to mention the tax break), and you'll be dancing a jig that you were wise enough to lock in essentially free money for such a long time. Also, don't forget, once you retire the difference in your tax rate from when you were working would probably come close to covering it. Your idea is a loser any way you look at it.

 

[pb4uski]

The thing I don't understand is if you did ER and received the employer account over 7 years or 10 years wouldn't that cash flow be more than sufficient to cover you living expenses including mortgage payments? I guess the employer account cash flows if you retire are not clear to me.

 

[68bucks]

I still think you are overly focusing on the mortgage and not the more general issue that all you really have to do is cover expenses until you are 59 1/2. Your required mortgage payment is 1300. The extra $750 doesn't have to be paid now, and unless you can pay it off, it makes more sense to me to defer it until you have access to all of your money. You mention $3000 for P&I, taxes, etc, but the taxes will still come whether you have a mortgage or not, and I don't know what etc is, but insurance will still be needed.

I would take another look at a 30 year mortgage and 72t. P&I would probably drop to ~$900/month. A 72t on $350K is probably around $10K/yr. That pretty much covers the mortgage. You already said that if you can lose the mortgage you can make it, so there you go, if my guesses on those numbers are correct.

As for losing money in the IRA, that's in the past. I bet you didn't lose 6% last year, and you're not going to lose 6% annually going forward. Except that you are going to lose 10% on whatever you take out early.

Like others have said, you can do what you want, but if you are looking for someone to give you support for taking a 10% penalty on a large sum, I don't think you'll get it, because it is a bad idea.

Well suffice to it's easy see what the popular opinion of my idea is. I like the idea of a 72t to cover the mortgage. Actually my advisor mentioned the same thing yesterday in an email. There are a lot of other good ideas mentioned too. For those that asked, my employer's plan is not a 401 it is a defined contribution plan in the form of a profit sharing plan and an ESOP. My focus on the mortgage is probably more centered on the intangible aspects of not having debt. I have been opposed to this idea for a long time myself so I'm surprised I'm considering it.