Paying off Mortgage with Taxable IRA

[Can_I_Retire_Now]

My apologies for another "Pay off Mortgage" thread. I don't know if my situation is unique or not, but here are the details....

Been debt free for several years. Bought a farm in another state. After buying the farm, we sold our payed off home and moved to the farm. The farm cost far more than the sale price of our home. We put 20% down on the farm and currently carry a 3.5% mortgage. The original intent was to pay off the farm in 4 years with the the IRA to lessen the tax bite. Our IRA is rather sizable but we will be taxed once we start withdrawing from it.

Well, I hate being in debt and I want to just go ahead and pay it off. Unfortunately, taking the money out of the IRA will put us in the 30% tax bracket, which is going to be a sizable amount of taxes.

Our financial advisor is against it. I was hoping for some sort of novel tax strategy that would allow us not to incur the sizable tax hit, but there is none offered that we are aware of. We are retired and we own no business for any write-offs, so the IRA withdrawal is subject to the highest tax rate.

On the one hand, a payed off property will give me piece of mind. but at the expense of forfeiting the opportunity to continue to grow our investments. We will still be okay money wise, but I just hate to give Uncle Sam so much of that money! We are going to talk to a CPA in a couple of weeks to see how best to approach paying off the mortgage.

With all this social unrest due to factors that we are all aware of, I think it would be in our best interests to just pay it off and be done with it. I am open to whatever wisdom you may have regarding our situation.

 

[COcheesehead]

The illiquidity of it all makes me queasy. I would personally pay it off over time. At least that way you have some flexibility.
I look at it this way, if someone approached me and said do you want a paid off farm in Tennessee or the same amount in an IRA? To me the answer is easy.

 

[RunningBum]

I don't know of a 30% tax bracket, unless you are including state income tax.

You hate having a mortgage, and you hate paying high taxes. Pick your poison, but the answer seems obvious.

How does it make sense to pay a 30% or whatever tax rate over 12%, 22% or 24% to pay off a mortgage with a 3.5% interest rate, especially when you can invest the money you'd use to pay off the mortgage? There's no way those numbers work out, and there is no magic to pay less in taxes on a bulk IRA withdrawal like that. Invest that money very conservatively since you seem concerned about the market.

 

[njhowie]

Pay off as big a chunk as you can annually without getting hit with a larger tax bill.

3.5% is a tremendous rate and is historically near all-time lows. Since you do have the money, there really isn't anything to worry about. However, I can appreciate your feelings. We paid off our mortgage 10 years ago and it was an excellent decision for us.

 

[Can_I_Retire_Now]

I appreciate your perspectives and replies.

Its a real conundrum for me at the moment. Smart money says pay it off over time and reap the benefits (maybe) of the stock market over that same period and allow the IRA to continue to grow.

The other side of me says debt is bad. The bank really owns the property until it is payed in full. I hate making mortgage payments. Although our FA says he can set it up so they get paid automatically so I don't have to concern myself with them. Still, its a dilemma for me..

 

[jollystomper]

Keep in mind, you likely benefited from taxes when you contributed to the IRA, if you were in a higher tax rate then.

I agree with njhowie. If you want to pay it off (which can be as much an emotional as a financial decision), pay off as much as you can without going out of your current tax bracket. And then continue that for how many number of years you need to pay it off.

 

[COcheesehead]

I appreciate your perspectives and replies.

Its a real conundrum for me at the moment. Smart money says pay it off over time and reap the benefits (maybe) of the stock market over that same period and allow the IRA to continue to grow.

The other side of me says debt is bad. The bank really owns the property until it is payed in full. I hate making mortgage payments. Although our FA says he can set it up so they get paid automatically so I don't have to concern myself with them. Still, its a dilemma for me..

The debt is bad mantra overlooks the fact that debt is just a tool. Use it wrong and it hurts you. Use it right and it helps you.

 

[jazz4cash]

Look for some safe investments that pay 1-2%. That cuts your cost of carrying the mortgage. With such a great low rate now of all times it’s smart to carry a big fat long mortgage. Definitely set up the auto pay options so you don’t even have to think about these payments. Congratulations, it’s a good problem to have. Wait a while to see how you feel. You can always chunk or down at some point in the future if you still feel queasy.

 

[RunningBum]

The debt is bad mantra overlooks the fact that debt is just a tool. Use it wrong and it hurts you. Use it right and it helps you.

+1. And think logically, not emotionally.

 

[pb4uski]

... Well, I hate being in debt and I want to just go ahead and pay it off. ... I was hoping for some sort of novel tax strategy that would allow us not to incur the sizable tax hit, but there is none offered that we are aware of. .... On the one hand, a payed off property will give me piece of mind. but at the expense of forfeiting the opportunity to continue to grow our investments. .... I think it would be in our best interests to just pay it off and be done with it. I am open to whatever wisdom you may have regarding our situation.

...Its a real conundrum for me at the moment. .... The other side of me says debt is bad. The bank really owns the property until it is payed in full. I hate making mortgage payments. ...

I hate to be harsh, but here's my wisdom... grow a pair and live with it. You should have thought about all this before you bought the farm and took on the morgage. Explore how much you can take out at a reasonable tax cost and use that money to pay it down if if makes you feel better.

 

[Can_I_Retire_Now]

I hate to be harsh, but here's my wisdom... grow a pair and live with it. You should have thought about all this before you bought the farm and took on the morgage. Explore how much you can take out at a reasonable tax cost and use that money to pay it down if if makes you feel better.

I am a big boy, I can take it..

 

[pb4uski]

Good to hear. Feel good knowing that you can make IRA withdrawals at a reasonable tax cost that can easily service the morgage payments so no need to worry. Put those mortgage payments on autopay and you'll hardly know they are there (personal experience).

 

[donheff]

Look for some safe investments that pay 1-2%. That cuts your cost of carrying the mortgage. With such a great low rate now of all times it’s smart to carry a big fat long mortgage. Definitely set up the auto pay options so you don’t even have to think about these payments. Congratulations, it’s a good problem to have. Wait a while to see how you feel. You can always chunk or down at some point in the future if you still feel queasy.

That's my take as well. Why incur a big tax hit? You can set aside the payoff amount in a stable value fund or something (with enough extra to cover taxes as you pay off the mortgage). Invest the rest of the IRA in your chosen AA and treat the "safe" money as dedicating to pay off the mortgage.

 

[ERD50]

The debt is bad mantra overlooks the fact that debt is just a tool. Use it wrong and it hurts you. Use it right and it helps you.

Exactly. OP is basing a decision on a false premise. That's no way to go through life, son.

-ERD50

 

[Sunset]

......

With all this social unrest due to factors that we are all aware of, I think it would be in our best interests to just pay it off and be done with it. I am open to whatever wisdom you may have regarding our situation.

I feel you are simply emotionally reacting to the news.

If you look at history, in times of great social unrest, one of the worst things to own (paid off) is property (land). Much better for the Bank to be risking 80% of the value.

Example: Jew in 1943 in Germany, with cash you can flee, land means you flee penniless.
American-Japanese in 1942 forced into internment (concentration) camps, if you had land you lost it or lucky to sell land for 10 cents on the dollar.
Germany 1945, most cities were bombed out, so your land was worthless.

....
The other side of me says debt is bad. The bank really owns the property until it is payed in full. I hate making mortgage payments. ....

It was pointed out to me a few years ago, you NEVER really own the land free and clear.
See the comparison.

Example: I buy a Picasso painting for $100,000 I can do what I want with it and don't have to pay anyone a fee to keep it. Year after year for zero cost I can keep my painting. (it might be stupid not to pay for insurance, but I can do that).

Your farm, you pay off the mortgage, and you still don't really own it, as every year you have to pay land taxes, if you don't pay land taxes then they take away your farm in just a few years. So in effect you don't really own the property free and clear, you are just still paying an amount to use it, and will forever.

Out of interest, I will point out there are exceptions, my family bought land around 1918, that was considered so worthless, nobody taxed it until around 1950 the town realized they could claim the land as part of the town and then tax it. So for about 5 decades we truly owned the land. Now we pay a land tax every year and feel like tenants of the land.

 

[pb4uski]

.... Your farm, you pay off the mortgage, and you still don't really own it, as every year you have to pay land taxes, if you don't pay land taxes then they take away your farm in just a few years. So in effect you don't really own the property free and clear, you are just still paying an amount to use it, and will forever.

Out of interest, I will point out there are exceptions, my family bought land around 1918, that was considered so worthless, nobody taxed it until around 1950 the town realized they could claim the land as part of the town and then tax it. So for about 5 decades we truly owned the land. Now we pay a land tax every year and feel like tenants of the land.

That's just plain warped.

So are you saying that everyone on this board who own property and pays property taxes don't "truly" own the property but are tenants?

How do you get to your land? I presume via a public road. If so, don't you think that you should contribute to the cost of creating and maintaining that public road?

 

[Sunset]

That's just plain warped.

So are you saying that everyone on this board who own property and pays property taxes don't "truly" own the property but are tenants?

How do you get to your land? I presume via a public road. If so, don't you think that you should contribute to the cost of creating and maintaining that public road?

I know it's a warped way of thinking about property "ownership" but the reality is unlike most other things a person owns, you lose your property unless you keep paying.

Of course I know the definition of ownership and tenant, but there are obviously multiple levels or degrees of ownership, since you only own your land if you pay the property tax every year, it's not pure ownership, and you will lose your land if you don't pay, similar to how a tenant will get kicked out if they don't pay their rent.

We get to the land via a boat, so there is nothing the town provides to us in terms of services, no road, no sewer, no water, no fire dept (volunteer) as they don't have a boat.

So we pay only to keep the property, with no town benefits.

 

[Animorph]

I love my 3.25% mortgage. My investing return has been much better than that.

If you must pay it off, do it in a way that minimizes taxes. Paying your mortgage off now versus a few years from now isn't worth paying any extra money to the IRS.

 

[gauss]

A bit off topic (but I think not too much) --

Do people understand that you can have an IRA invested in stable-value assets (such as an FDIC bank account)? It seems many equate "IRA" with "stock market investments."

Probably has something to do with the Wall Street/ retirement industry marketing campaigns.

I have seen others "cash out" their IRAs when the stock market took a dive because they didn't want to take the market risk any longer.

Unfortunately they did this via taxable IRA distributions of the funds -- all in the same year.

-gauss

 

[pb4uski]

I know it's a warped way of thinking about property "ownership" but the reality is unlike most other things a person owns, you lose your property unless you keep paying.

Of course I know the definition of ownership and tenant, but there are obviously multiple levels or degrees of ownership, since you only own your land if you pay the property tax every year, it's not pure ownership, and you will lose your land if you don't pay, similar to how a tenant will get kicked out if they don't pay their rent.

We get to the land via a boat, so there is nothing the town provides to us in terms of services, no road, no sewer, no water, no fire dept (volunteer) as they don't have a boat.

So we pay only to keep the property, with no town benefits.

Where do you park your cars when you go to the property by boat? I'm guessing on a town road or parking lot or a piece of land that you own that is accessible by car.... so your rationalization is BS.

Also, if you don't pay your income taxes they wil throw you in jail too... if you don't keep paying you lose your freedom... so I guess the way you think that there is no freedom.

 

[Montecfo]

In these uncertain times, I would not be rushing to pay off a mortgage. Cheap money and inflation hedge.

Paying taxes for the privilege of doing it would be a complete non-starter for me.

 

[jazz4cash]

A bit off topic (but I think not too much) --

Do people understand that you can have an IRA invested in stable-value assets (such as an FDIC bank account)? It seems many equate "IRA" with "stock market investments."

Probably has something to do with the Wall Street/ retirement industry marketing campaigns.

I have seen others "cash out" their IRAs when the stock market took a dive because they didn't want to take the market risk any longer.

Unfortunately they did this via taxable IRA distributions of the funds -- all in the same year.

-gauss

Yeah I think they do realize it but it’s ok to repeat. I implied as much way back in post #8. People are terrorized by these awful rates for bank savings accounts. One of the best ways to take advantage of crazy low rates is holding a mortgage. That’s no help if someone wants out of the market completely.

 

[Can_I_Retire_Now]

Maybe the right answer for us is to double up on the payments (additional going to principal only) for the immediate term. This allows us to stay liquid while at the same time keeping us in a lower tax bracket.

I have an appointment with our FA in a couple of weeks and our CPA that same day. Maybe they will like this plan a little better ..

I do appreciate the varied inputs to my inquiry. Ultimately, its our decision. We just want to get it right.

 

[levindb]

I would recommend you ask your FA to set up a new/special account within your IRA. Put the entire mortgage amount in that account. Then have the mortgage bank, or your FA, set up the monthly payments...for however many years that 3.5% is supposed to be.
From a mindset standpoint, you have paid it off. You do not have to write a check each month...but at the end of your mortgage term, you will probably have a large sum of money to spend, give to charity, or pass on to your heirs.
You should be able to sleep well, and have a smile on your face each morning.

 

[pb4uski]

^^^ Interesting sleight of hand!