I am 81 years old. I have a home mortgage of $118,300. I also have a $110,000 Rollover Individual Retirement Account (IRA) in a bank. Should I withdraw the money from my investment and use the money to lower the mortgage?
-Octavio
The best choice for you depends on what the rest of your finances look like and what your ultimate goal is. Regardless of why you’re asking this question, I think you need to consider how badly this could impact your cash flow and your flexibility to absorb unexpected expenses.
Consider these questions as you consider your next step. (Are you looking for help with a financial question? This tool can help match you with potential advisors.)
What is your goal with this decision?
Think about what made you ask this question in the first place. The best choice for you depends in part on your own personal “why”.
Do you want to do what leads to the highest financial returns? In this case, this is more of a math problem. Comparing the interest rate on your mortgage to the expected return on your investments – and the risks involved – will be a key element.
You want to simplify things? If so, and you can get rid of the mortgage entirely, it certainly would. You would remove two accounts with their associated payments, withdrawals, and tax returns from both. I see – I made decisions that couldn’t be strictly justified in a spreadsheet because they would reduce the complexity for me.
Worried about your heirs? I’ve had conversations with retirees who didn’t want to leave their beneficiaries with an unpaid mortgage out of concern that they might not be able to keep the home. If this is part of your motivation, talk to a counselor and attorney about planning your estate. They help you understand your options and can guide you.
These are just a few examples of common reasons you might think about it. In addressing them, I would like to suggest that you should first establish for yourself why you are considering it and what you hope to achieve. This is a necessary step to make a right choice. (Are you looking for help with a financial question? This tool can help match you with potential advisors.)
What is the immediate impact on your budget and cash flow?
Whatever your reason, make sure you don’t leave yourself without enough liquid funds.
Do you regularly take withdrawals from the IRA and use the money as part of your normal budget? If so, how would depleting the IRA affect your cash flow? Do these withdrawals cover a significant amount of your expenses?
One thing that strikes me at this particular point in your situation is that withdrawing the entire balance would not completely eliminate the mortgage. You would still have the payment but without the IRA to pay for it.
Assuming this is a traditional one tax-deferred IRA, you would owe taxes on the full amount, so make sure you take that into account. But even if we ignore the tax implications, you would still owe about $8,300 on the mortgage. Could you match this amount from other savings to pay it off in full? If not, is there a convenient way to cover the payment until it’s paid off without relying on the IRA? Whatever the case, make sure you don’t retreat into a financial corner where you have one mostly house paid off but then struggle to keep up.
You cannot rely on the IRA at all. If you can comfortably live on your Social Security, pensions, or other savings, great. You may only be taking your minimum required distributions (RMDs) because you have to from the IRA and don’t need the money to make ends meet. If so, that’s obviously less of a concern.
I suggest that you consider this idea carefully and give it significant weight in your final decision. (Are you looking for help with a financial question? This tool can help match you with potential advisors.)
Next Steps
Consider what makes you ask this question, as well as the cash flow and tax implications of withdrawing from your IRA. These considerations will help you in your final decision.
Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Do you have a question you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not a participant in the SmartAdvisor Match platform and has been compensated for this article.
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Source : finance.yahoo.com