If you’re coming up short on paying your mortgage, retirement savings needs may be put on the back burner. Even if you’re not 59 1/2 years old, you can request a distribution from your IRA no matter what your reason for wanting the money, including making a mortgage payment. However, you may have to pay extra in taxes and penalties when you make the distribution.
Traditional IRA Taxes
Traditional IRA distributions are taxable income no matter when you take out the money, unless you’ve made non-deductible contributions. In that case, you'd prorate your distributions, with the return of your non-deductible-contribution portion being tax-free and the portion coming from deductible contributions and earnings being taxable. For example, if you made a $3,000 nondeductible contribution to your traditional IRA and at the time of the distribution your traditional IRA is worth $10,000, 30 percent of your distribution is tax-free. If you took a $1,000 distribution, $300 would be tax-free as a return of your non-deductible contributions and $700 would be taxable, as it comes from deductible contributions and earnings.
Roth IRA Taxes
When you take an early distribution from a Roth IRA, you don’t pay any taxes on distributions of contributions. However, after you’ve exhausted the contributions in your Roth IRA, you will pay taxes on the early distribution of earnings. For example, if you’ve put in $10,000 and your Roth IRA is worth $14,000, you could take out up to $10,000 tax-free. If you take out $11,000, the last $1,000 is taxable.
The IRS does allow some exceptions from the 10 percent additional tax penalty, but paying your mortgage is not one of them. As a result, the 10 percent penalty applies to the taxable portion of your distribution. For example, if you take a fully taxable distribution from your traditional IRA to pay your mortgage, not only do you have to pay the income taxes, but you also have to pay the 10 percent additional tax penalty. However, if you take a tax-free distribution from your Roth IRA, you won’t owe the penalty.
If you find that you come into extra money shortly after taking the distribution and want to replace the distribution, you can roll the money withdrawn back into the IRA as long as you’re eligible for a rollover. To be eligible, you can’t have performed a rollover using the IRA within the prior 12 months, and you must complete the rollover within 60 days. For example, if you receive an unexpected bonus from your job and haven’t done a rollover in the past year, you can use the bonus to replace your distribution as long as you make the deposit within 60 days.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."