Implications of Using an IRA to Pay Down a Home Mortgage

Tapping your IRA may not be the best way to buy a house.
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Your IRA can do much more than help you retire comfortably, but the help comes at a price. If you use your IRA to help with your mortgage, for example, you'll have that much less in your account when you finally do retire. If you start tapping the account before you turn 59 1/2, you may have to pay a 10 percent tax penalty on the withdrawal on top of regular income tax.

First-Time Buyer

If neither you nor your spouse has owned a house in the two years before you close, you meet the IRS definition of a first-time homebuyer. That's good news for you. You can tap your traditional IRA for up to $10,000 -- if your spouse has an account, she can add another $10,000 -- toward the down payment and closing costs. As long as you make the payment within four months of closing, there's no tax penalty. The withdrawal is still taxable income, which implies your tax bill is going to be higher this year.

Roth IRA

When you put money in a Roth IRA, you pay tax on it, in return for tax-free withdrawals after 59 1/2. Earnings are taxable if you withdraw them sooner, but you can withdraw contributions tax-free at any age. "Forbes" says this makes a Roth useful if you want to start a retirement account but worry you might need the money for current expenses. Like a traditional IRA, however, taking out money now reduces what your account can earn in the coming years.

Periodic Distributions

If you can't qualify for the first-time homebuyer loophole, you can still tap your traditional IRA penalty-free by taking substantial equal periodic distributions. This requires that you take a specified amount from your IRA every year for at least five years or until you turn 59 1/2, whichever is older. The IRS website has the formula for calculating the amount. If you have years before you turn 59 1/2 when you have to keep taking withdrawals, that implies you'll have much less in your account when you retire.

IRA vs. Mortgage

If your mortgage interest rate is low, you may come out ahead keeping money in your IRA so that it can earn more interest over a longer period. If one of your IRAs is under-performing or your mortgage rate is high, you may be better off paying down the mortgage. However, you can also roll over money from the bad IRA into a better performer, depending on your situation: The only way to know for sure is to sit down and crunch the numbers.

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