I Was Wondering if it Would Make Sense to Liquidate Part of our IRA and Pay Off the Mortgage? – Ken

“Dear Steve,

I have lost my job due to a so-called “voluntary” early retirement program. I am looking, but have yet to land another job, and at 55 I dont think my chances are great of making anywhere close to what I was making in my last job. Our children are grown and on their own, and our only debt is a $245000 mortgage on our house.

We have approximately $600K in IRA’s spread at a couple of institutions, and about $80K in other savings. We have been trying to sell our old house without success, for almost a year because the real estate market as you know is dead. Its worth approximately $200K.

I was wondering if it would make sense to liquidate part of our IRA and pay off the mortgage, (6% fixed 30 yr) to get our monthly living costs as low as possible?


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Dear Ken,

Thank you for looking ahead and planning in advance rather than waiting until the last minute and being in a tough spot.

I’m rarely a fan of liquidating the Individual Retirement Account (IRA) and I’m not a huge advocate of it in your case for several reasons.

  1. As long as the funds remain in the IRA they are protected from your creditors. If your financial position was to go downhill, say you could not find a new job, I don’t want you to have opened that door to the IRA and left the withdrawn funds exposed.
  2. Refinancing is out of the question right now probably due to the “early retirement” but once you get employed again you could look at a refi at new lower rates and that would lower your monthly expense.
  3. You could use part of your 80K in liquid cash and pay down the mortgage so you can get it at a price someone would bite on. That money is already exposed anyway so using it to get you out of the house is not a bad idea.
  4. Besides, if you take cash out of the IRA you’ll probably have to pay a 10% penalty on the money taken out and taxes on it also. So if you wanted to pay off the mortgage you’d have to take out $245,000 + enough to pay income taxes on the 245K + a 10% penalty on that entire amount. It adds up to a lot more money that just the mortgage. Think about it, between the amount you are underwater on the mortgage plus the penalty to get the money out of the IRA you’d have to sink in about $75K when you can just use $45K of savings to get it down into selling range.
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It seems that potentially dumping the house, while full of sentimental moments, might be the more logical route to weather out the current financial storm. You could rent a small place with less upkeep, or maybe even an upscale condo. That would reduce your utility expenses and upkeep costs. It would give you greater flexibility right now and allow you to wait to see what the real estate and job market may do before you purchase again.

While you don’t have a new job just yet, you could again turn to the 80K and use some to pay a larger deposit for a rental and that should grease the skids to get you in.

So, if you consider this approach, it would allow you to dump the house much faster, reduce your overall monthly expenses, let you focus on finding a new job and give you some greater flexibility in your life to maybe close the door and take more vacations. But the big bonus is that it keeps your 600K safe for its intended use.


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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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