Should I pay off my $30,000 (4.5%) mortgage with my IRA monies?
I also have $25,000 in credit card debt with $76,000 in income. Income sources are social security, a teachers pension and a $37,000 salary for which I work for each year.
A good way to think this through is to look at how much you're earning (or it's costing) in each case. For example, the mortgage is only 4.5% interest whereas your credit cards are likely accruing double digit interest. And your IRA is likely (over the long-term) earning more than 4.5%.
Let's say your IRA averages a 6% return. Since you'll have to pay income tax, you'd have to liquidate more than $30k. Then you'd miss out on the opportunity to earn (for example) 6% ongoing on the amount you liquidated so you could pay off something that only costs 4.5%. This is not advisable.
The focus should be on the credit card debt and not accruing any additional credit card debt. I probably wouldn't suggest using your IRA monies for this, though. That balance is to replace your salary once you're no longer working.
If you're not already, it would be good to track your expenses each month, ensure you're living within your means, and find ways to put as much as possible towards paying off the credit card debt as soon as possible. Not living within your means is not sustainable. | 12.31.14 @ 00:34
Kate, here is an interesting idea that I heard, and actually am using right now. I don't intend to pay off my mortgage, ever. In fact, one expert’s advice is to keep as big a mortgage as possible and for as long as possible. Why? Couple of good reasons.
#1; our mortgage has been moved to a home equity line of credit, at interest only payments that are less than 1/3 of the previous monthly payment. The other 2/3 of the payment it is now earning interest in a 5+% insurance account. Put another way, we have those dollars under an interest rate working to make them grow. Had we paid it into the mortgage, it would not grow since there is no interest payable on equity. And, #2; we get a tax credit for that outstanding line of credit the same as we would with an actual mortgage. That would go away if we paid off the mortgage.
What might you do with the dollars not going into the mortgage any more? Put them in your IRA, which has an interest rate. Or, pay off some other high interest rate debt that is tempting you to look at draining your IRA. One day, you can pay off the mortgage - or not – if there is time for the account to grow, you will have the dollars to pay it off later. There is more nuance to this than I can present here, but sometimes paying off the mortgage may feel good but not be the best way to go, especially if doing so is compelling you to lose on your IRA by stopping it’s earning power only to sink it into the non interest paying environment of a mortgage. | 02.11.15 @ 17:49
I agree with Kirby. But I would take it one step further. According to a recent study by Robert Shiller, when adjusted for inflation, home values have appreciated by about 0.5%. If that is not the return on an investment you are looking for, then why would you want to put more dollars into your home? If you can get a greater return somewhere else, then take it. | 12.01.15 @ 20:14