Pay off mortgage with Roth IRA?

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Ricksample1
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Pay off mortgage with Roth IRA?

Post by Ricksample1 » Sat Jan 27, 2018 12:21 pm

Hi everyone, I enjoy finances, budgeting, etc... but I hate debt. Little of my background ~ built my house back in 2008. Wife has a 401k putting in 3 pct. I have a 401k putting in 6 pcnt. I have an IRA putting in zero currently. We only owe 23k on our house then were debt free.

I've been working 60 hrs a week 5 years straight paying off our house. Im 34 and we have 135k in retirement... I'm considering taking 23k from my Roth to pay off my house. Then starting next month increase the wife's 401 to 6 pcnt and start putting 500 a month back in my Roth.

So it's kind of like borrowing from it I guess? Taking a lump sum out, but increasing contributions by 600 a month. Reason is bc the market is at all time highs and the bull has been running for 9 years? Plus I can stop working as much, pile my extra into my savings and get a 2017 car this summer pay cash, just never having to take another loan out or worry about money.

Is this a dumb idea? I mean the market could drop 30 pcnt and I could lose that 23k

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FiveK
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Re: Pay off mortgage with Roth IRA?

Post by FiveK » Sat Jan 27, 2018 5:00 pm

Ricksample1, welcome to the forum.

Yes, the market is at all time highs and could drop 30%.

Exactly the same could have been (and was) said a year ago.

Depends somewhat on the mortgage rate, but putting the full $48K/yr into 401ks and IRAs (if your cash flow can support that) may be the more likely winner. No guarantees either way.

See Investment Order, Prioritizing investments, and Paying down loans versus investing for more thoughts.

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Earl Lemongrab
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Re: Pay off mortgage with Roth IRA?

Post by Earl Lemongrab » Sat Jan 27, 2018 5:09 pm

Bad idea. Roth space is precious.

JGoneRiding
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Re: Pay off mortgage with Roth IRA?

Post by JGoneRiding » Sat Jan 27, 2018 5:11 pm

I understand being close and wanting to finish.

Where is the money for the brand new no loan car coming?

Me: I would stop new contributions to ira and put that towards the loan, I would wait on the car till next year. Using those two things you should be done by June or Dec at the latest. Then you can ramp back up retirement and by the cat next year without devastating your future. Your 64 yr old self will thank you

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GerryL
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Re: Pay off mortgage with Roth IRA?

Post by GerryL » Sat Jan 27, 2018 5:29 pm

Earl Lemongrab wrote:
Sat Jan 27, 2018 5:09 pm
Bad idea. Roth space is precious.
OP wrote:
Then starting next month ... start putting 500 a month back in my Roth.

So it's kind of like borrowing from it I guess?
No, it's not like borrowing from the Roth. The most important thing in your Roth is the time it has to grow ... tax free.
You will be limited to putting $5500 a year back into your Roth, and as you work to build it up again, you will be losing the time the existing amount has to grow ... tax free.
If the market drops, you are not going to lose your $23K (unless you have the entire amount in a risky single stock). Your dividends will be continuing to buy new shares at a reduced rate.
Don't let your hatred of debt make you do something against your best interest. Debt is a tool. Used the right way it can be beneficial.

You didn't mention what interest rate you are paying on your mortgage.

lakpr
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Re: Pay off mortgage with Roth IRA?

Post by lakpr » Sat Jan 27, 2018 5:31 pm

I agree with Earl here, Roth space is precious and should NOT be lost.

I can also understand wanting to close out the remaining balance soon. IF I were in OP's situation, and IF my job is stable, and IF my 401-k plan allows loans, I would ask for the required loan amount and extinguish the mortgage. Then I'd redirect the payments that were going to the mortgage previously, to the 401-k loan payment. This has the "advantage" of:
1. Removing SOME money from the stock market that is currently at all time highs (sort of like cashing in chips in casino)
2. The interest being paid to the 401-k loan is being paid to yourself

Once the loan is paid off, I'd start to aim for maximizing the 401-k plan contributions for both.

chevca
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Re: Pay off mortgage with Roth IRA?

Post by chevca » Sat Jan 27, 2018 5:33 pm

With only $23k left, you barely have any interest left to pay on the mortgage if the rate is in the 3-4% range. I can see why you want it gone. But, I wouldn't take from the Roth to do it. Do you have any cash savings burning a hole in your pocket? That would be a better place to pay it off from.

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Ricksample1
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Re: Pay off mortgage with Roth IRA?

Post by Ricksample1 » Sat Jan 27, 2018 6:39 pm

JGoneRiding wrote:
Sat Jan 27, 2018 5:11 pm
I understand being close and wanting to finish.

Where is the money for the brand new no loan car coming?

Me: I would stop new contributions to ira and put that towards the loan, I would wait on the car till next year. Using those two things you should be done by June or Dec at the latest. Then you can ramp back up retirement and by the cat next year without devastating your future. Your 64 yr old self will thank you
Right now I'm only putting into my 401ks I haven't added to the Roth in about a year. I don't plan to this year unless the house is paid off, then I can do 500 a month. Right now I'm putting 2-3k towards the loan each month... including overtime which isn't guaranteed. The car wouldnt be brand new... I would never do that lol. A couple years old 12k range. When the mortgage is paid off, that 3k a month can go into the savings and I can pay cash. Im pretty much done with debt... just to be financially free able to buy what we want without having to check our budget lol.

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Ricksample1
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Re: Pay off mortgage with Roth IRA?

Post by Ricksample1 » Sat Jan 27, 2018 6:51 pm

GerryL wrote:
Sat Jan 27, 2018 5:29 pm
Earl Lemongrab wrote:
Sat Jan 27, 2018 5:09 pm
Bad idea. Roth space is precious.
OP wrote:
Then starting next month ... start putting 500 a month back in my Roth.

So it's kind of like borrowing from it I guess?
No, it's not like borrowing from the Roth. The most important thing in your Roth is the time it has to grow ... tax free.
You will be limited to putting $5500 a year back into your Roth, and as you work to build it up again, you will be losing the time the existing amount has to grow ... tax free.
If the market drops, you are not going to lose your $23K (unless you have the entire amount in a risky single stock). Your dividends will be continuing to buy new shares at a reduced rate.
Don't let your hatred of debt make you do something against your best interest. Debt is a tool. Used the right way it can be beneficial.

You didn't mention what interest rate you are paying on your mortgage.

That does make sense... my rate is 4 pcnt, variable. It's more just about becoming financially free that paying the 80 a month in interest though. We don't live on a super high income, I net around 2600 a month not including wife's income or overtime.... so eliminating a 1500 a month mortgage is huge. Our house was 200k... so I've one a lot of work getting it down to 23k.

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Ricksample1
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Re: Pay off mortgage with Roth IRA?

Post by Ricksample1 » Sat Jan 27, 2018 6:52 pm

chevca wrote:
Sat Jan 27, 2018 5:33 pm
With only $23k left, you barely have any interest left to pay on the mortgage if the rate is in the 3-4% range. I can see why you want it gone. But, I wouldn't take from the Roth to do it. Do you have any cash savings burning a hole in your pocket? That would be a better place to pay it off from.
I dont have much, I put a large chunk of it towards the loan 6 month ago... Then kept a little for safety net

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Ricksample1
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Re: Pay off mortgage with Roth IRA?

Post by Ricksample1 » Sat Jan 27, 2018 6:58 pm

lakpr wrote:
Sat Jan 27, 2018 5:31 pm
I agree with Earl here, Roth space is precious and should NOT be lost.

I can also understand wanting to close out the remaining balance soon. IF I were in OP's situation, and IF my job is stable, and IF my 401-k plan allows loans, I would ask for the required loan amount and extinguish the mortgage. Then I'd redirect the payments that were going to the mortgage previously, to the 401-k loan payment. This has the "advantage" of:
1. Removing SOME money from the stock market that is currently at all time highs (sort of like cashing in chips in casino)
2. The interest being paid to the 401-k loan is being paid to yourself

Once the loan is paid off, I'd start to aim for maximizing the 401-k plan contributions for both.
Hmm never thought of this... don't they charge interest or fees? Maybe I'll rethink paying off the mortgage for now... I'm honestly not to sure. My cars getting old... absolutely don't want another loan. I could stop paying extra towards the mortgage and save for a car to avoid a loan too. That's one of main reasons

Rob Bertram
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Re: Pay off mortgage with Roth IRA?

Post by Rob Bertram » Sat Jan 27, 2018 7:34 pm

As others have said, raiding your Roth IRA to pay down your mortgage early is a terrible idea. And in a similar vein, paying extra on your mortgage before filling up your Roth space is essentially the same thing.

The tax advantages of putting money into a 401k or an IRA are so good that we generally suggest maxing all tax advantage accounts before paying down a mortgage. What is your main motivation for paying off your mortgage early? Is it peace of mind? Have you spent the time to see what that money could have done differently if it were instead put into a tax-advantaged account? It might seem trivial right now, but effective saving and investing now can mean a difference of hundreds of thousands of dollars in 30 years.

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GerryL
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Re: Pay off mortgage with Roth IRA?

Post by GerryL » Sat Jan 27, 2018 8:08 pm

OP:
Suggest you play around with an amortization calculator (you can search for one on the web) and see what a loan looks like over time. Making extra payments in the early days of the mortgage can make a lot of interest disappear because you are lowering the principal ahead of schedule. But once the loan is fairly mature, your extra payments are not having the same effect.

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Ricksample1
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Re: Pay off mortgage with Roth IRA?

Post by Ricksample1 » Sat Jan 27, 2018 8:34 pm

Rob Bertram wrote:
Sat Jan 27, 2018 7:34 pm
As others have said, raiding your Roth IRA to pay down your mortgage early is a terrible idea. And in a similar vein, paying extra on your mortgage before filling up your Roth space is essentially the same thing.

The tax advantages of putting money into a 401k or an IRA are so good that we generally suggest maxing all tax advantage accounts before paying down a mortgage. What is your main motivation for paying off your mortgage early? Is it peace of mind? Have you spent the time to see what that money could have done differently if it were instead put into a tax-advantaged account? It might seem trivial right now, but effective saving and investing now can mean a difference of hundreds of thousands of dollars in 30 years.
Just piece of mind, financial freedom. To me it's extremely stressful having debt. So much so that it causes anxiety, sleepless nights, etc. After the mortgage is paid off wether it's now or 7 months from now I still plan to put at least 1k a month divided between my retirement accounts. So let's say I do that, after paying all my other bills I may have around 2k+ that's free... I can start having fun and not the guilt of spending money.

TG2
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Re: Pay off mortgage with Roth IRA?

Post by TG2 » Sat Jan 27, 2018 8:53 pm

Count me in with those who say raiding your Roth for this is a TERRIBLE idea. I consider my Roth money the most important money I have. Tax-free, no RMD's, tremendous flexibility in retirement.... No way I would use it for this.
Right now I'm only putting into my 401ks I haven't added to the Roth in about a year. I don't plan to this year unless the house is paid off, then I can do 500 a month.

I would go the other way. Far more important at your age to build your Roth than to pay off your mortgage early. It's not even close.

JBTX
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Re: Pay off mortgage with Roth IRA?

Post by JBTX » Sat Jan 27, 2018 9:00 pm

Personally, I would not touch the roth, and I would fully fund ALL retirement accounts before paying off a 4% mortgage.


You'll get a few years of interest tax savings by paying off the mortgage. You could get 3 or 4 decades worth of tax free growth with the Roth.

bayview
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Re: Pay off mortgage with Roth IRA?

Post by bayview » Sat Jan 27, 2018 9:10 pm

Ricksample1 wrote:
Sat Jan 27, 2018 8:34 pm
Rob Bertram wrote:
Sat Jan 27, 2018 7:34 pm
As others have said, raiding your Roth IRA to pay down your mortgage early is a terrible idea. And in a similar vein, paying extra on your mortgage before filling up your Roth space is essentially the same thing.

The tax advantages of putting money into a 401k or an IRA are so good that we generally suggest maxing all tax advantage accounts before paying down a mortgage. What is your main motivation for paying off your mortgage early? Is it peace of mind? Have you spent the time to see what that money could have done differently if it were instead put into a tax-advantaged account? It might seem trivial right now, but effective saving and investing now can mean a difference of hundreds of thousands of dollars in 30 years.
Just piece of mind, financial freedom. To me it's extremely stressful having debt. So much so that it causes anxiety, sleepless nights, etc. After the mortgage is paid off wether it's now or 7 months from now I still plan to put at least 1k a month divided between my retirement accounts. So let's say I do that, after paying all my other bills I may have around 2k+ that's free... I can start having fun and not the guilt of spending money.
Reframe your thinking: you will get a HUGE amount of financial freedom with a healthy and growing Roth IRA. You can’t “repay” your Roth after a withdrawal.

Max it out, and then throw what’s left over at your mortgage. The end is in sight; trying to hurry it up will hurt you financially.

Grin and bear it! You’ve done a great job, and you’re almost there. Don’t let impatience let you into financial foolishness.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

Stonebr
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Re: Pay off mortgage with Roth IRA?

Post by Stonebr » Sat Jan 27, 2018 9:59 pm

Earl Lemongrab wrote:
Sat Jan 27, 2018 5:09 pm
Bad idea. Roth space is precious.
+1. I hate debt too. Paid off mortgage in 1999 after selling stock in my taxable account.

Like the man says, "Roth space is precious."
"have more than thou showest, | speak less than thou knowest" -- The Fool in King Lear

haban01
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Re: Pay off mortgage with Roth IRA?

Post by haban01 » Sat Jan 27, 2018 10:04 pm

As much as youd love to have it squashed, I would recommend keeping 23k in the bond side so that you always have the option. I feel the same way you do. But I know that interest drag is so small. By prepaying as you are you will have it gone in a few years anyways. Id be more concerned about having adequate emergency reserves, HSA medical and mitigating other shorter term needs. Your doing a great job! :moneybag
Eric | | "Stay the Course" | "Press on Regardless"

Olemiss540
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Re: Pay off mortgage with Roth IRA?

Post by Olemiss540 » Sun Jan 28, 2018 9:23 am

OP,

Don't make any drastic changes, just keep doing what you are doing and the finish line will be here soon! You are close to being finished with your house payoff which will put you in a great position.

Stay focused and you will soon be able to relax. As Dave Ramsey would say, "live like no-one else so that soon you can LIVE like no-one else!"
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

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Pajamas
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Re: Pay off mortgage with Roth IRA?

Post by Pajamas » Sun Jan 28, 2018 10:57 am

Earl Lemongrab wrote:
Sat Jan 27, 2018 5:09 pm
Bad idea. Roth space is precious.
+1. I would not even consider doing that. The very valuable advantages of Roth accounts make them seem almost too good to be true.

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Watty
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Re: Pay off mortgage with Roth IRA?

Post by Watty » Sun Jan 28, 2018 11:28 am

Compared to a lot of the posters here before I retired I had a very good but middle class income. I was never able to come anywhere close to being able to max out my all my retirement accounts but I did just fine.

"Roth space is precious" is not always true if you would not be maxing out your Roth contributions in the future or if you can do Roth conversions in a low tax bracket later on.

Right now you are lucky that you both have 401k accounts which means that you can contribute.
1) $18,500 into each of the 401ks plus any employer match for a total 0f $37,000
2) $5,500 into each of your Roth accounts for a total of $11,000

That is $48,000 in retirement space you could fund each year in addition to other tax advantaged accounts like Flexible Spending Accounts, 529 college savings plans and HSA accounts.

Most couples(including me) don't make anywhere near enough max out all those account.

The big question is if you will be anywhere near maxing out all your retirement accounts. If not then I don't see any problem with withdrawing Roth contributions to pay off the mortgage as long as you don't have to pay any penalty to do the withdrawls. Your net worth would stay the same and you can add money to the Roth later on.

It also helps that it is only $23,000. If it was a hundred thousand dollars then it might be more of a condern.

One thing I would watch out for is that you need to have an adequate emergency fund. You don't want some large unexpected expense to cause you to get into credit card debt.

Having a paid off house and not working 60 hours a week would feel great, if I was in your situation I would probably do it.

Having a paid off house, no debt, and at least some money in a 401k at your age would put you way ahead of 95%+ of people and you could be giving advice to people here instead of asking for it.

aristotelian
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Re: Pay off mortgage with Roth IRA?

Post by aristotelian » Sun Jan 28, 2018 3:35 pm

Terrible idea. Not that I am advocating this, but if you don't want to take a loan to invest right now, your better option would be to put the Roth in CD's, effectively canceling out the mortgage. That way, you will at least keep your Roth contributions in the account. Then once the mortgage is paid off, you can increase your allocation.

If you take money out of the Roth to pay off the mortgage, those funds are gone from the Roth for good and you have given up the benefit tax free earnings in perpetuity on a large portion of your portfolio.

KlangFool
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Re: Pay off mortgage with Roth IRA?

Post by KlangFool » Sun Jan 28, 2018 3:47 pm

Ricksample1 wrote:
Sat Jan 27, 2018 8:34 pm
Rob Bertram wrote:
Sat Jan 27, 2018 7:34 pm
As others have said, raiding your Roth IRA to pay down your mortgage early is a terrible idea. And in a similar vein, paying extra on your mortgage before filling up your Roth space is essentially the same thing.

The tax advantages of putting money into a 401k or an IRA are so good that we generally suggest maxing all tax advantage accounts before paying down a mortgage. What is your main motivation for paying off your mortgage early? Is it peace of mind? Have you spent the time to see what that money could have done differently if it were instead put into a tax-advantaged account? It might seem trivial right now, but effective saving and investing now can mean a difference of hundreds of thousands of dollars in 30 years.
Just piece of mind, financial freedom. To me it's extremely stressful having debt.
Ricksample1,

1) Even if you pay off the mortgage, you still have to pay property tax and homeowner insurance.

2) What financial freedom? Unless and until your financial asset is big enough to support your lifestyle, you have no financial freedom.

3) In fact, you have so much of your money tied up in your house with minimal asset elsewhere, you are at greater risk of financial failure if you are unemployed.

4) By not putting money into your Trad. 401K, you pay more (10+%) tax in order to save 3% to 4% interest. How does this make any sense?

5) You have 135K investment and 200K house. You are "House Poor". The house cannot feed you or your family in a recession.

KlangFool

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