5 Reasons We Used an IRA Withdrawal to Pay Off the Mortgage

By Josh Patoka   Updated 02/14/2022 at 3:56 pm

If you’re at that point where you want to do anything to get out of debt, you might consider selling your investments. More specifically, using your retirement to pay down debt. We made the decision to use a $25,000 IRA withdrawal to pay off the mortgage. Do you think we’re crazy?

(Josh is a freelance writer during the day, and chases his two small children in his free time. He’s here to tell his debt free story — including why he used an IRA withdrawal to pay off his mortgage.)

There are many different mortgage payoff strategies you can use that eliminate your monthly payment without tapping into your IRA or 401k to pay off debt. However, there are several reasons why you might decide to follow a similar path to ours.

I’ll be the first to say that you should only use your retirement money to pay off the mortgage after you have used non-retirement savings. So if you contemplating using your retirement to buy a house or pay off the mortgage, there are a few things you should know:

  • Early IRA withdrawals are subject to a 10% penalty
  • It’s possible to withdraw up to $10,000 penalty-free
  • Traditional IRA withdrawals are also taxed

Before you make a snap decision to trade your retirement nest egg for financial freedom, you need to evaluate your motivation to get out of debt and make the best financial decision for your circumstances.

Our Mortgage Payoff Dilemma

Before I share the ins and outs of early IRA withdrawals, I’ll give you some background about why we decided to use our retirement funds to pay off our mortgage early.

One of the main reasons why we paid off our mortgage early was all the life changes we’ve experienced in the past five years.

Some of our most notable changes include:

  • Having two children
  • Changing to a family-friendly career
  • Taking a 50%+ pay cut with the career change

Although we never missed a monthly payment or went hungry, we went from making $80,000 annually as a salaried employee to earning $35,000 of variable income with our career change as we’re both self-employed. Although we only earned $20,000 the first year I changed careers because I didn’t have a reliable client base yet.

Memories from the 2008 Great Recession were still on our minds as we saw family members and co-workers struggle to make ends meet when they were laid off. Our mortgage payment alone was almost as much as our other monthly expenses combined!

Because my wife and I both earn a variable income and our occupations aren’t necessarily “recession-proof,” being debt-free before the next recession comes is a large priority for us.

Besides our variable income, our motivation to get out of debt is also saving thousands of dollars in interest payments.  After seeing how much money we could put in our bank account instead of paying mortgage interest, we started to think seriously about paying our entire mortgage off early.

We had the cash to pay off the remaining $40,000 balance, but it meant withdrawing $25,000 from our individual retirement accounts (IRA). Over the course of three months, we decided to pay off our remaining balance ASAP.

Today, we’re 100% debt-free!

What You Need to Know About Early IRA Withdrawals

Whether you have a Traditional IRA or a Roth IRA, you can make penalty-free withdrawals once you turn 59 ½. With a Roth IRA, your first contribution must have also occurred at least five years before. So if you open a Roth IRA on your 58th birthday, you must wait until you turn 63 before you can make your first penalty-free withdrawal.

When you make an early withdrawal, you will have to pay a 10% penalty unless the withdrawal is for one of these qualified distributions:

  • Pay for a first-time home purchase (up to $10,000 lifetime)
  • Qualified education expenses
  • Unreimbursed medical expenses or health insurance
  • Become disabled or pass away

Each deduction has specific rules, so I encourage you to review the current IRS early withdrawal policy or speak with a tax professional as well.

Since this article primarily focuses on paying off your mortgage, you can technically withdraw $20,000 penalty-free for your home purchase if you and your spouse both withdraw $10,000 from your individual retirement account. Just make sure you do it within 120 days of your home acquisition date to qualify for the deduction.

Unfortunately, we waited a couple years to withdraw from our retirement accounts, so we have to pay the 10% early withdrawal penalty on our withdrawals.

Early Roth IRA Withdrawals

Roth IRAs are slightly more complex than Traditional IRAs when it comes to early withdrawals. If your account has been open for less than five years, the earnings you withdraw can be subject to taxes (not the 10% early withdrawal penalty) even if you qualify for one of the qualified distributions.

If your first Roth IRA contribution occurred at least five years ago, your investment earnings are not subject to taxes.

Because you fund Roth IRAs with post-tax dollars, you will never pay taxes on your original contribution amount. As long as you withdraw less money than your total contribution amount, you don’t have to worry about paying taxes thanks to the Roth IRA ordering rules that distributes contributions and conversions first.

Most brokerages automatically withhold 10% of your early distribution to cover the early withdrawal penalty. If you withdraw $10,000, you can only expect to receive $9,000.

Early Traditional IRA Withdrawals

If you plan on making an early Traditional IRA withdrawal, you will need to pay taxes on the entire distribution amount because these accounts are funded with pre-tax dollars.

When you don’t qualify for one of the penalty-free early distributions, you also need to pay the 10% early withdrawal penalty too. For the same $10,000 withdrawal, you can anticipate only being able to spend $7,000 once your brokerage withholds 30% for taxes and penalties.

The Best Way to Use Your IRA to Buy a House

Using our IRA to buy our house wasn’t in our thought process when we bought our house three years before. We could have maximized the $10,000 tax credit and paid even less in mortgage interest.

The “right” way to make early IRA withdrawals to buy a house is following these steps:

  • Withdraw from a Roth IRA account that’s at least five years old
  • Make the withdrawal within 120 days of your house acquisition date or during the construction process
  • Only withdraw up to $10,000 from your Roth IRA and your spouse’s Roth IRA

Following these three steps means you can make an early IRA withdrawal that’s tax-free and penalty-free.

If you only own a Traditional IRA, your first $10,000 in withdrawals can also be penalty-free, but you still need to set money aside to pay distribution taxes.

5 Reasons Why We Used Retirement Funds to Pay Off Our Mortgage

I’ll be honest, many people who know anything about early IRA withdrawals think we are a fish with three eyes. IRAs and 401ks are for retirement after all, and Uncle Sam does his best to deter you from making early withdrawals. With mortgage rates at near historic lows, the long-term income potential from investing is higher than the money we saved in interest payments.

But, I’ll share a few reasons why withdrawing $25,000 early from our Roth IRAs was an ideal decision for our circumstances.

1. We Wanted Peace of Mind

The #1 reason why we decided to pay our mortgage early was for the financial peace of mind. Yes, we have less money to earn long-term compound interest, but being debt-free was more important to us given our personal situation.

When we made the decision to pay off our mortgage, we had a $35,000 annual income. Two years before, my career change took longer than expected and it took eight months for me to earn a steady income. Not having to make a $600 minimum monthly mortgage payment is an immediate $7,200 pay raise for us.

2. We Were Debt-Free Before

This isn’t the first time we are debt-free. Before we became proud homeowners, we were debt-free for two years. During this time, we squirreled away every spare dollar to make a sizeable down payment for our house.

Today, my wife and I are both self-employed and earn a variable income. Since we’re closer to a recession than we care to admit, we want to “recession proof” our finances as much as possible. Both of us have family members that either switched career fields during the 2008 Great Recession or extended their retirement date to make ends meet.

We can’t predict our future employment or health situation, but we can control our monthly payments today.

Because we were debt-free when we first got married, paying off our mortgage was a huge priority to us because we knew the benefits of not having a monthly payment.

3. We Still Have Money in Our IRA

Before we sold our first investment, we also said we wouldn’t make an IRA withdrawal if it meant spending our entire retirement nest egg. In reality, we only withdrew a quarter of our retirement account. And, we still have a fully-funded emergency fund that covers six months of living expenses.

One of the typical clichés against paying off your house early is that “you can’t eat your house!” We still have plenty of liquid cash to pay a surprise expense or survive a surprise job layoff.

4. We Used Our Non-Retirement Money First

Before we agreed to withdraw from our retirement accounts, we used our non-retirement savings first to minimize our tax bill. Because the 2018 capital gains tax rate for married couples earning less than $77,200 is 0% for long-term gains and 12% for short-term gains, you should always consider using your non-retirement investments to pay off debt first.

Our house cost $140,000 and we made our initial payments with our non-retirement savings and investments first. We made lump-sum payments from our savings accounts and taxable investment accounts first. Between these large payments and two years of double monthly mortgage payments ($1200 principal payments instead of $600), we whittled our remaining balance down to $25,000 in early 2018.

At this point, we were comfortable withdrawing from our retirement account to pay off our remaining balance.

5. We’re Debt Free!

Our mortgage was our last debt payment. Over the past decade, I had already paid off roughly $80,000 in consumer debt, excluding our mortgage. Not having to make yet another monthly payment is a huge relief.

Finally, I’m in my early 30s and my wife is in her late 20s. Not many people in our age group can say they are entirely debt-free! Instead of paying for yesterday, we can focus on saving for tomorrow.

If You’re Considering Using Retirement Money to Pay Off the Mortgage…

Using your retirement account should never be your first option to pay off debt because of the potential tax and early withdrawal penalties. If you decide to make early IRA withdrawals, you should ask these questions first:

  • Can I use any cash savings or non-retirement investments first?
  • What are the tax implications for an IRA withdrawal?
  • Will I still have most of my IRA balance left?
  • Is the immediate peace of mind worth it?

Everybody will take a different journey to achieve this goal. If your journey includes making an early IRA withdrawal, the peace of mind can be well worth it.

Like this story? Save it to Pinterest or bookmark it for later. You can find tips on how Josh and his family live comfortably on a modest income at his site, Money Buffalo.

Debt free story! 5 reasons we used IRA withdrawal money to pay off the mortgage.

20 thoughts on “5 Reasons We Used an IRA Withdrawal to Pay Off the Mortgage

  1. If I’m reading this right, you paid $2,500 in penalties to pay off the $25,000 mortgage? I am all for paying off your mortgage early for the reasons you listed (including peace of mind), but I can’t get on board with that hefty of a penalty to get there. In your case, if any of the worries you had came to pass (not having the money), you could have certainly exercised the option to withdraw money at that point, which in that circumstance would be wise versus falling behind on your payments, but I just didn’t see the rationale of doing it up front.

    1. Completely understand your opinion which is why we didn’t make the withdrawals when we first moved into our house. Had we taken the time to be more familiar with the tax laws, we would have made the withdrawals during the penalty-free window for first time home purchases.

      The main reason I contributed this article is to show that if you are going to use IRA withdrawals to buy a house, you need to do it during the construction or mortgage application process.

      Yes, the $2,500 penalty for us is like a large bee sting, but at the end of the day, $2,500 is water under the bridge over the course of a lifetime. The tradeoff of being debt-free given our personal life experience is worth this cost to us.

      We decided if we were going to do it, it was better to do it now instead of continuing to kick the can down the road.

      1. Are you sure the 10% penalty applies to the entire $25K withdrawal? What I’ve read indicates that it does not apply to the amounts you contributed to the Roth, only to the _earnings_. The original contributions can be withdrawn at any time, at any age, both tax-free and penalty-free. So if you contributed $25K to a Roth IRA, and it grew to $100K, you could then withdraw the $25K with no tax or penalty. Right? See https://www.hrblock.com/tax-center/irs/tax-responsibilities/early-withdrawal-penalties/

      2. Am I right to believe you were probably paying $250 a month in interest on the mortgage? Wouldn’t paying it off completely offset the cost of penalties in short order?

  2. I am considering paying off my mortgage of $96,000 with one of three of my retirement accounts. The way the market has been falling this December (2018) has set the fire under my backside to do so. I have a fairly nice pension and with social security and the two other IRA’s I am set to do it but first I need to consult a tax expert to see if doing so is a $ound move. What do you think ?

    1. Definitely consult a tax expert (and other financial experts) who are familiar with your exact situation about that. I will say that taking money out of investments that are losing value locks in a loss.

  3. In reality, many of us will live longer than our parents and likely work longer!

    Unless you live in a hot housing market, the cost in interest for your house over a 30-year loan is many times the initial house cost. People think their house is a good investment. In reality, I don’t see it.

    And my IRA and 401Ks have taken two major hits during the dotcom and 2008 housing crash. I will be working forever and getting rid of an expensive house payment is certainly on my mind.

    Thx for sharing.

  4. We plan to do something similar. We pay $1200 per month, but I’m now a 100% disabled veteran and draw disability tax free for life. So paying off the house will make it easy for us to live off of $3200 per month. We also have another ROTH, 401K, and my employer pension.

  5. Dan is correct. As long as you’re withdrawing principle and not earnings there are no penalties or even cap gains taxes. It’s your CASH!

  6. i just transferred my 401k over to an IRA and last year did a one time rollover to my hsa for unreimbursed medical expenses. I’m actually looking to cash out as we are on hard times me being out of work right now & was looking to do the mortgage help. but ive had my mortgage since october 2012.
    i don’t have 10k in my ira. but what is mine is a little over 7500. the only interest earned is less than $200. can i just take that penalty free? interest free?

    1. You’re going to need to talk to a financial advisor or CPA that knows your exact situation, age, and more details about the type of 401k & IRA you have & had. My wild guess would be no, but talk to someone like that.

  7. Can I withdraw $20,000 from my non Roth IRA to pay for my granddaughters college tuition, and avoid federal income taxes?

    1. I would say no, since withdrawals from a Traditional IRA are taxed as regular income. You may also want to look into whether or not you’d be subject to penalties.

  8. We have a 58K ira w/jones pays 244 per mo. We also have a HECM reverse mortgage owing 260k. We have 26k in line of credit generating 4.32%, which is better than we get from Jones.

  9. I turned 65 recently and have an IRA with $22,000.00 I am thinking of using this together with other monies to pay of my mortgage of $56,000.00 with an interest rate of 5.75%. I am divorced and live alone and really am not inclined to “work till I die”. My peace of mind being debt free is also important to me. I will still have emergency money with a savings of about $60K left and be able to work part time.

  10. In the beginning of Covid I watch my IRA tank
    I worked with another company to move things around
    I had 151000 and in about 4 months it went up to about 214000

    And then stoped

    I don’t feel comfortable with what may be coming in the coming years

    It is now at 190000 and I called my guy and he talked about moving things around

    He mentioned that I could withdraw money because I am 59.5

    I said can I take 53000 to be pay of my mortgage he said no problem but you have to pay taxes which I knew

    So that’s what I am planning on doing

    I am self employed and my health / dental insurance is 1900 per month and pays for nothing 😡 until deductible is met plus I have a HSA account

    Can’t I start contributing to a new IRA for tax deferred savings going forward

    Wouldn’t that lower my taxes ?

    Plus I would be saving about seven grand an interest on the rest of the mortgage

    1. You should still be able to contribute to a new or existing IRA going forward, but whether or not it lowers your taxes depends on a variety of things.

  11. I am thinking of doing something similar. I’m single and only have job income. I’m in the early part of my mortgage, but I would be in my eighties if I follow the 30-year term. Most of my payments go to interest at the moment, and my IRA loses money more often than gains. I would have to wait a few years to avoid the penalty since the withdrawal would be significant, but peace of mind would be worth it.

    The other thing I’m considering is a mortgage recast. This would lower my monthly payment, but if I keep paying at my current payment, it should speed up the payoff until I could withdrawal from my IRA.

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