Using an IRA to Make the House Payment
Before you tap your IRA to pay off a mortgage, remember the money hasn't been taxed yet. Instead, consider a "mortgage IRA."


Q: I will retire in 18 months and my husband and I feel that we are well prepared financially. We have about $2 million in our IRAs and 401(k)s, plus a pension. I would really like to pay off the $500,000 mortgage on our house. The interest rate is only 4.5%, but we would feel better if we could get rid of our monthly payments. How can I use my retirement savings to pay off the house? We don’t have much savings outside of these accounts.
A: It would seem reasonable to simply take some retirement savings and use it to pay off your home mortgage. The challenge, however, is that your retirement accounts don’t only belong to you. You have the taxman as your silent partner.
You’ve certainly done a nice job accumulating money in your 401(k)s and IRAs, and while it’s tempting to view the money as yours do to with as you please, unfortunately, none of these dollars have been taxed. This is, of course, because you received a tax-deduction on the money you contributed to the accounts, and all of these earnings have grown tax-deferred.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The good news is that the level of tax that you’ll pay on your retirement savings is, at least in part, up to you. By that I mean that you have some control over how much in income taxes you’ll owe based upon how much you withdraw in any one year.
The U.S. income tax structure is highly progressive, so that the more income you have in any one year, the higher your marginal tax rate. For those with low income, the standard deduction and personal exemption will eliminate any income taxes, so their rate is essentially zero. However, for those at the high end of the income range, the top federal tax rate is 39.6%, plus another 3.8% on investment income for Obamacare. (Additionally, if you reside in a state with high income taxes, you can add on another 10%, give or take.)
Worst scenario? If you pulled money out of your retirement accounts to pay off the $500,000, by the time you paid off both the mortgage and the income taxes, it could cost you about $900,000.
By my calculations, the total interest costs for your loan for this year will be about $22,500 (4.5% times your mortgage balance of $500,000). This might sound like a lot, but it’s nothing compared to the roughly $400,000 you would owe the taxman if you attempted to pay off your house in a single year.
One method to reduce the tax burden would be to pay off your home over a few calendar years. For example, pay $166,000 per year for the next three years. To be clear, while this would certainly shrink your income tax bill, it would still cost you much more than the interest rate you are paying.
Because you’d like to eliminate your mortgage payment, here’s what I suggest you do: Set up a separate IRA and move $500,000 into it. Think of this as your “mortgage IRA.” Invest these dollars somewhat conservatively, and then establish a monthly withdrawal that is equal to your mortgage payment. Each month, right before your mortgage payment is due, you’ll have a deposit from your “mortgage IRA” that will be the same amount as your house payment.
Your monthly withdrawal from your IRA will be treated as taxable income, but you’ll be receiving a tax deduction for the majority of your mortgage payment, essentially eliminating the income tax consequences. You will trigger a small amount in taxes, but it will be insignificant, particularly for the next several years.
If you like the sound of this strategy, then make sure you have a long mortgage. If your mortgage is a 15-year loan, you might consider swapping it out for a 30-year, or maybe even a 40-year mortgage. The goal here is not to pay off the mortgage balance as quickly as possible, but to keep the mortgage payment as low as possible.
A couple items to keep in mind: First, if you had amassed $2 million in savings that had already been taxed, paying off your home would be simple and probably advisable. Many retirees like the idea of having their house debt-free. Second, it’s important that you invest this “mortgage IRA” in a manner that will produce a high degree of confidence that it will generate enough of a return to make the monthly withdrawals, but without taking on unnecessary risk.
Scott Hanson, CFP, answers your questions on a variety of topics and also co-hosts a weekly call-in radio program. Visit MoneyMatters.com to ask a question or to hear his show. Follow him on Twitter at @scotthansoncfp.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Scott Hanson, CFP, answers your questions on a variety of topics and also co-hosts a weekly call-in radio program. Visit HansonMcClain.com to ask a question or to hear his show. Follow him on Twitter at @scotthansoncfp.
-
Is It Worth Getting a Free iPhone Through T-Mobile?
T-Mobile offers a free iPhone 16 Pro with select plans, including a 55+ option. Is the incentive worth the switch over?
-
What About Those ‘Guaranteed’ Life Insurance Ads?
Guaranteed life insurance policies can sound tempting if you've been declined for insurance elsewhere. Here are four downsides and one alternative.
-
Eight Tips From a Financial Caddie: How to Keep Your Retirement on the Fairway
Think of your financial adviser as a golf caddie — giving you the advice you need to nail the retirement course, avoiding financial bunkers and bogeys.
-
You Were Planning to Retire This Year: Should You Go Ahead?
If the economic climate is making you doubt whether you should retire this year, these three questions will help you make up your mind.
-
Are You Owed Money Thanks to the SSFA? You Might Need to Do Something to Get It
The Social Security Fairness Act removed restrictions on benefits for people with government pensions. If you're one of them, don't leave money on the table. Here's how you can be proactive in claiming what you're due.
-
From Wills to Wishes: An Expert Guide to Your Estate Planning Playbook
Consider supplementing your traditional legal documents with this essential road map to guide your loved ones through the emotional and logistical details that will follow your loss.
-
Your Home + Your IRA = Your Long-Term Care Solution
If you're worried that long-term care costs will drain your retirement savings, consider a personalized retirement plan that could solve your problem.
-
I'm a Financial Planner: Retirees Should Never Do These Four Things in a Recession
Recessions are scary business, especially for retirees. They can scare even the most prepared folks into making bad moves — like these.
-
A Retirement Planner's Advice for Taking the Guesswork Out of Income Planning
Once you've saved for retirement, you'll need your nest egg to support you for as many as 30 years. For that, you need a clear income strategy, not guesswork.
-
Why Smart Retirees Are Ditching Traditional Financial Plans
Financial plans based purely on growth, like the 60/40 portfolio, are built for a different era. Today’s retirees need plans based on real-life risks and goals and that feature these four elements.