Q. My husband and I have retired. We have IRAs totalling $425,000, monthly income of $4000, balance of $250,000 mortgage. Should we pay off our mortgage, which is 5.75%, with our IRA or take a monthly withdrawal of $2100 each month for mortgage payment? Thank you.
Lee - Sacramento
A. If you were to pay off your mortgage with money from your Traditional IRA, the amount withdrawn would become taxable income. The marginal income tax rate on this additional $250,000 of income would be at least 35%, i.e., you would owe a significant amount of federal and state income taxes. If you are under 59 ½ years of age, add a 10% penalty to the above percent.
Withdrawals from a Roth IRA are generally not taxable.
Given your income stream and IRA balance, it's unlikely that you will be able to refinance your mortgage to a lower interest rate.
I suggest that you make periodic withdrawals from your IRA to help you cover your mortgage payments.
Depending on the current asset allocation within your IRA, you should move at least one year's worth of mortgage payments to a money market account within your IRA, so that you are affected by market fluctuations.
Your IRA custodian, or a tax professional, can help you calculate the taxes you will owe on the money you take out. Your IRA custodian should be able to set this up automatic periodic payments for you.