Before you tap your IRA to pay off a mortgage, remember the money hasn't been taxed yet. Instead, consider a "mortgage IRA." ... 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.
Technically, you can withdraw as much money as you want from your IRA each month, but if you do so prior to retirement, you face stiff penalties from the IRS. Not only do you have to pay a 10 percent penalty for these funds, but you also have to pay taxes on this money.
Once you've exhausted your contributions, you can withdraw up to $10,000 of the account's earnings or money converted from another account—without paying a 10% penalty—for a first-time home purchase. If it's been fewer than five years since you first contributed to a Roth IRA, you'll owe income tax on the earnings.
Taking withdrawals from an IRA before you're retired is something you should do only as a last resort. ... Plus, the IRA withdrawal would be taxed as regular income, and could possibly propel you into a higher tax bracket, costing you even more.
Ramsey is averse to debt of any kind and believes you should pay off your mortgage as fast as you can. In fact, he recommends that people only take out a 15-year mortgage that is no more than ¼ of their take-home pay.
Here's how to minimize 401(k) and IRA withdrawal taxes in retirement:
Age 59½ and over: No withdrawal restrictions
Once you reach age 59½, you can withdraw funds from your Traditional IRA without restrictions or penalties.
Once you reach age 59½, you can withdraw money without a 10% penalty from any type of IRA. If it is a Roth IRA and you've had a Roth for five years or more, you won't owe any income tax on the withdrawal.
Generally, early withdrawal from an Individual Retirement Account (IRA) prior to age 59½ is subject to being included in gross income plus a 10 percent additional tax penalty. There are exceptions to the 10 percent penalty, such as using IRA funds to pay your medical insurance premium after a job loss.
If you're a qualified first-time home buyer, you'll be allowed to withdraw up to $10,000 from your IRA penalty-free.
9 Penalty-Free IRA Withdrawals
You can put up to $10,000 of IRA funds when you want to buy your first home. ... You must use the IRA funds within 120 days of withdrawal to pay qualified acquisition costs. This includes the costs of buying, building or rebuilding a home, along with any usual settlement, financing or closing costs.
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