Should You Use Retirement Funds to Pay Off Your Mortgage?
Key Points
The percentage of homeowners who carry a mortgage after 65 has risen in the past five years.
The money in your retirement account can grow dramatically over time.
You must balance the advantage of having no mortgage with the advantage of having more money later in life.
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At one time, the prevailing belief was that no one should enter retirement carrying a mortgage. However, times have changed. The percentage of people 65 and older who owe money on their homes has jumped by 13% in just five years.
In other words, there's a chance you'll still have a mortgage when it comes time to retire. Whether you have a retirement plan through work or are self-employed and have a solo 401(k), it can be tempting to use the dollars "just sitting there" to pay off a mortgage. The question then becomes: Should you?
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Not just sitting there
The thing about retirement accounts is that your money is never just sitting there. It's steadily growing thanks to compounding, being used to purchase quality assets at a bargain price, or both.
The first thing you must ask yourself is whether you're ahead financially by withdrawing funds from your retirement account. Here are three other questions that will help you take a deeper dive.
How much are you earning?
Look at your portfolio's performance over the past few years and check its annual growth rate. Let's say your portfolio has grown by 8% annually and you have a mortgage with an APR of 4%. As good as it might feel to own your home outright, do you really want to pull money from an account earning 8% to pay off a 4% mortgage?
Would you get hit with a penalty?
If you're under the age of 59 1/2 you have to be careful. Typically, withdrawing money from an account like a 401(k) or an individual retirement account (IRA) incurs a 10% penalty. For example, if your mortgage balance is $100,000 and you withdraw $100,000, you'll only receive $90,000. And since the cash withdrawn from a pre-tax retirement plan is taxed at your ordinary tax rate, you can expect a larger-than-usual tax bill.
What about your future needs?
How much would withdrawing money from your retirement account today impact the amount of money you have to live on in retirement? While making a withdrawal (before or after age 59 1/2) to pay off your mortgage would reduce your debt, it may also permanently reduce how much money you have as you grow older.
The decision of whether you should take funds from a retirement account to pay off your mortgage is entirely yours to make. Before you do, though, take time to consider what's best for your future.
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