Using IRA to pay off mortgage on rental property?

Question

I'm over 59.5 and about 5 years away from retirement. I may work longer, not sure.

I currently own a rental condo that still has about 85K on the mortgage wth an $800 mortgage payment. Current value on the condo is about 128K. I have over 100K in a traditional IRA.

How stupid would it be to use the IRA to pay off the mortgage and start enjoying the $800 a month extra income from not having a mortgage?

I also have a separate Roth IRA that I won't be touching. The condo originally cost $52K about 10 years ago. The value went up 16k in the past 12 months. It's in a great area and is an easy rent.

Matt Devincenzo · Answer

Without analysing the math and specifics of your income it's just a guess, but if you're considering this just take $800/mo from the IRA. Leaving the balance will be a better scenario since your IRA will continue to be invested, and your tenant will pay off the mortgage on the condo over time. I doubt there's any scenario where paying it off early is a better option.

Mason Weiss · Answer

Continue to let your tenant pay down the mortgage, the $800 extra is enticing right now but what if you want to use your IRA for something else 2 years from now? There is opportunity cost that has to be weighed and examined as well. I call these good problems to have because neither option is bad and now you get to decide how you want to grow further.

Joseph Neri · Answer

Generally Speaking with limited information about you and your goals.

Over 59.5 | $800 mortgage + condo fees with 7.125% interest | Traditional IRA 100k | Roth IRA

To your question: NO don't pay off your mortgage.

Consider this... Equity and Appreciation is NOT the same. Equity earn 0% return (inflation will destroy your 100K if its inside your condo) your Condo will Appreciate or crash in value regardless if you pay it in full or not. If all your money is trapped inside your house and you are already retired how easy/fast is it to access your equity?  what if something happens to you or if you just need the money for a great REI opportunity? think about that.

IMO Cashflow is greater that Appreciation so focus on Cashflow.

Try looking into these options and run your numbers.

- move IRAs to Annuities ( lots of options in this space some can earn 6-9% return without participating in market downturns) NOW you have 2 asset class working instead of 1 and its safer.

- Refi your current mortgage maybe you can get 5.5-6% somewhere that will free up $200-$300 per month for you.

-Maybe refi and rent your condo. If it rents at 1200 per month that's around $700 in cashflow. you can buy another property.

-If you are an active investor or have a business also look into Infinite Banking strategies could be a great way to recapture taxes and create another source of tax free income. This will give you better control of your cash and still be able to use your cash however you want.

At this stage in your life try to focus on cashflow and safety. Rate of return NOT important, Sequence of withdraw is more important.

Hope that helped. Good Luck

Dan Grider · Answer

Have you looked into a recast?

Matt Ruttenberg · Answer

I definitely wouldn't do it.  I'm assuming you're interest rate is lower than the current, let's say 4%.  If that's the case, then you'd be missing out on compound interest on anything you make over the 4%... not to mention that lump sum of taxes you would have still been earning interest on.

Think of a pre-tax retirement account as an interest free loan from the IRS... drag that out as long as possible.

Also, the tax deduction on the interest is another bonus for not paying it off yet.

I would at the very most, increase the payment.  But that still isn't wise from an arbitrage standpoint.

Steve Vaughan · Answer

@David Green

What is the rate on your $85k mortgage?

Chances are it's low and easy to earn higher than that in the market, especially after tax since interest on a rental is deductible and withdrawing from a traditional is def not.

David Green · Answer

Unfortunately it's at 7.125%.

David Green · Answer

I know this is the correct thing to do. That $800 really is enticing and could come in handy but your are correct about not touching the IRA.

David Green · Answer

I have not. I will look into this and see what that could do for me.

David Green · Answer

Good idea. I will consider this. It will prevent me from having a big tax bill from taking a bunch out of my traditional IRA.

Using IRA to pay off mortgage on rental property?

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