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“I’m at a crossroads”: Should I Use My $700K IRA to Pay Off My $35K Mortgage at 3%?

So here you are, looking at a mortgage balance that’s down to just $35,000 with a sweet 3% interest rate. Meanwhile, your IRA is sitting comfortably around $700,000. The big question: should you dip into that IRA to clear the mortgage once and for all?

This situation pops up more often than you’d think, especially for folks nearing or in retirement. After years of roller-coaster markets and historically low mortgage rates, many people crave that peace of mind that comes with being 100% debt free. But as simple as the question sounds, the answer is rarely black and white. It’s about more than just numbers—it’s about taxes, risks, and how comfortable you feel with your financial setup.

The Emotional Pull of Paying Off Your Mortgage

Honestly, I get it. There’s something incredibly freeing about owning your home outright. For many, it’s not just about saving on interest—it’s about the security of knowing you owe no one monthly payments. That feeling of “no debt” can be huge.

But before grabbing that checkbook and pulling from your IRA, take a moment to consider the bigger picture. Taxes, lost growth potential, and future cash flow all deserve a second look.

Watch Out for the Tax Trap

If your IRA is a traditional one (not a Roth), every dollar you withdraw counts as taxable income. That means pulling $35,000 could push you into a higher tax bracket this year. And if you’re under 59½, there might even be a 10% penalty on top.

Let’s break it down: say you’re in the 22% federal tax bracket. That $35,000 withdrawal would cost you about $7,700 in taxes, which means you’re actually pulling nearly $43,000 from your IRA to pay off a $35,000 mortgage. Ouch.

Plus, once that money leaves your IRA, it’s gone for good—not compounding and growing for your future self.

“But My Mortgage Rate is So Low!”

And you’re right—a 3% mortgage these days is like winning the lottery. If your IRA investments are bringing in 5%, 6%, or more, it usually makes more sense to keep that mortgage going and let your money grow.

Of course, the market isn’t guaranteed, and crashes happen. But historically, a well-diversified portfolio tends to outperform the interest on a fixed-rate mortgage over the long haul.

Here’s the kicker: once you use that $35,000 to pay off your mortgage, it’s stuck in your home. No quick access without selling or refinancing—probably at a higher interest rate than what you’re paying now.

When Paying Off the Mortgage Might Actually Make Sense

There are a couple of exceptions where pulling from your IRA could be a smart move:

• Required Minimum Distributions: If you’re already taking RMDs and they’re more than you need, using that money to clear your mortgage can be a tidy way to handle it.
• You’re Sitting on Plenty of Cash: If you’ve got solid savings outside retirement and just really want that mortgage gone for peace of mind, that’s totally valid. Sometimes that feeling of no monthly payment is worth it.

Why Flexibility Matters More Than You Think

Most folks overlook this: once you shove your cash into your home, it’s not liquid anymore. Emergencies, home repairs, or sudden opportunities all need ready cash. That $35,000 could cover a lot of unexpected bills if it stays in your IRA—even if you only withdraw a little bit each year.

And remember inflation. Your fixed 3% mortgage payments basically get cheaper over time as the value of a dollar declines. So, in a way, your future mortgage payments won’t sting as much.

When This Advice Doesn’t Fit

Of course, if you have a variable-rate mortgage or a higher interest rate—say 6% or 7%—then paying it off might be a better choice. Especially if your investments aren’t doing well or if you prefer playing it safe.

Also, if your health or expenses are unpredictable, simplifying life by ditching the mortgage can be a relief. Sometimes reducing monthly bills and stress trumps the math.

So, What’s the Best Move?

There’s no one-size-fits-all answer. If you’re thinking about using your IRA to pay off a small, low-interest mortgage, chances are you’re in a good spot financially.

The numbers typically don’t favor a big withdrawal, especially if you’re in a higher tax bracket. But if the monthly mortgage payment keeps you tossing and turning at night, maybe it’s worth the cost.

On the flip side, if you’re comfortable watching your investments grow and can handle the monthly payment, keeping that mortgage and your liquidity probably makes more sense.

Why Not Consider a Hybrid Approach?

Some folks don’t go all-in or all-out. They pay off part of the mortgage with cash or taxable accounts, then chip away at the rest over time with smaller IRA withdrawals that keep them in a lower tax bracket.

This steady approach can help manage taxes, maintain flexibility, and gradually clear the debt without feeling the pinch all at once.

Final Thoughts

There’s a mountain of advice out there about what you “should” do, but at the end of the day, it comes down to what feels right for you. Your comfort with risk, your tax situation, and your future plans all play a role.

If you’re in doubt, run the numbers with a mortgage payoff calculator and chat with a tax pro. The goal is to find a balance between smart money moves and peace of mind.

And hey—there’s no rush. There’s no trophy for paying off that last $35,000 if it doesn’t fit into your bigger financial picture.

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