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

Mortgage rates these days are through the roof, right? But if you locked in a sweet 3% fixed rate a few years ago, your situation probably looks pretty good—at least on paper. Still, plenty of folks with a low-rate mortgage find themselves asking: “Should I just pay off the rest of my mortgage now, even if it means dipping into my IRA or retirement savings?”

I’ve helped a lot of people wrestle with this exact question, and it’s a great example of how personal finance isn’t just about numbers—it’s about feelings, taxes, and real-life tradeoffs.

The Numbers Don’t Tell the Whole Story

When you crunch the numbers, it seems pretty simple. Your mortgage is costing you 3% interest, while your investments—despite market ups and downs—are probably earning around 5% or more annually. So why take money out of your IRA, potentially triggering taxes and penalties, just to pay off a loan that’s actually pretty cheap?

But here’s the thing: most people don’t struggle with this because they can’t do the math. They struggle because of the peace of mind that comes with owning their home outright. That feeling of security and simplicity isn’t something to brush off. I’ve had clients tell me they sleep better at night knowing they don’t owe a dime on their house. But just because it feels good doesn’t mean it’s always the smartest financial move.

The Real Cost of Tapping Your IRA

This is where things get tricky. If you’re under 59½, pulling money from your IRA will likely cost you a 10% early withdrawal penalty plus income taxes on the amount you withdraw. Even if you’re over 59½, that $35,000 you take out just gets added to your taxable income for the year.

Let’s say you’re in the 22% federal tax bracket. That’s roughly $7,700 in taxes right away—more if your state charges income tax. If you’re under the age cutoff, tack on another $3,500 penalty. Suddenly, paying off that $35,000 mortgage could end up costing you over $40,000 after taxes and fees.

This is something a lot of people don’t realize. They see their IRA balance like it’s cash in the bank, not realizing how much Uncle Sam will take if they tap it now.

Can Your Investments Outperform That 3% Mortgage Rate?

If you leave your IRA alone, that $35,000 stays invested—growing tax-deferred. Historically, balanced portfolios return around 6–7% annually over the long term. Sure, the market can be rocky and there’s no guarantee, but even a conservative 4% return outpaces your mortgage’s 3% interest.

Thanks to compounding, letting that money grow usually beats paying off a low-interest mortgage early.

The Priceless “Peace of Mind” Factor

Still, some people value the emotional comfort of being mortgage-free more than the numbers. There’s something genuinely freeing about knowing your home is 100% yours—especially if you’re living on a fixed income.

My advice? If paying off your mortgage helps you sleep better and you can handle the tax hit comfortably, it’s a reasonable choice. Just don’t let that emotional relief blind you to the real expense.

When Paying Off Your Mortgage Might Actually Make Sense

• You’re in a low tax bracket this year. Maybe your income’s light, so the tax impact won’t be as painful.
• You’re over 59½. That means no early withdrawal penalty.
• You have plenty of assets. The $35K is a small slice of your retirement pie, and your cash flow is solid.
• Your mortgage payments really weigh on you. Getting rid of them would noticeably ease your budget and stress.

In these situations, I’ve seen people pay off their mortgage and never look back—because they did it with their eyes wide open.

Two Huge Red Flags to Watch Out For

1. The Early Withdrawal Penalty: If you’re under 59½, that 10% penalty usually kills any benefit of paying off your mortgage early. I rarely recommend dipping into an IRA before retirement age unless it’s a true emergency.

2. Draining Your Retirement Nest Egg: If that $35,000 is a big chunk of your savings, pulling it out could hurt your future financial security. Once it’s gone, you lose the chance for tax-deferred growth and market gains. I’ve seen people regret that move years later when their retirement funds didn’t stretch as far as they needed.

A Smarter Middle Ground: Extra Mortgage Payments

If you’re itching to get rid of the debt but don’t want to raid your IRA, consider making extra payments from your regular cash flow. You’ll chip away at the balance faster without the tax hit. It’s a practical way to reduce debt and keep your retirement savings intact.

Remember the Opportunity Cost

The market isn’t predictable, but over time, your IRA likely will grow faster than your 3% mortgage rate. Taking money out now means missing out on those future gains. Also, inflation quietly reduces the real cost of your mortgage over time. What feels like a big payment today might feel much smaller in ten years, especially if your income grows or Social Security increases with inflation.

What I’d Do If I Were You

If I were over 60, in a low tax bracket, and had my retirement well-covered, I might pay off the mortgage for the peace of mind alone. For most folks, though, I’d leave the IRA funds alone and let them keep growing. If you want to be proactive, make extra payments, but don’t let fear of debt drive you into a costly move.

The Takeaway

There’s no one-size-fits-all answer here. The math usually says don’t pay off a low-rate mortgage with IRA money, especially when taxes and penalties come into play. But personal finance is personal, and if the emotional payoff is worth it to you—and you understand the costs—go for it. Just make sure you’re doing it for the right reasons, not just because you hate seeing that mortgage statement each month.

Two quick warnings: don’t do this if you face big tax penalties, and don’t do it if it knocks your retirement savings down too far. Too many people underestimate those risks and end up regretting it.

At the end of the day, sometimes the smartest move is simply to do nothing at all—except keep an eye on your finances and stay curious about your options.

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