Should you take IRA money all at once to pay off your mortgage?

One decision, two ways to do it

Using IRA money to pay off the mortgage can feel like one simple decision: take the money out, pay off the loan, and be done. But how you take the money out can change what it costs. Whether to take it all at once depends on how big the payoff is and what other income you have that year.

Why one big withdrawal can cost more

Every dollar you take out of a traditional IRA counts as income in the year you take it. One large withdrawal lands on top of everything else you earn that year, and that can have a few effects:

• It can push a lot of that money into a higher tax bracket.
• It can make more of your Social Security taxable.
• If you’re 63 or older, it can raise your Medicare premiums two years later, because those premiums look back at the income on your tax return from two years earlier.

None of these shows up on the mortgage statement, but each one can add to the real cost of paying off the house.

Splitting it up

If the payoff is large, it usually costs less to split it up. A few ways to do that:

• Take part of the money in December and the rest in January, so it lands in two tax years.
• Spread the withdrawals over a few years.

The right split depends on the size of the payoff, your other income, and where your brackets fall that year. It is much easier to plan the timing before the money comes out than to undo it afterward.

How we handle it

At Sansone CPA & Financial, we coordinate your tax, investment, and retirement decisions so a large withdrawal is timed around the rest of your income. That starts with retirement income planning in Crystal Lake, IL built around your tax return.