Use Retirement Funds to Refinance
I want to refinance. Does it make sense to pay down my principal balance with retirement funds?
We would like to refinance our home. We have an old IRA account that we would like to use to reduce our mortgage amount (aprox $100K). What are the tax implications? Would it be worth it in your opinion.
- Review all the costs of refinancing, to see if refinancing makes sense.
- Consult with a tax professional, before withdrawing funds from a retirement account.
- Understand that a 10% penalty will apply to retirement fund withdrawals taken before age 59 1/2.
Thank you for your question about refinancing and the best use of your retirement account.
First of all, it is great that you are considering the tax implications of a retirement account withdrawal, as they can be very serious.
There are some key facts that you left out of the picture. This prevents me from giving you specific advice, but I can give you an idea of what factors to consider.
The fourth quarter of 2010 is a great time to refinance your home; rates are at a historic low. Whether it is a good idea for you to refinance depends on your individual circumstances.
What is your current interest rate? How many months is it going to take you to recoup the costs that you will pay on the loan, taking into account the reduction in your mortgage payment? How many months are you adding to your loan term?
How many months will it take for the savings on your interest and private mortgage insurance (PMI), if you will pay PMI, to exceed your closing costs?
What is the value of your home? Do you need to pay down the principal balance in order to qualify for refinancing or to avoid paying private PMI?
How long do you plan to stay in your home? It takes time to recoup the costs of the refinancing. If you move before then, refinancing does not make sense.
What is your age? Are you 59 ½? The tax implications will depend in part on how old you are. For most retirement accounts, withdrawing funds before you are 59 ½ results in a 10% penalty. If penalties apply, does it make sense to pay $10,000 in penalties in order to achieve.
What kind of retirement account do you have? Is it a standard IRA or a Roth IRA? Are the funds in the account from principal contributions you made or from earnings that occurred in the account? You pay taxes on earnings when you withdraw them with the traditional IRA, while earnings are tax-free with a Roth. Also, you have paid taxes on the principal contributions on the front-end in a Roth IRS, but the contributions in standard IRA were made tax-free.
What is your current tax bracket? Will the disbursement from the IRA boost you into a higher tax bracket? If that would be the case, it could make sense to take out a smaller amount, multiple times, over a number of years. Are you likely to see your income drop in the near future? If so, you may not want to take out a large sum that will be added to your taxable income, thereby raising your tax bracket.
Seek the counsel of a certified financial planner and a tax professional. Speak with the financial advisor to review your entire financial picture. Review your cash flow, assets, and your need to lower the mortgage payment with your advisor. A tax professional will be able to lay out all the tax implications.
Do not take a very large distribution from a retirement account without reviewing the issues I have raised.
I hope this information helps you Find. Learn & Save.