Last week I wrote about the hidden emergency fund in your Roth IRA. In case you didn’t read that article, a huge takeaway was that you can take out contributions (not earnings) out of your Roth IRA penalty-free at any age.
In writing that article, I thought about how much accessible money I might have in my Roth IRA. I’ve been maxing it out for about 15-20 years. That’s a big chunk of change. Without adding it up, I’d estimate it is around $50,000 (some years the maximum contribution was $2000). What if I took all that money out to pay off my mortgage?
Personally, I’d never such a thing and here’s why. The math of the average returns in the stock market (7-8%) is more valuable to me than saving 3.5%, especially when the interest on that is tax-deductible. I’ll go with the math every time and twice on Sunday.
However, there are others who aren’t as focused on the math. Some people, such as those who follow finance “guru” Dave Ramsey hate debt and try to eliminate it as soon as possible. A mortgage is debt. I consider it good debt, but some of these people are against all debt. I understand their thinking, being free of debt can be huge psychologically. It can eliminate stress and that’s a good thing.
This left me wondering, has anyone ever considered making this move? On some level, it makes sense to eliminate your mortgage for peace of mind. You won’t need as big a retirement if you’ve eliminated your biggest expense, right? While all this is true, I’ll still go with the numbers and take the 7-8% compounding over many years vs. the 3.5% (minus the tax deduction) compounding over the same time.
I have to think someone has said, “I’m done with debt. I’m going to raid my Roth IRA and get this debt out of my life.” If you are that person, I’d love to talk to you. I think it’s an interesting option for debt-haters and I’ve seen it discussed.
On the other hand, what about the reverse situation? What if you had home equity and did a cash-out refinance or home equity line of credit (HELOC) for the sole purpose of investing the money to earn a higher percentage. As an entrepreneur, I have access to solo 401Ks and SEP-IRAs, but I often don’t max them out. Why? Because I need the cash to live on. Also, it can be tough to max them out because these types of accounts have higher limits.
Getting money out of your home to invest sounds risky, but it truly is the opposite of pulling money out of your investment to pay off your house, right? So maybe it isn’t so crazy?
What do you think? Let me know in the comments.