Rethink paying off mortgage with IRA
Q: I’m thinking of paying off my mortgage with money from my IRA. Should I? — B.C., Greensburg, Pennsylvania
A: Think twice about it. With a traditional IRA, if you’re younger than 59 ½ , withdrawals will be taxed at your ordinary income tax rate, and you’ll face a 10 percent early withdrawal fee, too. Also, the amount you withdraw will boost your taxable income, perhaps moving you into a higher tax bracket, and by wiping out your mortgage, you’ll lose your mortgage-interest tax deduction.
Compare your mortgage interest rate with the growth rate you expect for your IRA holdings. If your mortgage rate is 5 percent, paying it off early essentially “earns” you 5 percent. If you think you would have earned 5 percent with your IRA investments, you’re not ahead. Cashing out a retirement account also means that money won’t be able to grow for you.
Do the math for your situation, but consider keeping your IRA and trying to make extra payments on your mortgage when you can.
Fool’s School: Dividends and yields
When you find a great growing company in which to invest, if it pays a dividend, that’s the icing on the cake. To assess the size of the dividend, check out the “dividend yield,” which expresses the relationship between the stock’s price and the amount of its annual dividend.
Consider Boeing. It was recently trading around $240 per share, paying out $1.42 per quarter ($5.68 per year) as a dividend. Take $5.68 and divide it by $240 and you’ll get 0.0237. Multiply that by 100 and you’ve got a dividend yield of 2.37 percent, so you’ll earn 2.37 percent per year on your investment from dividends alone.
Dividends of healthy companies tend to increase over time, delivering additional value to shareholders. Companies rarely decrease or eliminate their dividends, as that would make investors unhappy. Like many companies, though, Boeing was challenged in the recent recession, and its dividend growth stalled. Its payout has more than tripled since 2011, though, and it was hiked by 30 percent for 2017.
A dividend will hold steady for months or years at a time. But the yield fluctuates daily as it’s tied to the stock’s price. As a stock price rises, the yield falls, and vice versa. If Boeing shares suddenly doubled in price to $480, the yield would be halved, to about 1.2 percent ($5.68 divided by $480 is 0.012).
Name that company
Few people know my name, but my chips are very likely in your smartphone, cable box and other devices. I’m the product of mergers and spinoffs, and for more than 50 years I have been tied to Hewlett-Packard, Agilent, AT&T, Bell Labs and Lucent, and I’m the product of a 2016 acquisition by Avago Technologies. I or my predecessors introduced the first LED dot-matrix displays in the 1960s and launched the first Wi-Fi/Bluetooth/ FM combo chip for mobile phones in 2007. I have shipped more than a billion optical-mouse chips. My market value recently topped $100 billion. Who am I??
Last week’s trivia answer
I trace my roots to 1847, when one of my co-founders, an immigrant, invented America’s first candy machine — a lozenge cutter — followed by a sugar pulverizer. My offerings today include Squirrel Nut Zippers, Mighty Malts, Canada Mints, Mary Janes, Sweethearts, Candy Buttons, Clark Bars, Slap Stix and Sky Bars. Who am I? (Answer: NECCO)