Daily Trade News

How to decide whether to pay off that debt


When it comes to whether retirees should pay off their mortgage in retirement, there typically is no clear-cut answer.

That’s because like most things about planning for (and in) your post-working years, the decision depends on your specific situation.

Obviously, a couple of benefits come with paying off a mortgage: Your monthly obligations drop, which can provide more wiggle room in your cash flow. 

More from Personal Finance:
How to tap your home for cash as home values rise
Why inflation is both good and bad for your wallet
Here’s how to snag the best Amazon Prime Day deals

Yet depending on your tax situation and your available remaining assets — as well as where the pay-off money would come from — you may face financial implications that would need to sit well with you.

Here’s what the experts have to say.

The math

Sometimes, the calculation can be cut and dried. That is, if you’re paying more in interest on your mortgage than the interest you’re earning on the money you’d use to pay it off — and the tax consequences of doing so would be minimal — it may be an easy decision.

“Do you have the cash just lying around in a checking account? If so, then it may be a no-brainer to pay off a debt costing you a few percentage points when you’re earning nothing on cash in today’s rate environment,” said certified financial planner Brian Schmehil, director of wealth management for The Mather Group in Chicago.

Likewise, if you’re invested in bonds that are yielding 1.5% and you’re paying more than that on your mortgage, you essentially are negating the gains from the bonds, said CFP Allan Roth, founder of Wealth Logic in Colorado Springs, Colorado. 

He also pointed out that if you’re paying, say, 2.5% on your mortgage and you pay it off, you essentially just earned that rate on the money you used to retire the loan.

“It would be a risk-free, tax-free, 2.5% return,” Roth said. 

Additionally, you didn’t have to sell an asset for that return: Your home, whose value could rise, remains yours.

On the other hand, if the money you’d use to pay off the mortgage is invested through a retirement account, the interest-rate comparison may not work in your favor.

“If that’s the case, it may not be in your financial best interest to pull money out of a retirement account to pay down a debt that’s costing you less than what you otherwise might make by investing it,” Schmehil said.

Also, if you’ve been able to deduct mortgage interest on your tax return — you must itemize your deductions to get that break — keep in mind that this benefit will disappear. (Most taxpayers do not itemize, however.)

Taxes

There also may be tax consequences to taking a distribution from your retirement funds.

Unless the account is a Roth — whose contributions are made post-tax but distributions are generally tax-free — your withdrawals would typically be taxable. Traditional 401(k) plans and individual retirement accounts provide a tax break for contributions, while distributions are taxed…



Read More:
How to decide whether to pay off that debt