As retirement approaches and you look for ways to save, eliminating your house payment can seem like an obvious choice. But is paying off your mortgage the right decision?
The answer is… it depends.
Keeping the Mortgage
While keeping your house payment will take away a chunk of your monthly income, it will leave your retirement nest eggs intact and provide a yearly tax deduction that will work in your favor—especially if you have recently refinanced and are still paying a considerable chunk of interest each month.
Most experts agree if paying off your mortgage requires you to reduce or stop contributions to your 401(k), you are likely making a big mistake, particularly if your employer makes a matching contribution. However, if you can make an extra payment each month without sacrificing your monthly retirement contributions, do it. It may just be the ideal approach to shortening the term of your mortgage.
Paying Off the House
If you have been paying off your home for years, the tax benefit will have little or no benefit. If you can pay off your house without touching your 401(k), do it. Otherwise, leave your retirement savings alone. Withdrawing from a deferred tax retirement account to pay off a mortgage is generally considered a poor idea, especially since that withdrawal will be taxed at the individual’s highest tax bracket. That is a higher price than most are willing—or able—to pay to free up monthly expenses.
That being said, there can be times when paying off your mortgage is to your advantage; however, most of those reasons are more emotional than financial. Paying off your mortgage can offer a huge psychological benefit, and can also benefit your heirs.
If you are considering paying off your mortgage when you retire, it is vitally important to consider all the tax implications such a transaction will create. Busey is here to help you make the right decision. For expert advice, call us today at 1.800.67 | Busey.
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