There are several questions people entering retirement ask themselves. Should I keep working? What will I do with my time if I stop? Do I have enough to live on? And, as more and more people retire with a looming mortgage payment, should I keep the mortgage or should I pay off the house?
This last question is an important one. And, as you can imagine, it isn’t easy to answer. Let’s consider these two options:
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 you with 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 a number of 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 401(k) 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 people a huge psychological benefit, and doing so can also benefit their heirs, who will also benefit from a home that is paid off. If a reverse mortgage is something you need to do, having a fully paid off home can offer more toward your daily living expenses in future years.
All in all, 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 1.800.67Busey.
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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Busey Investment Services and not necessarily those of Raymond James. The information has been obtained from sources conserved to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.
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