Myrna McGrath, a 75-year-old native of Iowa, retired at the age of 66 but had no plans to pay off her mortgage. Former CPA McGrath claims, “I gave it a lot of thought.” But because I make more money from my retirement plan, which is invested in stocks and mutual funds, than it costs me to maintain my mortgage, I chose to do so. ”.
Even so, you might be hesitant to enter retirement while still owing a mortgage. A mortgage can feel like a burden on a fixed income since it is typically the largest single expense in someone’s monthly retirement budget.
The key factors are your age, the size of your mortgage, your attitude toward debt, and your retirement income plan.
For McGrath, it was also a matter of convenience. I allow my mortgage holder to escrow my insurance premiums and property taxes because I have an escrow account with them, says McGrath. “Having them do that is more convenient for me,” ”.
When you’re retired and thinking about paying off your mortgage, the choice might seem difficult. We’ll get you started with five key considerations.
You may incur financial penalties if you withdraw funds from your personal or employer-sponsored accounts before you are eligible to retire.
If you’re younger than 59. 5. If you withdraw money from your IRA or an employer-sponsored plan like a 401(k) or 403(b) early, there is a 10% penalty. Depending on your financial objectives and plan, that 10% could represent a significant loss.
In addition to penalties, the more retirement funds you spend now, the less you will have in the future. Before you invest heavily, be aware of how much money you may need to maintain your standard of living in retirement.
Your comfort with debt
Sometimes emotional factors are just as important as financial. The math can be overridden by who you are and how you feel about debt, according to Stanley Poorman, a financial advisor with Principal®. “Do you view your mortgage balance as the weight of the world, or are you content to carry it into retirement?”
Making mortgage payments into retirement could free up money for other expenses or priorities, depending on your financial goals and comfort level with debt.
“7 steps to pay off debt and save for retirement” is more information.
The size of your mortgage
The point above doesn’t mean you shouldn’t consider the numbers. The value of your mortgage when you retire could significantly alter your payoff strategy.
Taking distributions from retirement accounts to pay off debt may cause you to move into a higher tax bracket than you would otherwise, according to Poorman. You should be aware of this.
Any pre-tax money withdrawn from your 401(k) while you are retired is considered income. Thus, withdrawing $100,000 from your retirement account to pay off your mortgage, for instance, could easily push you into a higher tax bracket and result in thousands of dollars in additional taxes. The impact of a $10,000 balance probably won’t be as significant.
If you withdraw $100,000 from your retirement account to pay off your mortgage, you might fall into a higher tax bracket and end up paying thousands more in taxes. The impact of a $10,000 balance probably won’t be as significant.
The amount of interest that you pay may be tax deductible if you keep up with your monthly mortgage payments. But for it to matter, the level of interest must be fairly high. The standard deduction was nearly doubled by the 2017 Tax Cuts and Job Acts, which for many Americans eliminated itemized deductions like mortgage interest.
Protect your mortgage.
Life insurance offers mortgage protection if you decide to carry your mortgage payments into retirement. You can match the term of a term insurance policy to the term of your mortgage.
Your nest egg
If you intend to pay off your mortgage, take withdrawals first from the source with the lowest interest rate if you have multiple sources of funding for your retirement years. For instance, if your savings account earns just 1% and your retirement account earns 6% to 7% 5%, you might want to use your savings instead of your retirement funds.
It’s crucial to have several money pots available, according to Poorman.
However, be careful not to spend all of your money; keep a safety net for unexpected events. It might be best to continue making payments if you don’t have a diverse portfolio and paying off your mortgage would use up the majority of your hard-earned money.
“3 steps to help create a retirement income plan” for more information.
Rates of return
Because interest rates are still historically low, you might receive less interest than you would from investments. Your home is an investment, and McGrath claims that the return on his investment outweighs his interest rate. “If interest rates were high, a different factor would be taken into account.” ”.
Paying off your mortgage might be a smart move if the growth potential of your retirement savings is lower than the interest rate on your mortgage. But in addition to the potential tax benefit, pre-tax contributions to your retirement account might provide better growth potential.
Tip: Your current asset allocation may need to be adjusted once you retire. Switching from saving to spending your savings may mean you still need some growth potential to keep up with inflation. (And so you don’t run out of money.) You will want to evaluate your risk tolerance before making changes.
Conclusion: It’s not always a simple decision to pay off your mortgage in retirement. It depends on a number of variables, such as your personal financial situation and goals. A financial expert can be of assistance if you require assistance creating a plan or desire ongoing guidance.
Ready to get started?
1 Joint Center for Housing Studies of Harvard University, 2020 Housing Insights
The information in this communication is provided solely for educational purposes, and it is understood that Principal® is not providing any legal, accounting, investment, or tax advice. On all issues relating to legal, tax, investment, or accounting obligations and requirements, you should consult with appropriate counsel or other financial professionals.
Principal Life Insurance Company provides insurance items and plan management services. Securities offered through Principal Securities, Inc. , 800-547-7754, member SIPC and/or independent broker-dealers. Members of the Principal Financial Group®, located in Des Moines, Iowa 50392, include Principal Life and Principal Securities. Investment advisory products offered through Principal Advised Services, LLC. Principal Advised Services, Des Moines, Iowa 50392, is a part of the Principal Financial Group®.
FAQ
What is the tax rate for withdrawing from a 401k after 59 1 2?
Once you reach this age, you are permitted to withdraw as much money as you like from the account. You are subject to ordinary income tax once you reach the age of 59 1/2 and take a qualified distribution from a 401(k).
Should I use my 401k to pay off my house when I retire?
Paying off your mortgage might be a smart move if the growth potential of your retirement savings is lower than the interest rate on your mortgage. But in addition to the potential tax benefit, pre-tax contributions to your retirement account might provide better growth potential.
Can I cash out my 401k to pay off my house?
Since it is your money, the quick answer is yes, you can use a 401(k) to purchase a home. While there are no limitations on how you can use the money in your account, there is a 10% early withdrawal penalty and taxes if you take money out of a 401(k) before age 5912.
Do I pay taxes on 401k withdrawal after age 60?
You effectively take on the role of your own paymaster, choosing the distribution’s amount. You will pay income tax on your withdrawals if your 401(k) contributions were traditional personal deferrals, so the answer is yes.