Mortgage payments and taxes

[chief04010]

Here is my situation I currently owe approximately 140K on my mortgage and pay about $1100 a month. When I retire I will have access to my 401(k) and can take a partial lump sum to pay off the mortgage but that extra 140K will have a big effect on my taxes for that year. My question is it worth it to pay more taxes for one year and get rid of the $1100/month payment and is there a loophole that I could use to pay less tax. Perhaps there is a better way to approach paying off the mortgage instead of one lump sum payment?

 

[JoeWras]

Paying off my mortgage was one of the biggest boosts to my F.I. It also boosted my over all well being.

That said, it isn't always appropriate in all cases.

In your case, I'd suggest you look at your income stream, and then determine what kind of income you can realize from your 401k before hitting the next bracket. You could intentionally realize the correct amount of income to not go up to the next bracket. Likewise, you can estimate next year and see if you'll be in a lower bracket the following year, and start then with the same strategy.

For example, if you are single make $40k, then you can realize $45k to pay off part of the lump sum and stay in the same bracket (25%). If you realize the whole 140k, you'll be doing much of it with the next bracket up.

That would be my strategy. Others may disagree.

There are multiple moving parts here to consider:
- When will you take your 401k income? How are you spreading it out? You'll have to realize the income and associated tax payment sometime.
- What is your mortgage rate? Is it worth an early payment?
- Are you realizing any significant tax advantage through a mortgage interest deduction?
- What kind of return do you think you can get with the money in your 401k versus the mortgage rate?
- Do you get peace of mind completely owning the roof over your head? Or maybe you don't mind that the bank owns part of it.
- Etc.

 

[Animorph]

You will be paying taxes by withdrawing from the 401k no matter what. So how much extra will it cost to take it all out in one lump sum? Maybe more than one year's worth of mortgage interest. Draw something out now at 25% tax that you could usually withdraw for only 15% and you are paying a 10% penalty. Maybe two years of mortgage interest?

So if you can withdraw the money at your normal tax rate, great. If not, you probably want to pay it off over several years and keep the tax bite reasonable.

Of course, I always vote to keep the mortgage and invest, but that's another question.

 

[chief04010]

Thanks for the replies, you've gave me more to think about. As if I needed to think about this any more. LOL