Pay off mortgage if means entering 22% tax bracket?

[Bugeater]

Retired in 2022 (age 56) and built a house at end of COVID. House ended up being $150k more due to materials and labor increases. Since my $ at this stage is all tax deferred, I took out a mortgage to defer sequence of return risk (20 yr at 5.8%).

I live about $15-20k below the top of the 12 % tax bracket. Wondering if I should just pay extra mortgage in the amount that takes me up to the 12% top (paying off mortgage in about 6-7 yrs) or all at once, but those extra funds would all be in 22% tax bracket.

Mortgage being paid from funds earning ~4%.

I'm leaning towards the 6-7 year plan.

Thoughts?

 

[MarieIG]

It doesn't have to be all or nothing.

 

[Gumby]

Mortgage rates probably will decline this year and you may want to refinance if and when they do. Perhaps you can pull the term in a little and get something below 4% by the end of the year. Then, you can decide whether you are comfortable prepaying principal on a lower rate mortgage.

 

[Dash man]

I’ve been without a mortgage for 14 years and love being debt free. But you have to make this decision for you.

 

[qwerty3656]

could also consider doing Roth conversions - what does your future tax situation look like?

 

[Mark1]

You can also pull out a little extra money this year (and maybe next year?), while staying within the 22% tax bracket regardless of whether you apply it to the mortgage, or not. At least you keep your options open for later, and it is unlikely you will ever top out within the 10% bracket, so it will likely come out someday at 22% or higher.

 

[Bugeater]

could also consider doing Roth conversions - what does your future tax situation look like?

Yes, Roth conversations in my plan for future as well, after mortgage. My total expenses, tax included is around $100k/yr so will always have around $20k +/- to top of 12 % bracket. For some reason, I have a mental block about drifting into the 22% bracket and losing that extra 10%.

 

[Dash man]

You might want to look ahead to 2026. The tax rates will be going up after current law expires.

 

[Bugeater]

You might want to look ahead to 2026. The tax rates will be going up after current law expires.

Agree, something to consider as well with both increased tax rates but also more interest deduction ability.

Fortunately, $150k mortgage vs payoff is not a huge amount either way. I'm probably overthinking

 

[W2R]

I’ve been without a mortgage for 14 years and love being debt free. But you have to make this decision for you.

+1, 17 years in my case.

My original plan was to finish paying it off in 2005, but Hurricane Katrina happened that year. John Lennon's famous quote, "Life is what happens to you while you are busy making other plans" was demonstrated quite clearly for some of us here in New Orleans that year.

Flexibility is really helpful for retirees sometimes. All in all, paying off the mortgage later than planned (for unavoidable reasons) turned out to be a non-problem for me.

 

[Badger]

As best as I can remember we paid off an 8.75% mortgage 25+ years ago once it did no good for itemizing taxes. We made a second payment the size of the monthly payment that went to the principal and owned the house in about 5 years after a decent savings.
Was it a good idea? It was for us with our limited knowledge and we have enjoyed the lack of having another debt while we continued to sock away that money into our retirement. Others here may have a better idea.

 

[Gumby]

Purely by chance, we made the final payment on our mortgage in 2017, when the TCJA was passed and the home mortgage interest deduction was no longer helping us. We started with a 30 year mortgage in 1993 at 8.375% and refinanced five times, eventually ending up with a 5 year mortgage at 1.99%.

It was always our plan to enter retirement (in 2019) without a mortgage and we prepaid principal to make that possible, but I have since come to the conclusion that if cash flow permits and the interest rate is low enough, it can be a viable strategy to keep the mortgage in retirement.

 

[statsman]

Our intent was to keep the mortgage (8 years remaining at 2.625%) once we retired. A bit over a year later, we sold the house and paid off the mortgage since we were moving out of state. It was just as well. As mentioned in this thread, the change to the tax law was about to pretty much eliminate the home mortgage deduction (along with the cap on the property tax deduction).

The new house purchased in 2019 required 32% of what we cleared on the sale of the house. I have to say not having a mortgage starting that year (first time in 33 years) felt great. I can see why some prefer that route.

 

[Stormy Kromer]

Since you asked.

Me personally ? I would soak up the 12% bracket and add it to the principal. I wouldn't go beyond that.

I have lived with a mortgage and mortgage free. I like both. Having a mortgage never bothered me as long as I knew the house was worth more, and I had the funds in my investment account to pay it off whenever I wanted. I should also point out that my mortgage started in 1993 at 7% and I refinanced it down twice to about 4%. I held it for the duration and invested surplus funds to my investment account.

All of this said, if you're more comfortable paying off your mortgage I sure won't argue with you. Peace of mind has value.

 

[audreyh1]

Roth conversions.

 

[bmcgonig]

Compare your after tax mortgage to the after tax 4% money used to pay it. Isn’t the after tax 4% less than the mortgage? If so why not pay it off?