It can feel great to pay off your mortgage when you get to
retirement. You're no longer making those monthly payments, nor are you
paying interest on your loan balance. But it can also be problematic.
And I'm not going to get into the details of the problems.
This video is more about the solution, but you can look in the
description and find a video that describes some of those pros and cons
and helps you decide what to do about it. For the next couple
of minutes here, we'll just focus on how to avoid those tax problems
so you don't bump yourself up into a much higher tax bracket and
potentially make your Social Security payments taxable, and maybe make your
Medicare premiums go up, and cause a bunch of other havoc on your
finances if you take a big lump sum distribution just to pay off
the mortgage all at once. We're going to make two critical assumptions.
First is that you have decided that this is the right move for
you. You've already looked at those pros and cons, and you've just decided
that you want to pay off the mortgage as quickly as possible.
It might not be in one lump sum next week, but we're going to do
it as quickly as possible. The other assumption is that all the money
is in pre tax retirement accounts, so if the assets you're going to use
are in just a taxable brokerage account or your bank account or in
Roth IRAS, the math might be a little bit different. That doesn't mean
you should or shouldn't do it, it's just that that's not going to be
exactly what we talk about. The ultimate goal here is that you have
a plan and that gives you some clarity and some confidence on what
you're going to do next, and you at least know there's light at
the end of the tunnel, that you can be done with that mortgage
at some point shortly. So just an overview of what we're about to
talk about here is: How does this strategy work? And it's basically that
you take the money out a little more slowly than in one lump
sum. So, by doing it over a series of years, and I'm going to show
you exactly how to figure out how much you might take each year,
but by doing it over a series of years, you can avoid a
lot of those problems that I've highlighted in that previous video,
and. All along the way, you're going to want to compare the interest
costs that you pay or don't pay to the taxes you pay or
don't pay, and all of the other expenses that do or don't come
up. So let's dive into those four key pieces, and the first one
is going to be that income tax rate. How can you avoid bumping
yourself up to into a substantially higher tax bracket? To. Help guide you
here, what you want to know is exactly at what level of income
you're going to be in different tax rates. So you can just search
for tax rates for different levels of income, and Tax Foundation as good
of source as any... Or the IRS has that, of course,
but ultimately, we want to know roughly what level of income leads to
you being in a different tax bracket. And you can then withdraw enough
from your pre tax accounts looking at everything else on your tax return,
you probably want to do this with the help of your CPA or
your tax preparer, but you look at all of those different sources and
say, what level am I willing to pay taxes at? Is it 22%?
Is it 24%? And from there, you can decide exactly how much to
take out, and you can see that if your income each year is
roughly around $50,000, you take out $200k or $300,000
to pay off a mortgage all of a sudden, you bump yourself up
into a much higher tax bracket. So again, decide what level you're willing
to pay taxes at, and then figure out what income level is good
with that. Now, let's look at Social Security. How can you avoid paying
income tax on your Social Security? Once again, you can just do a
quick web search and this will tell you exactly where you need to
go, right to SSA.gov to figure out at what level or what are
the factors that make your Social Security taxable... You don't necessarily
have to not pay taxes on Social Security, it could make sense to
do so, but I think you want to at least do that as
an informed and intentional decision. So you can see that if your so
called "combined income," and that's kind of a funny combination of different
things on your return, if your combined income is over a certain level,
then some or most of your Social Security income could be taxable.
So again, you're going to look at all of the sources of income
you have that go into this calculation, and you're going to say,
Well, how much can I withdraw until I reach one of these thresholds
and am I willing to pay taxes on 50% of my Social Security?
And if not, then stay below that level. And then we've got your
Medicare premiums, so those of you over age 65
are potentially going to pay more depending on your income, so to find
that information again, you guessed it, you're going to search for Medicare
premium costs, and what we're most interested in here is the Part B
premium. So this is something that is going to be adjusted depending on
the income you have, so if we look at a joint tax return
and whatever your income is here, as the income increases, so do your
monthly premiums. So here you want to say, where am I at on
my current income, what are the withdrawals I can take to pre pay
the mortgage and do partial prepayment? You don't have to pay off the
whole thing at once, but as you make those partial pre payments,
what can you do to avoid additional monthly costs? So again,
you're looking at the interest cost that you would or would not pay,
and then you're looking at the Medicare premiums that you would or wouldn't
pay, and the Social Security tax and income tax, and you put all
that together to help you decide. And there are those of you who
are under 65 and you're not on Medicare, so you're going to be
buying your own health coverage. So to find out about some subsidies and
income levels that might be important to you, you can just search for
what I did here, "ACA subsidy," and if you start going over to
healthcare dot gov, they can show you some income levels here that are
going to be interesting for you, and then you can go through a
little wizard, and put in whatever the details are about your household
and go through a calculator and figure out at what point might you
be able to save some money or get some subsidies on those premiums,
and again, this guides you and tells you how much might be okay
to take out without wreaking havoc on the rest of your finances.
Once you've looked at all that and maybe some other things as well,
you can evaluate all the pros and cons, and that includes things like
opportunity cost, what might that money do otherwise, or is it going to
be okay to have it tied up in the house if you want to get
it back out later? These are just all different things you want to look
at, and then that helps you decide exactly what's best to do.
By the way, I help clients do this as well. If you want
my help with that, you can explore working with me. If you found
this helpful, please leave a quick thumbs up that helps me know that
I'm on the right track, and it helps to get the word out
to other people as well. Thanks for watching.