This is probably one of the most common questions I am asked when people come in to my office: “Should I withdraw money from my retirement account and pay off my house mortgage?” Besides these dollars being taxed as ordinary income, (usually the highest of the available types), you may be moved to another tax bracket on your regular income or cause your social security to be taxed. After all, if you need $100,000 to pay off your mortgage, you may have to withdraw as much as $150,000 (taxable), just to pay the state and federal income taxes. Should you still withdraw it and pay off your house?
That depends on many factors. Here are a few areas that clients have found to be the top questions to consider when this decision needs to be made. First, consider whether or not you plan on living in this house for the rest of your life. If it fits your needs, then it could be the “rest of your life” house. Is it a single story home with an accessible driveway, backyard, and interior layout? Is it close to your children and grandchildren? Can you afford the ever-increasing costs to live in California?
Another area to consider is how much other money you may have available to earn interest and help pay for your lifestyle for the decades to come. You may need to have more money coming in each year, and that is going to take more than a small pension and social security. Do you have other sources of income, such as rental property or business income? Do you have enough for emergencies and regular home repairs? This is going to take cash because you cannot remove a piece of drywall or carpet and go to the grocery store to exchange it for food or medicine.
Finally, one of their top considerations revolves around healthcare. In today’s mixed up world, we have found that healthcare has become unpredictable, both in costs and in coverage. The co-pays and out-of-pocket expenses only seem to go up every year, leaving many people to wonder if they really have health insurance at all. Make sure you have enough money to buy the best health insurance you need. By withdrawing money from your retirement account and spending it on your house mortgage, those dollars are gone forever and cannot earn interest ever again.
Solution: So, the answer to the question is: It depends on your personal situation. However, with interest rates still near all-time lows, the cost to borrow money is very inexpensive. If savings interest rates increase over time, then we can expect it to be even more mathematically favorable to keep the house mortgage and your savings. As long as you can make the payment with your income, my clients have always preferred having cash on hand. A predictable and safe income strategy is always the secure way to go.
Arif Halaby is a Certified Estate Planner in California and President/CEO of Total Financial Solutions, Inc., a financial and insurance services company in Santa Clarita with offices extending to the San Fernando Valley, Simi Valley, and Antelope Valley. 661-753-9683