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