Q. I am 60 years old, married and have been retired several years. We don’t have tons of money. What is the common theory on paying off one’s mortgage early? My mortgage rate is 5.875 percent. I have about $100,000 remaining and no other debt.
T.P.
A. What would you do with the money if you don’t pay off the mortgage? And where is the money coming from?
These are the two key questions, said Judy Shonborn, a financial planner and accountant in Greenfield, Wis.
If you’re investing those dollars in an ultrasafe vehicle such as a certificate of deposit, then you aren’t earning enough in interest to justify keeping the mortgage at nearly 6 percent, Shonborn said.
The other important factor is what type of account you would draw down to pay off the mortgage, she said. Withdrawing a six-figure sum from a 401(k) plan or a traditional individual retirement account could easily throw you into a much higher tax bracket, and you’d have to pay income taxes on the withdrawal at the higher rate, she said.
“Never keep a mortgage just for the tax deduction,” Shonborn said. “It’s just like buying something you don’t need because it’s on sale.”
More Top Picks Best Trail Running Shoes For Older Runners
Bottom line: Paying off the mortgage early can be a great idea, but don’t do it all at once if it means a big tax hit. Check into refinancing to get a lower interest rate and pay it off as aggressively as possible without taking large withdrawals that could throw you into a higher bracket, she said.
Q. My wife and I are near retirement. We had 60 percent of our 403(b) retirement plans invested in stocks. When the crash came, we moved it to fixed-income accounts, but feel these aren’t completely safe. These are former employer plans, so I believe we can roll our money into another investment without tax penalty. Is that true? And is there an IRA or bond or fund we can invest that will remain tax deferred until retirement and is insured by the government?
F.S.
A. You can transfer your former employer plans into an IRA. Do it correctly so you can keep the accounts tax-deferred. For help, see this article on the IRS Web site: irs.gov/retirement/article/0,,id=160469,00.html. There are several financial institutions, including online banks, where you can invest in FDIC-insured certificates of deposit. Bankrate.com lists some on its rate-search engine for 1-year IRA CDs.
One note: This strategy may protect you from market risk, but the low rates won’t protect your nest egg from inflation over a lengthy retirement.
———-
Have a retirement question? Write to [email protected], or via mail at Your Money, baiduhai, Room 400, 435 N. Michigan Ave., Chicago, IL 60611. If your letter is selected, we may include you in a future column.