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It’s one of those debates that rarely seems to have a clear-cut winner: should retirees pay off their mortgage or keep making those monthly payments?

The answer – probably a little annoying – is that it depends.

Of course, there are some immediate benefits to paying off a mortgage: your monthly obligations decrease, and you may gain more headroom for your cash flow.

However, depending on where the cash would come from – as well as your tax situation and your available remaining assets – there could be financial implications that should be a good fit for you.

Please note the following.

The payment

Sometimes the math can be cut and dried. That said, if you were paying more interest on your mortgage than the interest you earn on the money you would use to repay it – and the tax ramifications of that would be minimal – it can be an easy decision to make.

“Do you have the money just lying around in a checking account? If so, it may be a piece of cake to pay off a debt that costs you a few percentage points if you don’t make any cash in today’s interest rate environment.” said certified financial planner Brian Schmehil, director of asset management at The Mather Group in Chicago.

If you invest in bonds that yield 1.5% and pay more than that on your mortgage, you are essentially negating the gains on the bonds, said CFP Allan Roth, founder of Wealth Logic in Colorado Springs, Colorado.

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He also pointed out that if, for example, you pay off 2.5% of your mortgage and pay it off, you essentially only earned that interest rate on the money you used to withdraw the loan.

“It would be a risk-free, tax-free rate of return of 2.5%,” said Roth.

Plus, you didn’t have to sell an asset for that return: your home, which could go up in value, remains yours.

If the money you would use to pay off the mortgage is in a retirement account, the interest rate comparison may not work in your favor.

“If so, it may not be in your financial best interests to withdraw money from a retirement account to pay off a debt that costs you less than what you could otherwise do with an investment,” Schmehil said.

If you’ve been able to deduct mortgage interest from your tax return – you need to list your deductions to get this break – remember that benefit will go away. (Most taxpayers don’t provide any information, however.)

The tax factor

There may also be tax consequences if you make a distribution from your pension fund.

Unless the account is a Roth whose contributions are made after tax, but distributions are generally tax-free, your withdrawals are usually taxable. Traditional 401 (k) plans and individual retirement accounts provide a tax break on contributions, while distributions are taxed as ordinary income.

“If that distribution moves you from the marginal range of 12% to 22%, or from the bracket 24% to 32%, you pay Uncle Sam an 8% to 10% tax premium just to pay off a potential debt that costs you only 3 % “, said Schmehil.

However, if you do decide to use that retirement savings to get rid of your mortgage and minimize taxes, you could spread the payout out over several years, said Roth of Wealth Logic.

“If you are in the 12% border group, I would say you withdraw an amount that will keep you at that 12% rate every year,” said Roth.

Also, be aware that when you pay off your mortgage, the cash you put in is essentially converted into equity in your home – which you may or may not be able to use easily later.

In other words, if an illiquid asset – your home – were to hamper the achievement of your financial goals, depending on your goals and your risk tolerance (how long to), it might be better to keep the money elsewhere in a cash or investment account You need the money and whether you can take the volatility in the markets.

We generally recommend repaying the mortgage and getting the emotional benefit of lowering the fixed overhead.

Larry Ginsburg

Owner and President of Ginsburg Financial Advisors

However, Schmehil and other financial advisors said that even if you were to determine the math that it would make more financial sense to keep paying your mortgage, the calculation has an emotional side that can – and maybe should – weigh heavily on it.

“Yes, customers could potentially make more money leaving capital with us to manage and earn more after-tax returns than the cost of interest on their mortgage,” said CFP Larry Ginsburg, owner and president of Ginsburg Financial Advisors in Oakland, California .

“Why speculate with your home? What great benefit does this bring to a customer?” Said Ginsburg. “We generally recommend repaying the mortgage and getting the emotional benefit of lowering the fixed overhead.”

For example, he said, it helps alleviate retirees’ anxiety during a market downturn because they are less concerned about the impact of their income even when they have nothing to worry about.

Ginsburg said customers who initially disagreed with his advice to get rid of their mortgage thanked him later.

“I’ve never had anyone come to me and say they are unhappy that they have paid off their mortgage,” he said.