No. of Recommendations: 1
cliff666: "Slightly OT, I am having the same argument with myself.

I am still working, and I don't want to take any gains this year. Above all, I don't want to touch an IRA or 401K until I retire, all because of the tax hit involved. For the moment I throw all looose change at the mortgage. When I retire (next year), I will liquidate a variable annuity and use it to knock down the mortgage. Only about half of the annuity will be taxable. I don't want to take the tax hit this year, as it will throw us into a higher bracket.

I will start to liquidate non-tax sheltered assets for living expenses, but on advice of my CPA, I will start to use my IRA accounts, at least liquidate them to convert to Roth IRA's. She says until age 71½ we will be in a "tax holiday" and we should reduce our conventional IRA's and 401K's as much as we can without tilting the tax scale too heavily. I would appreciate the thoughts of this august group, as well."

Many of the invest instead of pay-off the mortgage crowd are in their accumulation years, and those arguments to invest make some sense in that context.

The analysis changes, however, when the accumulation years end and you are withdrawing funds from yoru accounts for living expenses, including mortgage payments. Because "safe withdrawal rates" are generally so much lower than many people realize, one really should consider having the mortgage paid in full at retirement, unless the after-tax cost of the mortgage is less than the applicable SWR.

For example, let us assume a 4% SWR and a 5.5% mortgage that is 4.125% effective rate after tax (25% federal bracket, 0 state income tax, enough other deductions that mortgage interest is fully deductible [i.e., none needed to cover the standard deduction basket]).

Paying off the mortgage makes sense to either (i) increase current spending or (ii) lower withdrawal rate.

The tax holiday must be the time before RMDs start; until then, you can withdraw as much or as little as you see fit, to maximize fully lower tax brackets. Once RMDs start, you can never withdraw less, and if your retierment accounts are large enough, RMDs can push you into higher brackets and make more of SS taxable. To the extent that you can get money out (or converted to Roth IRA, with no RMD) at lower rates before RMDs start, it is good, and it will also likely decrease the RWD amount, too.

I know that intercst has written about this issue on his REHP board, but it is not the most commonly addressed topic, mostly because it is not applicable to many people, because so many are wondering how to make thier money last through retirement.

Regards, JAFO

Print the post  


The Retirement Investing Board
This is the board for all discussions related to Investing for and during retirement. To keep the board relevant and Foolish to everyone, please avoid making any posts pertaining to political partisanship. Fool on and Retire on!
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.