Scott Burns: Boomers want to minimize tax bite, pay off mortgage
Q: My wife and I are some of the “leading edge” baby boomers getting ready to settle into retirement. I am 67 and she is 60.
My wife recently retired. I will retire in early 2014.
We are basically debt-free except for the mortgage on our house, about $325,000.
We currently have about $945,000 in savings inside various IRAs and 401(k)s.
Both of us are eligible for small pensions, less than $1,000 per month.
I am not drawing Social Security at this time.
Both of us will be eligible to draw the maximum amount of Social Security.
Our question is that we would like to pay off our home mortgage.
But since all of our savings are in IRAs and 401(k)s, won’t we be subject to a large tax bite of 33 to 35 percent if we withdraw the necessary funds to pay off the mortgage?
I figure at a tax bite of 35 percent, we would need to take out $500,000 to net $325,000.
That would only leave us $400,000 in savings.
We have 14 years left on our mortgage.
We are torn between selling the house and downsizing or staying here.
We love this house.
It is more house than we need.
But the thought of moving is not something we would look forward to.
Is there a way to minimize our tax bite and pay off our mortgage, or are we better to take out what we need each of the next 14 years to make the scheduled payments?
A: Taking pretax dollars out of your retirement plans is not the way to skin this cat.
Your first choice should be a “right-sizing” move that would secure shelter appropriate to your retirement.
But if you can’t bring yourselves to do that, the second-best way is to refinance the mortgage to the lowest rate possible for 30 years.
This will turn your mortgage into a homegrown inflation hedge.
It will leave you with a monthly payment just more than $1,400 a month, if the interest rate is about 3.5 percent.
It’s a good bet that you will be returning less purchasing power than you have already borrowed.
(I do think this is a slam-dunk for younger people, but it is less certain for retirees who must pay off mortgages with investment funds rather than wage earnings.)
With the low-rate mortgage in place, you can work on paying it down, hopefully while remaining in the 15 percent tax bracket.
For 2013 you can have $72,500 of taxable income on a joint return and still pay taxes at no more than 15 percent.
Add deductions, exemptions and some untaxed Social Security benefits, and you should be able to make a good payment toward the mortgage without exceeding the 15 percent tax bracket.
Meanwhile, the purchasing power of the money you owe will be declining.
The only task left to make this a good deal is making certain that your retirement funds enjoy good returns. (No small task.)
Copyright, 2013, Universal Press Syndicate