2 reasons why paying off your mortgage before retirement might not be the best decision

It is generally advisable to pay off all your debts, including your mortgage, before you retire. But in some circumstances, it might not be the right financial decision for you.

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Here are a few reasons why paying off your mortgage before retirement might not be the best decision.

You want to delay withdrawal from taxable accounts

“The decision to pay off a home, or any debt, should be informed by a well-thought-out retirement income plan,” said Devin Carroll, owner and principal advisor at Carroll Advisory Group. “While the freeing up of cash flow may be attractive, it could be that saving money may provide a greater benefit.”

For example, it may make financial sense to keep the funds you would have used to pay off your mortgage in a cash account to supplement your early retirement years.

“It could be the difference between withdrawing money from your taxable accounts,” Carroll said. “Ultimately, it comes down to making a decision based on a plan that compares multiple scenarios.”

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Withdrawing from other accounts would put you in a higher tax bracket

In some cases, withdrawing from taxable retirement accounts can be very costly.

“If most of your retirement assets are in IRAs or 401(k) [plans] (pre-tax money) and then withdrawing money from your retirement account would be fully taxable and could even put you in a higher tax bracket,” said Scott A. Bishop, executive director of retirement management solutions. wealth at Avidian Wealth Solutions.

“If you also have Medicare coverage, it can also increase the cost of your (and your spouse’s, if married) Medicare premiums,” he continued. “This additional cost or ‘penalty’ is called IRMAA – Medicare’s Monthly Income-Related Adjustment. Depending on your income level, this could increase the base premium, which will be $164.90 in 2023.”

If the withdrawal takes your income above $182,000 if you are married and depositing jointly, the premium will increase to $238.10 per month. If your income exceeds $750,000, the premium will increase to $578.30 per month.

Your mortgage rate is particularly low

Jay Zigmont, Ph.D., CFP, founder of Childfree Wealth, typically advises his clients to pay off their mortgage before retirement, but there are some circumstances in which saving that money could pay off.

“If you’re one of the lucky people who got a mortgage rate within 2, then right now you could be earning more in a high-yield savings account,” he said.

You might also consider investing this money in treasury bills.

“Instead of making extra payments on principal, you can earn more money and have more money in your pocket by simply parking your money in a short-term treasury bond,” Doug “Buddy” said. Friends, CFP, CEO of Cardinal Retirement Planning. “It’s an opportunity to earn more interest without taking the risk of losing money if a company defaults or stock prices fall – the use of treasury bills and savings accounts insured by the FDIC can be smart and safe because they are backed by the faith and credit of the US government.”

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This article originally appeared on GOBankingRates.com: 2 Reasons Paying Off Your Mortgage Before Retirement May Not Be The Best Solution

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