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Retirees may face a $60K tax hit when paying off a $200K mortgage
A couple planning to retire and use $2.5 million in investments to clear a 4% $200,000 mortgage faces the potential for large tax costs, depending on whether mortgage interest would be itemized rather than offset by the standard deduction.
A Yahoo Finance story highlights how paying off a $200,000 mortgage can be financially appealing for retirees, but tax considerations can materially change the outcome.
It cites the example of Leslie, 57, and her husband Rick, 59, who planned to use part of a $2.5 million investment account to pay off a $200,000 mortgage carrying a 4% interest rate as they aim to retire, with plans to each retire by age 62.
The article notes that while paying off a low mortgage rate can be viewed as a guaranteed return equal to the interest expense eliminated, portfolio returns are not guaranteed, and retirees may have less time to recover from market losses.
The story also points to a key tax issue: mortgage interest generally must be claimed as an itemized deduction, and many retirees may receive more benefit by taking the standard deduction instead, which could create a sizable tax cost, the article says could be as high as $60,000 in the scenario discussed, depending on their tax situation.