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I would appreciate your response as to whether or not I should pay my house off. Here are some details. I am 71 years old. I owe $ 68K on the house valued at $170K. The mortgage is 15 years w/ about eleven years remaining, at a fixed rate of 5.1%. We have approximately $ 215K in savings mostly in IRA's. I receive a pay-out each January of approx.$ 5K. I believe if I take $ 68K out my IRA bank will hold back 10% for tax and send me approx. $ 60K and I will then take out the additional funds from a savings account to pay off the house. Will the $ 60K sent be considered income, and if so, will I pay income tax on it and how much. Annual income is $ 35K and we do not have enough deductions that exceed the $12.3K for the IRS. What are the pluses and/or minuses and your advice. By the way I am in very good health and hope to live long enough to pay it off on a monthly basis of $700 per.  I thank you in advance for your response.
 
Confused.

posted from email 

Harry,

Paying off your mortgage would probably ease your cash flow because much of your mortgage payment is return of principal, not interest, at this point. Before paying it off in a lump sum, however, you should see an accountant and see what impact a lump sum would have on your income taxes. It might be better to pay it off in several installments over a period of two, three,  or four years.

What you want to do is (1) stay within the 15 percent tax bracket and (2) avoid triggering the taxation of Social Security benefits. That’s a complicated calculation but it’s a pretty good bet that a lump sum payment from your IRA, which would be taxable income, would trigger taxation of SS benefits.  Hence, it’s a good idea to get  some very precise tax advice before acting

Once the mortgage is paid off, your IRA balance will be lower so your RMDs will be smaller and your tax bill lower. While your RMD will be smaller, the amount of money available for things other than your mortgage may well be larger than it is currently.

I agree with Joe's advice, and would emphasize his advice to obtain qualified counsel who will objectively look at your particular situation.  I would not bypass any opportunity to take an additional distribution that would not be taxed or would be taxed at a low rate and apply it to your mortgage principal.  Or convert it to a Roth IRA.

I have an additional observation.  Your statement suggests to me that you lack understanding of what Required Minimum Distributions (RMD) are.  Depending on your exact age, maybe it hasn't fully hit.  If it hasn't, it's about to.  And if it hit last year you may owe a penalty.

The first RMD amount in your case is probably higher than the $5K you've been taking, which seems to be about right for the dividends if you have your money in an index fund.  If the $215K in IRAs is in traditional IRAs as opposed to Roth IRAs, your RMD amount will be closer to $8K each year, and will be double that this year if you turned 70 1/2 last year.  Not taking your RMD amount can result in substantial penalties. If you haven't been keeping track, hopefully your IRA custodian is, and will force a distribution to meet your RMD.
 

I have the same question except our circumstances are different. I'd like someone to show me math whether it's worth paying off for our dwelling.

I am thinking that maybe we should pay off our house at the end of 2008. We obtained a 15-year fixed rate mortgage of $96,500 at 4.75% in 2003. The balance in Dec'08 will be $53,766 (after having paid extra towards the principal in the past). Should we pay it off? Not sure how our income tax is calculated, but I'm estimating our AGI for 2007 to be above $120k. We live in NC.

Now we've got $105k in Savings and a ladder of CD's at an average APY of 5.4%-5.5%. We almost max out 401k's. Roth IRA's are fully funded, $1k/mo goes into savings, and another $1k/mo invested in taxable accounts. The latter will substantially dwindle (disappear?) after we have a second child in a couple of years.

We'd like to relocate to a different suburb in 3-4 years when it's time to start school for the current child. And we'll need to replace one of the cars in a year or two.

We would love to live totally debt free, but maybe at 4.75% it doesn't make sense to pay-off...?

Thank you very much.

PS. Yes, we're frugal people.... 

 Since you can do better than 4.75% in an FDIC insured savings account or CD, seems to me you would be better off saving in one of these.  Look at Ingdirect or EmigrantDirect, or other online banks.  While your effective interest rate from savings is reduced by taxes, so is the effective interest rate on your mortgage. Unless you can't deduct the mortgage interest payments from your income tax.

Any decisions based on taxes should be on your marginal rate.  That is, how much was the federal and state income taxes on the last dollar of income. 

I wouldn't let being debt free be a motivator.  You obviously have the discipline to not run out and spend your savings.  If you have a mortgage of $60,000 and $105,000 in savings you have a positive net worth even ignoring the value of your house. 

I have the same question, different circumstances.

Have $140,000 in a money market, have $40 in mutual funds and max out 401k each year and currently have $240 in 401k funds, I don't qualify for roth or additional iras  Took at 15 year mortgage on 163k at 6.25% with payments beginning 2/2002 - maturity date is 1/2017 and I now owe $105,000.   Should I pay some of it off or all of it?  We plan on staying in our home forever. 

You should do this. But you need to do it very carefully. Let me explain why.

The most important fact here is that even a 5.1 percent interest rate is hard to get in today's market without taking significant risk. So you're probably NOT earning 5.1 percent on the savings that would go to paying off the mortgage.

Your mortgage also has principal payments and those have to be taken from a source like your IRA account, increasing your taxable income.

As you get older your RMD (Required Minimum Distribution) from your IRA will get larger and larger, increasing your taxes and increasing the odds that you will have to pay taxes on a portion of your Social Security benefits. You may benefit from paying the mortgage off now or over the next two years.

The hard part is finding a way to pay off the mortgage without creating an undue tax burden on yourself. For a joint return in 2008 you can have taxable income up to $65,100 and remain in the 15 percent tax bracket. Since you also have a $10,800 standard deduction, a $2,100 elderly deduction, and $7,000 in personal exemptions, you can have another $19,900 in income before jumping into the 25 percent tax bracket. That's a total income of $85,000 before you jump brackets.

That tells me that you should pay part of your mortgage off in December and pay off the remainder in January, so you'll avoid paying taxes at an extra-high rate just because you're paying debt off. You can, and should, get the exact numbers worked out by a good tax accountant.

Scott