Loans Cost More During Retirement!

That makes no sense! Your monthly payment is the same, it doesn't cost more. The extra cost is hidden.

Your monthly mortgage cost remains at $1,250, $15,000 yearly. $2,400 of that is your property tax so you need an extra $12,600 of income to pay the mortgage instead of just the taxes. Only $6,500 is interest because your loan is almost paid off, but that only increase your deductions from the standard $7,850 to $10,000.

If you withdraw an additional $19,500 from your IRA, your taxes will increase $6,880 which is marginal tax rate of 35.28%, which leave you with the extra $12,620 you need to make the mortgage payment instead of just the property tax. You actually have $20 extra so you can stop for lunch on April 15th.

Things are definately not any better the next year. Your mortgage interest is lower so your itemized deductions are lower so you now have to withdraw an extra $300 from your IRA which raises your marginal tax rate to 36.24%. The good news is that you now have an $5 for a nicer lunch on the next April 15th.

All of this is happening because of the parallel taxation of your Social Security benefits. For each additional $1,000 you withdraw your taxable income goes up $1,850.

What Can You Do?

Everyone's situation is different, but in this example your mortgage payment pushed you to the top of your 46.25% marginal tax bracket. You have finished paying your parallel taxes on 85% of your SS benefits and your marginal rate is now back to 25%.

How much do you still owe? You might consider taking a big chunk out of your IRA to completely pay off the remainder of your mortgage in the normal 25% and 28% Federal tax brackets. This will move your future tax rate back from the 13% green tick mark to the 5% red tick mark.

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