If you need an income stream greater than the after-tax cost of your mortgage, then paying off your house might not make mathematical sense, said Tom Anderson, author of 'The Value of Debt in Retirement.'

It's rarely a bad idea to pay off debt, so should you get rid of your mortgage when you reach retirement? You might be thinking of cashing out your 401(k), 403(b), or TSP savings to pay off your home loan, but make sure you know the pros and cons.

You can eliminate your monthly payment and stop paying interest with this approach. Plus, you may have less money in the markets, which can help reduce anxiety. However, there are some potential pitfalls of wiping out debt with your retirement savings.

Please be sure you understand the tax implications of this move. You may need to withdraw more than your mortgage balance (to pay the loan balance PLUS taxes), and there could be unintended consequences. For example, you might face higher Medicare premiums (at least temporarily), you might make more of your Social Security income taxable, you might need to pay estimated taxes, and you could potentially incur tax penalties.

Again, it's not necessarily a bad idea, but it might or might not be the right move, so review the numbers carefully. Consider also your need to get cash for monthly or annual retirement income, and other important aspects discussed in the video. Before you make a decision, check with your CPA and your financial planner to review the details (this can potentially save you some heartache).

Note that by managing your retirement account withdrawals (perhaps paying off the mortgage over several years instead of in one lump sum), you might be able to reduce the impact on your taxable income.


Personal Finance: "Why Paying Off Your Mortgage in Retirement May Not Be the Best Idea"