Use 401k to Pay Off Mortgage?

Philip is retired but still owes on his home mortgage.

QUESTION: Philip is in his 60s and he just retired.  He’s living off his 401-K investments, which total about $500,000.  He owes over $100,000 on his house.  Should he pay his house off completely in one payment from his 401-K or should he continue making payments?

ANSWER: You should pay it off as soon as you can – four or five years at the most.  You shouldn’t clean out half of your nest egg to pay off the house, but at the same time you don’t want to go into retirement with a mortgage.

Let’s talk about the people who are telling you to keep a house payment for the tax deduction.  If you have a $200,000 mortgage at 5% interest, you are paying $10,000 in interest.  If you have a $10,000 tax deduction that means you don’t pay taxes on $10,000 of your income.  If you lose that deduction because you paid off your mortgage, you’d have to pay taxes on the additional $10,000.  Taxes on $10,000 for you are probably $3,000. 

Everyone is telling you not to pay off your house so that you can keep paying the bank $10,000 a year to avoid sending the government $3,000.  That advice is just ludicrous.  If you want to turn $10,000 into something, give it to your church.  You still get to deduct the $10,000, but you’re out of debt.