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Hi Revone,
Thank you for this question! Paying off a mortgage is a wonderful achiement. You must be sure about the tax consequence that you set into motion though. If you are withdrawing from a retirement account, be mindful that the amounts withdrawn will be added to the income already earned and/or received for the year. If you have a 401-K and are still working, consider borrowing against the 401-K. If you do so and remain with the same employer, there will be no additional income to report. Be sure to remain with the same employer until the loan is paid back and you have a tax free loan!
This is a common and complex question. Multiple factors have to be evaluated. If the mortgage is at the recent historically low rates, it does not make sense to use investment liquidity to pay off a long term, low interest rate loan. We are in a rising interest rate environment so interest bearing deposit rates are rising and the mortgage is generally fixed. At some point, the interest bearing deposits may be earning more than the mortgage rate.
One problem I have seen occur, a client takes a large withdrawal from a 401 (k) or an IRA to pay off a low interest rate mortgage. Does it make sense to incur a 10% early withdrawal penalty to pay off a 6% mortgage? If the client is 59.5 years old or older, there is no early withdrawal penalty but the withdrawal may fall into the 12% or 22% tax bracket. So the positive of No More Mortgage may be outweighed by Big Tax Bill. Where does client get the liquidity to pay the tax bill; another 401 (k) withdrawal?
With the higher standard deduction changes of the 2017 Tax Cut and Jobs Act, fewer taxpayers are itemizing deductions and may feel that the mortgage interest deduction is not helping them. Using the standard deduction does not necessarily lead to the conclusion that one should impair liquidity to pay off the mortgage.
In general, I would not recommend removing funds from tax advantage accounts to pay off a mortgage and I would be careful of drawing down cash and investments to pay off the mortgage and winding up in a tight liquidity position. If your earnings are growing from employment and investments, and you can pay down your mortgage at a faster rate, great.
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