With New Taxes, Is Paying Cash Better?

Since the federal government passed the most recent tax package in 2017 some retirees may no longer benefit from carrying mortgage debt. Retirees often have very little to itemize other than a mortgage and the new standard deduction is a whopping $24,000 for a married couple. With interest rates near all time lows it takes a pretty big mortgage to produce interest payments over $24,000 in a year.

Paying cash for a property could lead to a better and stronger position later on. A reverse mortgage could be used later in life should cash flow in the future be impeded by natural inflation or an unforeseen financial event.

Paying cash could also open the door to places like condominiums or manufactured homes in senior parks. With no mortgage payments the HOA or park fees are likely to be easily covered with the retirees fixed income payments.

Mortgages can free up capital that may be invested elsewhere at a higher rate of return, but retirees should be mindful that risky investments are unwise in the latter third of life.

Mortgage free living allows the retiree to spend less of the fixed income each month which can help preserve assets in 401k or IRA accounts. For fixed pensions it allows for more monthly spending or to build up a solid savings account. As mentioned earlier, a free and clear house also allows the retiree to utilize a reverse mortgage to increase income later in life should the resources in the 401k or IRA run low or if the pension begins to lose ground against inflationary conditions.

As always when I write about investments and taxes I encourage people to consult with licensed professionals in the investment industry and a professional tax accountant before making decisions based on information in articles lie these. Everyone has different and often unique financial needs and conditions that ought to analyzed by an appropriate professional.

To Own or Owe in Retirement

Many people ponder their financial position as the close in on retirement or sometimes after they begin to adjust to retirement. There is a large contingent of folks that want to have their home free and clear during retirement. At first glance owning a home outright seems like a no-brainer, especially once the homeowner has retired and set on a fixed income.

As with many things in the financial universe the prevailing sentiment is not always the best solution for any one given situation. Generally having a free and clear house is a good thing. The retiree need only be able to make the tax payments and handle maintenance to keep a roof over his head. Regardless of one's financial position, a free and clear home is a good thing. But is it the best thing?

Retirees often find themselves in a bit of an IRS tax challenge. Typically they no longer have tax deductible children, college deductions, etc. They find themselves in a similar position tax wise that they were in decades earlier before the "family". Uncle Sam can dig deep into the pockets of retirees without any shelter. Most retirees do not have enough income to have this "problem". However, retirees that have incomes that approach six figures need to consider the value of having a tax deductible interest payment on their primary residence.

Interest rates are low right now and taking out a 30 year note for half the value of the home during retirement may be a great hedge against the IRS. 50% loan to value protects the homeowner against even the most severe economic downturn but offers up a decade or more of generous tax deductions while the interest payments are still steep early in the loan cycle. Retirees that are drawing on 401k assets can draw less if the taxes are reduced by the deduction against the mortgage. Sometimes the tax benefits outweigh the monthly expense of servicing the note on the mortgage. Additionally the retiree has extra cash in the bank roughly equal to the loan amount at his discretion to use as capital of additional retirement savings.

Retirees are well advised to consult a financial planner and a tax professional to be certain all the possible scenarios are evaluated to ensure the best possible outcome in the future. A house is often a tax shelter as well as a physical shelter, in retirement it may turn out to be the only tax shelter. To owe or own in retirement is a valid question that must be taken under consideration for each
individual situation and always under the advisement of well qualified professionals.