Paying Down Mortgage ith IRA versus Roth IRA
I am 65, my wife is 61. We still put $24,000 into a 457b each year (total saved is $750k). We are planning for retirement. We are concerned about the taxes that will hit when pensions, social security, and RMDs kick in. We have been considering IRA/Roth conversions. We have also wondered about the efficacy of paying down the mortgage on our principal residence. Our thinking about the mortgage is that when the house is sold, the proceeds would be exempt from tax. Do you have an opinion about whether the Roth conversion or mortgage pay down is the best strategy?
Permalink Submitted by Alan - IRA critic on Mon, 2015-05-18 23:27
It depends on how much you can benefit from conversions. That may depend on when you both retire because the prime conversion years are those few years after retirement and before RMDs and SS kick in. A simplistic plan that works for some people is to delay SS to 70 or close to 70 to bank the annual delayed retirement credits and then convert up to the top of your 15% bracket for those years. But you have to consider all the variables such as your total assets and income etc. If you have DB pensions, this strategy will be watered down somewhat because those payments will probably begin right after retirement. Ideally, you want some tax diversification between pre tax and Roth retirement plans, so the less you have in Roth now suggests using the money for conversion taxes. You proceeds from the house sale will probably be tax free regardless of the mortgage paydown, and the mortgage costs you less if your interest rate is low and if you are able to itemize the interest. You might also end up looking at the total situation and hedging your bets by paying converting some and paying down the mortgage with the rest. It is not an all or nothing decision, and there are several variables to factor in to your decision.