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[EnjoyIt]

I have posted non emotional reasons such as having the ability to adjust my income to qualify for the best level of ACA (or whatever it is in a few years) and to work my Roth ladder but it does not matter.

I truly wish you the best and hope that life cooperates with your plans.

Fortunately we will both be able to FIRE happily and I do not need to convince anyone of my path so cheers

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The tax event you create when selling to pay off the house greatly out weighs the benefits you think are going to be mathematically advantageous. As in your post above you thought something was better but when math was applied it wasnt it's better to do your homework than assume.

The fixer brings up an interesting question.  My mortgage is about $24k per year.  By having that mortgage in retirement I very well may be unable to do Roth conversions at a reasonable tax bracket.  Having that extra income can also eliminate health insurance subsidies. Keep in mind some of us plan on retiring a litter fatter then others and the tax consequence may very well be real.  Going from 0% tax to 12% or being forced into RMDs has financial consequences especially if it also means paying more for health insurance premiums.  I am not making assumptions and will have to do the math myself once getting close to that option/situation.  I believe every situation may be different.  A 12% tax hike on the extra income, plus an extra few hundred per month on health insurance may eliminate the likely financial benefit of keeping a mortgage.

[boarder42]

This has been discussed before and I explored this option. It doesn't make sense. I thought wow those are two great points maybe I'll pay mine off but nope the math doesn't work out. Because we're talking about taxable money here. If it's money in a conversion it gets even worse bc now you're paying a penalty. And taxable with drawals are only taxed on their gains. And they are taxed at ltcg or qd rates.

I should say someone else explained it and did the math. To prove why it still didn't work. I don't think it was @tomsang but it may have been.

[EnjoyIt]

This has been discussed before and I explored this option. It doesn't make sense. I thought wow those are two great points maybe I'll pay mine off but nope the math doesn't work out. Because we're talking about taxable money here. If it's money in a conversion it gets even worse bc now you're paying a penalty. And taxable with drawals are only taxed on their gains. And they are taxed at ltcg or qd rates.

I should say someone else explained it and did the math. To prove why it still didn't work. I don't think it was @tomsang but it may have been.

I'll do a better job with the math when it actually affects me in the future with real figures.  But simply speaking most of us have a majority of our assets in a 401k or IRA.  Withdrawals from those accounts are taxable at the marginal rate which means any extra withdrawal is in affect taxed at 10/12/22% and that does not include state tax.  One reason why this cash is still in tax deferred account is because by having a mortgage one is in a higher tax bracket and Roth conversions may not be the right move.  In addition by taking out the extra money the government diminishes some of your ACA subsides making the calculation even worse.  This math can be significant if the FIRED family already has an expected yearly spending of more than $60k/yr.  The more one is interested in spending in retirement the worse the math becomes due to increasing tax brackets and lose of subsidies.  Someone looking to spend $100k/yr will be looking at 22% taxation on the mortgage payment.  The math gets even more complicated once social security is being collected and now also starts getting taxed all because of the mortgage payment. 

Now take a family looking to live on $100k and the added mortgage expense is being taxed at 22% and much more significant. 

[boarder42]

Yes even moreso when your money is in a 401k or IRA you don't want to do this. You're facing 10% penalties on top of the income tax.

Money is fungible. You are unlikely to be able to do the math and make this come out ahead. You're looking at this in some obscure vacuum.

[EnjoyIt]

Yes even moreso when your money is in a 401k or IRA you don't want to do this. You're facing 10% penalties on top of the income tax.

Money is fungible. You are unlikely to be able to do the math and make this come out ahead. You're looking at this in some obscure vacuum.

This is not an absolute vacuum this is a very real situation for many retirees who want a fatter retirement than $40K/yr. Also you can take cash out of a 401K penalty free using the 72t process prior to 59.5 years old.

I think the blanket statement if always keeping a mortgage may be false. This is especially true when taking into account taxes and the loss of subsidized healthcare. I think each person needs to do their own analysis to decide what is right for them. Something as simple as losing free health insurance vs paying an extra $8K a year on premiums plus an extra 10% in taxes can exceed any benefit of arbitraging a mortgage.

[boarder42]

I'm at 80k. For my number and most at 100k or more will have sizeable taxable savings. Run the math it's unlikely. I've never said impossible.

[One]

I'm at 80k. For my number and most at 100k or more will have sizeable taxable savings. Run the math it's unlikely. I've never said impossible.

Sounds like fuzzy math

[boarder42]

Yes even moreso when your money is in a 401k or IRA you don't want to do this. You're facing 10% penalties on top of the income tax.

Money is fungible. You are unlikely to be able to do the math and make this come out ahead. You're looking at this in some obscure vacuum.

This is not an absolute vacuum this is a very real situation for many retirees who want a fatter retirement than $40K/yr. Also you can take cash out of a 401K penalty free using the 72t process prior to 59.5 years old.

I think the blanket statement if always keeping a mortgage may be false. This is especially true when taking into account taxes and the loss of subsidized healthcare. I think each person needs to do their own analysis to decide what is right for them. Something as simple as losing free health insurance vs paying an extra $8K a year on premiums plus an extra 10% in taxes can exceed any benefit of arbitraging a mortgage.

its not "free" you have to sell funds or sacrafice tax savings to pay the home off.  Plus you sacrafice future gains.  you need to put numbers down - b/c they dont work out for most cases.  all these things feel like they should make it work but when you put pen to paper they typically dont regardless of the spending level you plan to have.  There is almost nothing that makes you go from free insurance to 8k a year in premiums.   Also if you're jumping up to the 22% bracket - depending on the bracket you're in now you should be using all the roth that you have vs putting it into traditional accounts. 

throwing out there are lots of variables that make it all unique doesnt mean it doesnt work for most if you do the math.  You're the one who isnt convinced drop down the scenario you think you have that makes it mathmatically better for you and let us tear it apart.

[EnjoyIt]

Yes even moreso when your money is in a 401k or IRA you don't want to do this. You're facing 10% penalties on top of the income tax.

Money is fungible. You are unlikely to be able to do the math and make this come out ahead. You're looking at this in some obscure vacuum.

This is not an absolute vacuum this is a very real situation for many retirees who want a fatter retirement than $40K/yr. Also you can take cash out of a 401K penalty free using the 72t process prior to 59.5 years old.

I think the blanket statement if always keeping a mortgage may be false. This is especially true when taking into account taxes and the loss of subsidized healthcare. I think each person needs to do their own analysis to decide what is right for them. Something as simple as losing free health insurance vs paying an extra $8K a year on premiums plus an extra 10% in taxes can exceed any benefit of arbitraging a mortgage.

its not "free" you have to sell funds or sacrafice tax savings to pay the home off.  Plus you sacrafice future gains.  you need to put numbers down - b/c they dont work out for most cases.  all these things feel like they should make it work but when you put pen to paper they typically dont regardless of the spending level you plan to have.  There is almost nothing that makes you go from free insurance to 8k a year in premiums.   Also if you're jumping up to the 22% bracket - depending on the bracket you're in now you should be using all the roth that you have vs putting it into traditional accounts. 

throwing out there are lots of variables that make it all unique doesnt mean it doesnt work for most if you do the math.  You're the one who isnt convinced drop down the scenario you think you have that makes it mathmatically better for you and let us tear it apart.

Hey, I never said it won't work.  I just said everyone should do their own math when the situation applies to them and see which is better.   I would love to run the math for our situation but to do that I need to know what ACA subsidies my area has, how they change with increasing income as well as what my out of pocket yearly expenses will be.  I am simply not interested in doing that research right now because those figures may very well change when we retire.  BTW, our plan is to semi retire at the end of this year.  We plan to work 2 days a week until we get sick of working and then fully retire.  It could be after 1 year or it may be 20 years.  BTW, our mortgage will be paid off in 9 years. While working I see no reason to pay it off but once retirement comes I will do my own math and see. 

As for health insurance costing $8k per year.  I honestly have no idea how subsidies are calculated.  I know that while young our unsubsidized ACA insurance was about $650/month with a $6k deductible each.  Our mortgage is actually $28,200 per year.  If that extra payment is enough to go from full subsidies to no subsidies an extra $8k in yearly payments is definitely possible.  I have seen others in their late 50s discussing even higher premiums and that is before out of pocket expenses which would be lower if subsidized.  So, again, I just don't know and can't argue for or against it.

I can tell you this...even if holding a mortgage wins out but by a few hundred a year, I will gladly pay off the mortgage for the luxury of being debt free knowing fully well that I am missing out by that small amount.

[boarder42]

Yes even moreso when your money is in a 401k or IRA you don't want to do this. You're facing 10% penalties on top of the income tax.

Money is fungible. You are unlikely to be able to do the math and make this come out ahead. You're looking at this in some obscure vacuum.

This is not an absolute vacuum this is a very real situation for many retirees who want a fatter retirement than $40K/yr. Also you can take cash out of a 401K penalty free using the 72t process prior to 59.5 years old.

I think the blanket statement if always keeping a mortgage may be false. This is especially true when taking into account taxes and the loss of subsidized healthcare. I think each person needs to do their own analysis to decide what is right for them. Something as simple as losing free health insurance vs paying an extra $8K a year on premiums plus an extra 10% in taxes can exceed any benefit of arbitraging a mortgage.

its not "free" you have to sell funds or sacrafice tax savings to pay the home off.  Plus you sacrafice future gains.  you need to put numbers down - b/c they dont work out for most cases.  all these things feel like they should make it work but when you put pen to paper they typically dont regardless of the spending level you plan to have.  There is almost nothing that makes you go from free insurance to 8k a year in premiums.   Also if you're jumping up to the 22% bracket - depending on the bracket you're in now you should be using all the roth that you have vs putting it into traditional accounts. 

throwing out there are lots of variables that make it all unique doesnt mean it doesnt work for most if you do the math.  You're the one who isnt convinced drop down the scenario you think you have that makes it mathmatically better for you and let us tear it apart.

Hey, I never said it won't work.  I just said everyone should do their own math when the situation applies to them and see which is better.   I would love to run the math for our situation but to do that I need to know what ACA subsidies my area has, how they change with increasing income as well as what my out of pocket yearly expenses will be.  I am simply not interested in doing that research right now because those figures may very well change when we retire.  BTW, our plan is to semi retire at the end of this year.  We plan to work 2 days a week until we get sick of working and then fully retire.  It could be after 1 year or it may be 20 years.  BTW, our mortgage will be paid off in 9 years. While working I see no reason to pay it off but once retirement comes I will do my own math and see. 

As for health insurance costing $8k per year.  I honestly have no idea how subsidies are calculated.  I know that while young our unsubsidized ACA insurance was about $650/month with a $6k deductible each.  Our mortgage is actually $28,200 per year.  If that extra payment is enough to go from full subsidies to no subsidies an extra $8k in yearly payments is definitely possible.  I have seen others in their late 50s discussing even higher premiums and that is before out of pocket expenses which would be lower if subsidized.  So, again, I just don't know and can't argue for or against it.

I can tell you this...even if holding a mortgage wins out but by a few hundred a year, I will gladly pay off the mortgage for the luxury of being debt free knowing fully well that I am missing out by that small amount.

its not a few 100 a year its thousands still you're just throwing around random numbers - if your mortgage is 28200 then you've got to have taxable savings or you're spending at an extreme level.  and when you pull money out of taxable savings they are taxed at LTCG rates.  there is almost no way you can get from paying 8k for healthcare under the current ACA to paying 0 by getting rid of the capital gains on 28200 worth of money flowing out.  even at 100% appreciation on the funds being used to pay the mortgage 15% tax on 14100 is only 2115.  and it only increase your income by 14100 not 28200.  plus add the tax implications of taking a huge sum out to pay it off in a single year either from a qualified or taxable account and it criples it even further. 

i completely understand not wanting to do the math ahead of time but dont make the claim and throw the numbers around if you're not going to back them up - that leads people to come here and go yep this is a good idea see what that guy said 8k a year - b/c its a difficult concept to grasp for most people in general so any thing they can grab to make them feel like their getting a mathematical advantage they will just latch on to and not do the math themselves.

[EnjoyIt]

@boarder42
You are right about my taxable. About half my savings are in taxable and my situation isn't take cash out to pay off mortgage but more like is it worth taking out another mortgage once this on is lose to being paid off?

Also, do you know how subsidies are enacted for health insurance. I realize there has something to do with 400% of poverty but each state is different. 

Next if I need x dollars to live on, I am already pulling from my taxable account to keep taxes low. An addition $28K will likely be taxed at 15% on maybe half of it being capital gains. By pulling that cash out it may stop being worthwhile to do backdoor Roth conversions. Something I am eager to do when retired.  Not doing conversions will mean more taxes in the future via withdrawals and increased taxation on SS.

You are right that throwing around random numbers is pointless and may confuse someone who is latching on to the "feeling" that debt free is always the right answer.  That's why I think everyone needs to do their own math as the answer may fluctuate widely.

A 3-4% arbitrage on a $300k loan is $9-12K per year and a huge chunk of change. It would take a lot of taxes and loss of subsidies to make it not the most ideal financial decision.