Tax Implications of Paying Off a Mortgage Before Retirement

What advisors wish you knew about killing the mortgage before retirement

Here’s the uncomfortable truth advisors wish more pre-retirees absorbed: killing the mortgage is as much a tax move as it is a money move. Rate matters, sure, but the bigger lever in 2025 is how you fund the payoff. Pay with cash from a brokerage account? Different story than tapping a traditional IRA, doing a hasty Roth conversion, or yanking a big RSU sale. Same mortgage, wildly different tax-implications-of-paying-off-mortgage-before-retirement.

Quick gut check: “Isn’t the payoff decision all about the interest rate?” Sounds right. It’s not. The rate is the headline; the funding source is the footnote that changes your taxes, Medicare surcharges, and even state liabilities. Pull $200k from a traditional IRA at 65 to nuke the mortgage, and you might push yourself into a higher marginal bracket for the year, trigger IRMAA two years later, and shrink the room you had for low-tax Roth conversions. Same house, same loan, but your after-tax retirement income just got tighter. Ask me how many times I’ve seen that exact oops, too many.

Context helps. Last year (2024), the standard deduction was $29,200 for married filing jointly and $14,600 for single filers (IRS). With the SALT deduction still capped at $10,000 under TCJA, a lot of households don’t itemize, meaning mortgage interest didn’t save them much on taxes anyway. And we’re heading into 2026 where the TCJA provisions are scheduled to sunset. That could mean: a higher mortgage interest cap (back toward $1,000,000 of acquisition debt from the current $750,000 for newer loans), the SALT cap potentially going away, personal exemptions returning, and bracket thresholds shifting. Translation: the math you run this fall might look different after 12/31/2025.

Why bring this up now? Because rates are still elevated relative to the pre-2020 era, and homeowners feel emotionally done with debt heading into retirement. I get it, I paid off my first mortgage early and slept better that night. But here’s the twist: cash flow stability in retirement often matters as much as interest savings. If your payoff drains liquid reserves or forces taxable withdrawals at bad tax rates, you’re trading one form of risk (rate risk) for another (sequence-of-withdrawal risk). It’s the same idea said a bit differently: a paid-off house with a stressed tax plan is not financial freedom. It’s just quiet stress.

What you’ll learn in this section: (1) why taxes hinge more on the funding source than the rate, (2) how to weigh retirement cash flow stability against interest savings, and (3) what the 2026 post‑TCJA changes could mean for deductions and brackets. We’ll talk about when a partial payoff beats a full one, why a multi-year plan often wins, and how to keep the IRS and your state from taking a victory lap on your payoff day. Sounds annoying? Yea, but it’s the difference between a clean burn and a tax flare-up.

• Reality check on itemizing: With 2024’s standard deduction at $29,200 MFJ ($14,600 single), many retirees got zero incremental tax benefit from interest. If you didn’t itemize last year, your mortgage likely wasn’t saving you taxes.
• Funding source matters: Brokerage sales, IRA draws, and Roth conversions create different tax bills, capital gains, and IRMAA exposure. Same $200k; very different after-tax outcomes.
• 2026 can reshuffle the deck: Post‑TCJA rules may lift the interest cap, remove the SALT $10k lid, and change brackets, so the payoff timing could change your lifetime tax tab.

Advisor takeaway: Don’t just kill the mortgage, stage it. A 2-3 year payoff runway often keeps brackets, IRMAA, and state taxes in-bounds while preserving the cash flow you actually live on.

Why the mortgage-interest deduction often doesn’t help anymore

Yes, mortgage interest can be deductible, but only if you itemize. That’s the catch. Since the Tax Cuts and Jobs Act (TCJA) kicked in, the higher standard deduction through 2025 means a lot of retirees don’t itemize at all. IRS data shows this shift pretty clearly: in 2021, about 90% of individual filers claimed the standard deduction (pre‑TCJA it was closer to two‑thirds). If you’re in that majority, paying mortgage interest isn’t lowering your federal tax bill. It feels counterintuitive, I know, but if itemizing doesn’t beat the standard deduction, your mortgage interest isn’t doing any tax work for you.

Here’s where folks get tripped up. You only benefit if your total itemized deductions exceed the standard deduction. Last year (2024), the standard deduction was $29,200 for married filing jointly and $14,600 for single. The line got higher again this year with inflation adjustments, so the hurdle’s still high. And the SALT deduction is still capped: under current law, state and local taxes (SALT) are limited to $10,000 through 2025. That cap alone wipes out a lot of the itemizing advantage homeowners used to count on. I’ve had more than a few conversations where someone says, “But I paid $12,000 in property taxes,” and we have to remind ourselves the federal deduction stops at $10,000.

Now, on the mortgage side, the interest deduction itself is capped to acquisition indebtedness. Translation: debt used to buy, build, or improve the home. The IRS reinforced this since 2018, home‑equity interest is only deductible if the proceeds went back into the home. Kitchen reno that added value? Good. Debt used for a car, college, or credit cards? Not deductible. And the loan size matters: for loans originated after December 15, 2017, you can deduct interest only on up to $750,000 of acquisition debt. Older, grandfathered loans may keep the $1 million cap. If you refinanced a pre‑2017 loan without increasing principal for non‑improvement reasons, you generally keep the old limit; if you pulled cash for non‑home uses, you may have partially tainted the deduction. It’s fussy, I know.

Let me put numbers to it because this is where the rubber meets the road. Say you’ve got $8,000 of mortgage interest, you hit the SALT cap at $10,000, and you gave $1,500 to charity. That’s $19,500 of itemized deductions, well below last year’s $29,200 MFJ standard deduction, and still below the bar for many retirees this year. In that scenario, your mortgage interest isn’t producing a federal tax benefit. It’s just… interest. The same math bites a lot of single filers too, especially those with paid‑off homes or small balances.

Yes, mortgage rates are still around 7% in Q4, and that’s real cash out the door. But the tax benefit is a separate question, and for many retirees, the benefit is zero because they’re not itemizing. The point bears repeating: if you aren’t itemizing, paying interest yields no federal tax benefit. None. State rules vary, but the federal picture is pretty unforgiving until TCJA sunsets after 2025.

Advisor takeaway: Under current law through 2025: SALT stays capped at $10,000, itemizing only helps if you clear the higher standard deduction, and only acquisition debt qualifies (generally up to $750k for post‑2017 loans; some older loans keep $1m). Do the tally before you assume the mortgage is helping your taxes, because often, it isn’t.

How you fund the payoff can spike your tax bill

The source of cash is the tax story. If you raid a pre‑tax IRA or 401(k) to kill the mortgage, every dollar you pull is ordinary income in that calendar year. That extra income stacks on top of Social Security, RMDs (if you’re there), dividends, the whole pile. In a year like 2025 with yields still decent and markets choppy, I keep seeing folks take a six‑figure withdrawal thinking it’s a one‑time thing. It is one‑time. The tax bill isn’t small.

Two quick, un-fun mechanics you have to respect:

• Ordinary income brackets: Large IRA/401(k) withdrawals can bump you into a higher marginal bracket, phase out deductions/credits, and increase the taxability of Social Security. It’s basic, but it bites, especially if you’ve been coasting in a low bracket during early retirement.
• Capital gains and NIIT: Selling appreciated taxable assets to raise cash can push your net investment income and modified AGI high enough to trigger the 3.8% Net Investment Income Tax. NIIT has hit at $200,000 MAGI for single filers and $250,000 for married filing jointly since 2013. Go over those thresholds and your long‑term gains and dividends can get that extra 3.8% layer slapped on.

And there’s a delayed sting lots of people miss: Medicare IRMAA. Medicare uses a two‑year lookback on income. So a big income year in 2025 can raise your Part B and Part D premiums in 2027. That’s not theoretical, I’ve watched clients write surprise checks they weren’t planning for. The surcharge tiers aren’t gentle, and they apply per person. One of those things where you think you’re done paying for the house and then, whoops, the mail brings a higher premium notice two years later.

State taxes can pile on too. Selling taxable investments to fund the payoff may trigger state capital‑gains or ordinary income tax. A few examples: California taxes capital gains as ordinary income with a top rate of 13.3%; New York’s top bracket is in the 10% ballpark; several states still have 0% on long‑term gains, but most don’t. The point: the “I’ll just sell some funds” plan can carry a federal + NIIT + state stack that feels… heavier than expected.

There are cleaner cash buckets. Roth IRA principal (your contributions) generally comes out tax‑ and penalty‑free, and qualified Roth earnings are tax‑free too. If you did Roth conversions earlier in your 60s, when brackets were lower, before RMDs, paying off the mortgage from the Roth can be a lot gentler on your 1040. That advance work creates options now. I know, easier said than done, but strategy beats improvisation here.

Let me make this concrete. Say you need $200,000 to wipe the mortgage. Pulling $200,000 from a pre‑tax IRA could push your MAGI across the NIIT line and into a higher ordinary bracket, spike the taxable portion of Social Security, and queue up IRMAA in 2027. Selling $200,000 of stock with $120,000 in embedded gains could leave you with long‑term capital gains tax at your bracket plus 3.8% NIIT once you cross $200k/$250k MAGI, plus state tax if applicable. Same $200k, very different after‑tax outcomes depending on the source.

Is this getting a bit in the weeds? Yeah. But the checklist is straightforward:

• Model the tax impact of the cash source, pre‑tax, Roth, or taxable.
• Watch the NIIT thresholds: $200k single / $250k MFJ (in place since 2013).
• Estimate state tax on gains; don’t forget California’s 13.3% ordinary rate on gains.
• Check IRMAA exposure: a 2025 spike can raise 2027 Medicare Part B/D premiums.
• Sequence matters: harvest losses, spread sales, or partial paydowns over multiple years to stay under cliffs.

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Advisor takeaway: Tax‑improve the payoff source first. Where possible, blend cash: some taxable basis, some Roth, maybe a smaller pre‑tax draw, keep MAGI below NIIT/IRMAA tiers. If you’ve got runway, stage the payoff over 2-3 tax years. It’s boring. It’s also how you keep the IRS from becoming your unintended co‑owner.

The after‑tax math that actually matters

Here’s the clean way to frame it. What’s your after‑tax mortgage cost versus what you can earn, after taxes, after inflation, on low‑risk cash today? If you’re not itemizing, your effective mortgage cost is simply the sticker rate. A 6.75% 30‑year? Then it’s 6.75%. No fancy footnotes. And that’s most households right now. The IRS data show that about 10% of filers itemized deductions in 2022 (post‑TCJA world), which means roughly 9 out of 10 didn’t get any federal break from mortgage interest that year. If you’re in that 90%ish bucket, stop assuming a tax subsidy that isn’t there.

If you do itemize, the math changes, but not always as much as people hope. Your effective rate is roughly rate × (1, marginal tax rate on the last dollar deducted), subject to caps and phase‑ins. Two big speed bumps in 2025: (1) the $10,000 SALT cap (unchanged since 2018) still bottlenecks many higher‑tax‑state households, and (2) you only benefit to the extent your total itemized deductions exceed the standard deduction. If you’re already itemizing without the mortgage, great, you’re likely getting the marginal deduction. If you only itemize because of the mortgage, some of that interest is just getting you up to the standard deduction line rather than saving you at your full bracket. That’s the nasty little nuance.

Quick example to ground it. Say your rate is 6.75% and you’re in a 24% federal bracket with itemizing room. Effective cost ≈ 6.75% × (1-0.24) ≈ 5.13%. That’s before any state tax interaction, which can tweak the edge case but usually not by a full percentage point. If the SALT cap means your state taxes aren’t fully deductible, don’t count on a big federal offset there.

Now the other side of the ledger: What can your cash earn today with low risk? For most of 2025, 3-6 month Treasury bills have hovered around the high‑4s to low‑5s in yield. A 5.0% T‑bill held in a taxable account at a 24% bracket nets roughly 3.8% federal‑after‑tax (and state‑tax free for most states). High‑yield savings and brokered CDs have been in a similar zip code, though check your state tax and early withdrawal rules. Layer on inflation: headline CPI has been running roughly ~3% year‑over‑year in Q3 2025. So that 3.8% after‑tax turns into something like ~0.8% real after inflation, give or take. Not amazing, but it’s positive, unlike 2021‑2022 when cash got torched in real terms.

Compare the two honestly. If you’re not itemizing and your mortgage is 6.75%, while your after‑tax, after‑inflation cash return is ~0.8%, the spread is big. Paying down looks attractive on pure arithmetic. If you are itemizing and your effective mortgage cost drops near 5.1%, the gap narrows. Now it’s a tighter call, and that’s before we price the value of liquidity.

Liquidity matters. A lot. Once you wire $150k to the bank, it’s sticky. Getting that back usually means a new loan, new underwriting, and whatever rates the market is throwing at you later this year or next. Meanwhile, cash on hand covers layoffs, medical surprises, and ugly roof leaks. Near retirement, there’s another layer: sequence‑of‑returns risk. If a bad market shows up in your first 2-3 years of retirement, a bigger cash buffer can let you avoid selling equities at depressed prices. In that context, keeping 12-24 months of planned withdrawals in T‑bills or CDs, even if your mortgage math slightly favors paydown, can be the smarter portfolio move.

Bottom line, and I’ll say it twice because it’s the core: match your after‑tax mortgage cost to your after‑tax, after‑inflation low‑risk yield, then adjust for the real, practical value of liquidity. If you don’t itemize, assume the sticker rate is your cost. If you do itemize, apply the bracket haircut but mind the SALT cap and the standard‑deduction hurdle. And don’t shortchange your emergency fund to win a spreadsheet battle you might regret in a recession.

State taxes, property rules, and the 2026 wildcard

Here’s where it gets messy, and I mean “coffee‑stained spreadsheet” messy. States do their own thing. Some mirror federal itemizing rules, some pick and choose, and a few let you deduct mortgage interest even if you took the federal standard deduction. That mismatch is exactly why paying off the mortgage in Q4 2025 versus January 2026 can change your after‑tax outcome.

Quick examples to make it real (and yes, I’ve had clients tripped up by this more than once):

• Massachusetts: allows a state‑level deduction for mortgage interest on your principal residence even if you don’t itemize federally. It’s an adjustment on the MA return, not an itemized deduction. Translation: your mortgage may still lower your state tax even if the IRS standard deduction wipes out the federal benefit.
• Illinois: offers a property‑tax credit (historically 5% of property tax paid on your principal home, per IL statute) that’s separate from federal itemizing. No mortgage required; it’s about the property tax bill.
• Minnesota and many others: have “circuit‑breaker” style refunds/credits that scale with income and property tax burden. Again, mortgage or no mortgage doesn’t decide eligibility, your residency, age, income, and the tax bill do.
• Texas/Florida and several Sun Belt states: senior homestead exemptions or over‑65 freezes/ceilings can reduce assessed value or the levy. Your loan status isn’t the driver, ownership and age are.

So the first step isn’t exotic tax alchemy. It’s simple: pull your state’s rules for itemizing vs. standard deduction, mortgage‑interest treatment, and senior property‑tax relief. If your state decouples from federal in any of these, your “keep or kill the mortgage” math changes. It really changes.

Now, the 2026 wildcard. Under the Tax Cuts and Jobs Act (TCJA), many individual provisions are scheduled to sunset after 2025. That includes the doubled standard deduction, the elimination of personal exemptions, the $10,000 SALT cap, and the tighter mortgage‑interest cap. Two data points worth anchoring on:

• SALT cap: $10,000 per return (married filing jointly or single) has applied for tax years 2018-2025 under TCJA. If the sunset occurs, the pre‑2018 rules, without that $10,000 cap, could return in 2026.
• Mortgage interest limit: interest on up to $750,000 of acquisition debt for loans originated after Dec. 15, 2017 (2018-2025). Under a full sunset, the cap would revert to $1,000,000 of acquisition debt in 2026 (historical pre‑TCJA rule).

What does that mean in plain English? If you’re right on the edge of itemizing, 2026 could flip your decision. No SALT cap and a lower standard deduction (with personal exemptions returning) might push you back into itemizing even with a smaller mortgage, or no mortgage. The opposite is true in 2025: the big standard deduction and the SALT cap make itemizing harder to reach, which often neutralizes the mortgage‑interest benefit.

Timing matters. If you’re planning a payoff, run two scenarios with your advisor or software: paid off in December 2025 versus January 2026. Same house, same loan, different tax world. I know it sounds nitpicky, but a one‑month shift can swing whether you itemize and by how much. It’s the same idea said a little differently: the calendar page can change the tax math.

One more real‑life wrinkle. Rates this fall are still elevated by post‑pandemic standards, 30‑year mortgages have hovered around the high‑6% to low‑7% range in 2025, which makes the “keep vs. pay” decision feel emotional, not just financial. I get it. I’ve paid off a mortgage early once, and I’ve kept one when the spreadsheet said to keep it, and the stomach said “please just be done.” Both were defensible, but the taxes looked very different because the state rules didn’t match federal and because of the SALT cap bite.

Bottom line for states: check your state’s itemizing rules, how they treat mortgage interest, and what senior property‑tax relief you can claim. Then line that up against the 2025 versus 2026 regime change. Simple steps, big impact.

Tactics to shrink the tax hit (and sleep better)

You don’t have to go all‑or‑nothing on payoff. The cleaner move is to stage it. That’s not me hedging; it’s just how the brackets and Medicare surtaxes behave in real life. A big principal check in one year can push Adjusted Gross Income (AGI) upward, because you might realize gains, do Roth conversions, or trigger phaseouts, while a two‑ or three‑year schedule can keep you inside friendlier lanes.

• Stage paydowns to manage brackets and IRMAA. Medicare’s income‑related monthly adjustment amount (IRMAA) kicks in based on MAGI from two years prior. For 2024, the base threshold is $103,000 (single) and $206,000 (married filing jointly); cross a tier and Part B/D premiums jump. Those thresholds adjust annually, but the point stands: one large payoff‑related sale in 2025 can raise 2027 premiums. I’ve seen clients miss by a few hundred bucks. Painful. A staggered payoff, with partial principal reductions each December/January, can keep you under the line and spread any premium impact.
• Coordinate with Roth conversions before RMDs start at 73. Under SECURE 2.0 (effective 2023), Required Minimum Distributions begin at age 73. Earlier years, say, a gap after retirement but before Social Security + RMDs, can be golden for partial Roth conversions. Fill the 12% or 22% bracket instead of letting future RMDs shove you into higher brackets later. This is where a partial mortgage paydown and a partial conversion can work together: lower fixed expenses lets you convert more without overshooting your bracket or IRMAA. And just to circle back, yes, I’m saying do both in small bites, not one giant bite.
• Harvest gains thoughtfully; look for 0% long‑term capital gains windows. In 2024, the 0% LTCG bracket runs up to taxable income of $94,050 for married filing jointly and $47,025 for single filers. If your income is temporarily low this year, you may be able to realize appreciated shares at 0% federal LTCG. It feels weird to sell a winner just to buy it back, but resetting basis can fund a payoff later without a tax surprise. If you’re charitably inclined, donate appreciated shares (held 1+ year) to the charity and use your cash to pay down principal, same economic result, better tax result.
• Use QCDs to reduce AGI and preserve cash. If you’re 70½ or older, Qualified Charitable Distributions let you send IRA dollars straight to a charity, lowering AGI. For 2024, the annual QCD limit is indexed and set at $105,000 per person. QCDs can also count toward your RMD once those start at 73. Lower AGI helps with IRMAA, helps with the 3.8% Net Investment Income Tax thresholds, and leaves your checking account intact for mortgage principal.
• Keep a HELOC as a liquidity backstop. I’m not saying borrow to invest. I’m saying don’t drain cash to zero just to be “done” with the mortgage. A modest HELOC provides optionality for roof leaks or an adult kid that calls on a Friday night. Rates are variable, many lenders price near prime (8.5% in 2025) plus a margin, so effective rates often land around 9-10%. That’s not cheap, but it’s cheaper than panic‑selling equities in a down week to cover an emergency.

Small, nerdy clarification because I’ve tripped on it myself: your taxable income drives the LTCG bracket, but your MAGI drives IRMAA. They’re related, not identical. That’s why a plan that looks perfect on a capital‑gains chart can still bump Medicare premiums. Double‑check both columns.

One last tactic that’s boring but works: coordinate the timing. In Q4, yes, right now, run a rough 2025 tax projection with your advisor or software. If you’ve got room before the next IRMAA tier, consider a year‑end principal chunk and a small Roth conversion, then tee up another round in January. Same dollars, different calendar, nicer tax bill.

Quick checklist: stage paydowns, fill low brackets with Roth conversions before age 73 RMDs, harvest gains in any 0% window (2024 thresholds: $47,025 single / $94,050 MFJ), use QCDs (70½+, $105,000 limit in 2024) to lower AGI, and keep a HELOC for liquidity so you’re not cash‑dry.

I’ve done the “sleep at night” move and the “spreadsheet wins” move. The hybrid, paced paydown plus pre‑RMD Roth work, has been the sweet spot for most folks this year with mortgage rates still hovering in the high‑6s to low‑7s. Not perfect, just practical.

Net of it all: the best move maximizes optionality, not just pride of ownership

Paying off the house before retirement feels incredible, I get it; I’ve done the victory-lap walk to the mailbox. But the scoreboard that matters is after-tax cash flow, risk, and flexibility. If wiping the balance in one gulp means jacking up ordinary income, tripping IRMAA, and draining liquidity, the “win” can age badly by February. The cleaner approach in 2025 has been simple: judge the payoff by the after-tax return, stay under tax cliffs when you can, and keep some dry powder.

Start with the math that actually pays you. Your mortgage cost is the after-tax rate, not the headline coupon. If you still deduct mortgage interest (many don’t since TCJA), the deduction applies only to acquisition debt up to $750,000 on loans originated after Dec. 15, 2017, and you still face the $10,000 SALT cap through 2025. Translation: plenty of households get little to no federal benefit from mortgage interest anymore. On the investment side, your safe benchmark is what you can earn without taking equity risk, think T‑bills/CDs, versus the mortgage’s after-tax cost. If the after-tax mortgage rate is clearly above what you can earn safely, accelerate paydown. If it’s close, optionality often wins.

Now the landmines. One-year income spikes are expensive. The 3.8% Net Investment Income Tax (NIIT) still kicks in at modified AGI over $200,000 (single) / $250,000 (MFJ), those thresholds aren’t indexed. Medicare IRMAA surcharges are cliff-y and apply two years after the income year; a big Roth conversion or a giant IRA withdrawal to kill the mortgage in 2025 can raise your Part B and D premiums in 2027. Worth it? Sometimes. But if the only benefit is bragging rights and a slightly lower coupon, why eat a multi-year surcharge?

So what’s the practical move this year? A staged, tax-aware strategy usually beats an all-at-once payoff. Pair principal reductions with bracket management: fill lower ordinary brackets with measured Roth conversions before age-73 RMDs, harvest long-term gains in any 0% window (for 2024, that’s up to $47,025 single / $94,050 MFJ), and use Qualified Charitable Distributions (70½+, up to $105,000 in 2024) to suppress AGI. Keep a HELOC or ample cash so you’re not house-rich, liquidity-poor. Does that add a tiny bit of complexity? Yep. Is it worth the optionality? Also yep.

And I’ll say the quiet part. Flexibility in retirement usually beats a zero balance if the tax cost of getting to zero is high. You can always accelerate later if rates jump or your safe yields fall. Can you un-ring an IRMAA bell? Not easily.

Simple rule set for 2025:

• Judge the move by after-tax returns: compare your after-tax mortgage rate to safe, after-tax yields.
• Bracket discipline: avoid pushing MAGI into NIIT ($200k single / $250k MFJ) and IRMAA tiers unless the payoff math clearly wins.
• Prefer staged reductions over lump-sum payoffs when a one-year spike would raise Medicare premiums or capital-gains/NIIT exposure.
• Preserve liquidity, cash or HELOC, so you can handle shocks without tapping IRAs in a bad market year.
• Let taxes, cash‑flow resilience, and your sleep-at-night factor co‑pilot; pride comes for the ride.

There’s gray area, always. Some clients sleep better with a small balance and max flexibility; others want the deed framed on the wall, period. I’ve done both. The hybrid, paced paydown with smart tax fills, has been the sweet spot this year with mortgages still around the high-6s/low-7s and T‑bills hanging near the 5% neighborhood. Not perfect. Just practical, and kinder to your future Medicare and tax bills.

Frequently Asked Questions

Q: Is it better to pay off my mortgage before retirement if my rate is 3.25%?

A: Maybe, but don’t make it a rate-only decision. The funding source drives the tax bill. Paying with a big traditional IRA withdrawal can spike your 2025 taxable income, trigger Medicare IRMAA in 2027, and crowd out smart Roth conversions. If your cash is in taxable with minimal gains, great. If it’s IRA-heavy, a slower paydown or partial lump sum often wins, net of taxes.

Q: How do I decide which account to use without blowing up my taxes?

A: Stack the deck. 1) Start with taxable brokerage: use cash, high-basis lots, or harvest losses to offset gains. Keep AGI below cliffs that hit credits and IRMAA later. 2) Consider a partial prepayment to shorten the loan and trim interest while staying in your current bracket. 3) Traditional IRA last, if you must, fill the rest of your current bracket, not beyond. 4) Roth is generally the last resort; it’s your tax-free growth engine. 5) Coordinate with charitable gifts (DAF bunching) to offset gains and review state taxes, too.

Q: What’s the difference between paying with a traditional IRA withdrawal vs. selling brokerage assets?

A: Traditional IRA money is all ordinary income the year you pull it, every dollar counts toward AGI, which can push you into a higher marginal bracket, phaseouts, NIIT thresholds, and Medicare IRMAA (with a two-year lag). Selling from a taxable brokerage usually means capital gains on the gain only, not your cost basis. You can offset gains with harvested losses. Also, last year (2024) the standard deduction was $29,200 MFJ/$14,600 single, and many didn’t itemize because SALT was capped at $10k, so mortgage interest often didn’t reduce taxes much anyway. State taxes can differ: some states tax capital gains and ordinary income the same; others have quirks. Net-net: brokerage sales tend to be more controllable and tax-efficient than big IRA withdrawals in one year.

Q: Should I worry about IRMAA and the 2026 TCJA sunset if I pay off the mortgage this year?

A: Yes, both. IRMAA uses a two-year lookback, so a big 2025 payoff that spikes AGI can raise your Medicare premiums in 2027. I’ve watched folks “nuke the note” at 65, only to get hit with higher Part B/D premiums two years later and wonder what happened. Even tax-exempt muni interest counts in MAGI for IRMAA, sneaky, I know. Here’s the playbook I actually use with clients: 1) Run a 2025 tax projection before any transfer. Map your top federal and state marginal rates, NIIT exposure, and where IRMAA cliffs sit. 2) Consider splitting the payoff across 2025 and early 2026 to keep each year under key thresholds. 3) If you’re charitably inclined, bunch gifts into a donor-advised fund in the same year you realize gains or IRA income; that deduction can neutralize part of the spike. 4) Use partial paydowns: trim the balance to drop PMI or shorten the term rather than a full zero-out. 5) Preserve room for strategic Roth conversions, crowding them out with a one-time IRA yank can hurt your lifetime tax bill. 6) Keep the TCJA sunset in view for 2026: SALT cap could change, mortgage interest limits may shift, and brackets may widen or narrow. The math you run this fall can look different after 12/31/2025, so build flexibility into the plan. And if you did already blow through a cliff, file a Medicare IRMAA appeal (life-changing event form) if you qualify, retirement and income reductions sometimes get relief.

@article{tax-implications-of-paying-off-a-mortgage-before-retirement,
    title   = {Tax Implications of Paying Off a Mortgage Before Retirement},
    author  = {Beeri Sparks},
    year    = {2025},
    journal = {Bankpointe},
    url     = {https://bankpointe.com/articles/mortgage-payoff-retirement-taxes/}
}