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Is Paying Off a Low-Interest Mortgage a Good Idea?

For many families, a home loan constitutes a significant portion of their household debt. As a result, some people choose to reduce this debt as much as possible before entering retirement. In fact, nearly one in three retirees have mortgage debt, and 17% of those paying off debt say that their mortgage is a top financial priority.[1]

But not all debt is equal. Interest rates have been historically low in recent years, so depending on your rate, your mortgage may be the cheapest form of debt you hold.[2] As such, using your extra money in different ways could make sense. Because everyone’s financial situation is different, many factors can affect choosing whether to pay off your mortgage.

As you assess your own mortgage, here are 5 common questions to consider:

1. Have you maxed out contributions to tax-advantaged accounts?

Preparing to have the income you need in retirement is important – yet, only 46% of retirees believe they have enough money.[3] If you and your financial representative feel comfortable with your retirement savings, you may be able to devote income to extra mortgage payments. However, the final years before retirement are your last opportunity to boost your contributions. If you still have room to save, you may want to bypass paying off your mortgage and put those additional funds into tax-advantaged accounts.

2. Will paying down the mortgage affect your taxes?

If you itemize your taxes, then your mortgage interest payments may be deductible. Once you stop making mortgage payments, you can no longer deduct that interest. Further, choosing to pay off your mortgage, either before or after you retire, also brings a different set of tax strategies to consider. If you can still benefit from deducting interest on your taxes, then you may want to continue doing so. Keep in mind that it’s important to view your financial situation from a complete perspective before making any tax decisions.[4]

3. Do you have adequate cash reserves?

Emergency savings are critical for an effective, long-term financial strategy. Unexpected life events, like unemployment, a sudden illness, or home repair, can strain household finances. To adequately prepare, you should aim to have at least 3 to 6 months of cash reserves on hand.[5] By doing so, you’ll be better able to cover major expenses without having to liquidate investments or go into debt. If you do not already have an emergency reserve – or need to set aside more money – consider boosting your savings before paying down your mortgage.

4. Do you have other debt?

People in the U.S. are carrying lots of debt, which can threaten their financial strategy. In fact, the average person with debt holds at least $38,000 (excluding mortgages), and 45% of retirees carry non-mortgage debt.[6] If you find yourself in a similar financial situation, you may want to put extra money toward other debt. Further, if any of those liabilities have interest rates higher than your mortgage, then you’ll keep more money in the long run by paying down that debt today.

5. Will paying off your mortgage bring happiness?

Most financial decisions have emotional components, which is why understanding your long-term goals is important when making a strategy. For some people, knowing that they own their home, free and clear, outweighs other financial considerations. If being able to pay off your mortgage early aligns with your financial goals, it may be the best decision for you.

The Takeaway

Choosing to pay off a mortgage requires carefully looking at your financial life and prioritizing which strategies make sense. With careful attention to your unique needs, you can make sound decisions that support your long-term goals. If you have any questions or would like to discuss this topic further, contact a CapSouth advisor at 800.929.1001 or visit our website at www.capsouthwm.com  

Footnotes, disclosures, and sources:

As part of the 2017 Tax Cuts and Jobs Act, mortgage interest deductibility is limited to mortgages up to $750,000 in principal value.

Investment advisory services are offered through CapSouth Partners, Inc., dba CapSouth Wealth Management, an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable.  CapSouth does not guarantee the accuracy or completeness of the information.  This material has been prepared for planning purposes only and is not intended as specific tax or legal advice.  Tax and legal laws are often complex and frequently change.  Please consult your tax or legal advisor to discuss your specific situation before making any decisions that may have tax or legal consequences.

This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth Partners). The policies and procedures governing these third-party sites may differ from those effective on the CapSouth company website, as outlined in these Disclaimers. As such, CapSouth makes no representations whatsoever regarding any third-party content/sites that may be accessible directly or indirectly from the CapSouth website. Linking to these third-party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent Registered Investment Advisory firm. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences.

[1] https://www.transamericacenter.org/docs/default-source/retirees-survey/tcrs2018_sr_retirees_survey_financially_faring.pdf

[2] https://www.thebalance.com/fed-funds-rate-history-highs-lows-3306135

[3] https://www.transamericacenter.org/docs/default-source/retirees-survey/tcrs2018_sr_retirees_survey_financially_faring.pdf

[4] https://www.thebalance.com/mortgage-interest-deduction-before-and-after-retirement-2388985

[5] https://www.investopedia.com/terms/c/cash-reserves.asp

[6] https://news.northwesternmutual.com/planning-and-progress-2018

https://www.transamericacenter.org/docs/default-source/retirees-survey/tcrs2018_sr_retirees_survey_financially_faring.pdf

Inherited Accounts Under the CARES Act

Tucked into the gigantic “Coronavirus Aid, Relief, and Economic Security” (“CARES”) Act were two key changes you should know about, regarding required minimum distributions (RMDs). Both were designed to give people more control over their money and to help manage selling investments during an emergency.[1]

One provision allows retirees to forego taking RMDs from Individual Retirement Accounts (IRA) or 401(k)-style plans this year.

The other provision allows people who have inherited 401(k)s, IRAs or Roth IRAs to suspend distributions in 2020 (while RMDs don’t apply to people with Roth IRAs, they do apply to investors who inherit Roth accounts).

Let’s take a look at a couple of examples.

  • Let’s say an account holder has been taking RMDs from an inherited account for a number of years using the life-expectancy method set by the Internal Revenue Service.  The account holder can forgo a distribution in 2020, and resume distributions in 2021.
  • Suppose an account owner passed away on January 1, 2020, and left the IRA to an adult child. The new 10-year rule would start in 2021. The beneficiary would have until the end of the 10th year to withdraw the entire account.[2]

Important Note: If you have already taken a distribution from an IRA or 401(k)-style plan this year, you may be able to roll the funds back into the plan. But if you have already taken a distribution from an inherited IRA, you may not be allowed to put that money back. Keep in mind, the CARES Act is a 335-page bill, and some of the provisions are open to interpretation. Please contact your tax or legal professional to understand how it might impact your situation.

Big picture, these rule changes are meant to help Americans who may be struggling with the economic, emotional, or physical toll of COVID-19. In a tough time, these provisions of the CARES Act give account owners some flexibility that may provide some relief.

To further discuss inherited accounts under the CARES Act, contact CapSouth at 800.929.1001. To learn more about CapSouth Wealth Management and the services we provide, contact a local CapSouth office or visit our website at www.capsouthwm.com.

Investment advisory services are offered through CapSouth Partners, Inc., dba CapSouth Wealth Management, an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable.  CapSouth does not guarantee the accuracy or completeness of the information.  This material has been prepared for planning purposes only and is not intended as specific tax or legal advice.  Tax and legal laws are often complex and frequently change.  Please consult your tax or legal advisor to discuss your specific situation before making any decisions that may have tax or legal consequences.

This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth Partners). The policies and procedures governing these third-party sites may differ from those effective on the CapSouth company website, as outlined in these Disclaimers. As such, CapSouth makes no representations whatsoever regarding any third-party content/sites that may be accessible directly or indirectly from the CapSouth website. Linking to these third-party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

[1] The Wall Street Journal, March 25, 2020.

[2] Forbes.com, March 30, 2020. Under the SECURE Act, your required minimum distribution (RMD) must be distributed by the end of the 10th calendar year following the year of the Individual Retirement Account (IRA) owner’s death. Penalties may occur for missed RMDs. Any RMDs due for the original owner must be taken by their deadlines to avoid penalties. A surviving spouse of the IRA owner, disabled or chronically ill individuals, individuals who are not more than 10 years younger than the IRA owner, and children of the IRA owner who have not reached the age of majority may have other minimum distribution requirements.

CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent Registered Investment Advisory firm. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences.

How to Keep Money in Your Family – Estate Planning

You’ve invested your life into caring for your family’s wellbeing. You cherish them and want them to mature into smart, healthy, successful adults. Naturally, as they become adults and grow older, your authority over them recedes. They make their own decisions, and you just hope it’s for the best.

Your feelings don’t change. They are your children. And they’ll always be your children. The same goes for your closest, most intimate friends. You want their futures to be safe and secure; you want them to prosper in life. And what better way to show your devotion and appreciation than by ensuring your hard-earned money and investments go to them—after your passing?

In other words, how do you keep your money in your family or within your circle of closest friends?

Estate planning is the key. Why is planning your estate so important?[i]

  • You avoid probate court. In many states, probate fees can reach 5% of the value of the estate. For an estate valued at $400,000, legal fees may reach $20,000.[ii]
  • Planning your estate will lessen the tax burden on your heirs. If you die without a will, the laws of your state, not you, govern how your estate is distributed. However, inheritance laws generally favor spouses, domestic partners, and blood relatives. But why leave it to the legal system to decide?[iii]
  • Many people who are beginning to plan their estates seek professional financial advice following the loss of a loved one or a close friend. While wise, the timing may be off. The best time to start estate planning is immediately—to avoid potential worst-case scenarios, such as mental decline or sudden death of a spouse or loved one.
  • Comprehensive estate planning, ironically, helps protect beneficiaries, both adult and children. With adults, a plan helps guard against bad financial decisions later or potential credit problems. With children, it designates guardians or conservators to protect minors’ financial interests.[iv]
  • A solid estate plan with asset protection provisions may help shield your assets from potential creditors.[v]

You’re planning to enjoy many more years with your family and friends. What can you do now to ensure your money goes to loved ones—as opposed to Uncle Sam?

Here are 5 ways to maximize your family money in the here and now:[vi]

  1. You can spend your money and your assets, which will ultimately reduce your tax burden and benefit your family. Obviously, your first priority is to your loved ones, not to bolstering government coffers. The problem, however, is that you may live a good, long life, and your goal is to ensure you don’t outlive your wealth. This option is worthwhile if you have plenty of cash reserves and a robust estate.
  2. Gifts pose the same challenge if your estate and your assets have the potential for a long-shelf life. While giving to family and friends is noble, the IRS establishes restrictions on giving levels. You may give up to $15,000 each to individuals or charities before having to file gift tax returns. The maximum lifetime gift tax exemption is $11.18 million.[vii]
  3. You may lend to family members and friends. However, to stay IRS compliant, you should draft a loan note that includes the loan amount, payback date, interest rate, and any collateral or security. This enables you to avoid the IRS’s gift classification.[viii]
  4. You may pay wages to your family; 4 in 5 older Americans suffer from at least 1 chronic disease and may need care.[ix] By 2030, more than 1 in 5 Americans will be over the age of 65.[x] The IRS allows for the paying of wages to family members, which helps build their Social Security earnings record.[xi] Services may include providing home health care or performing other household or small business-related work.
  5. You can create a life estate deed, which transfers the family’s house to a child while the parents retain the right to live in the house. Following the death of the parents, children don’t have to go through lengthy probate proceedings. The home transfers to children—beneficiaries or remaindermen—as a gift.[xii] A life estate deed may also remove the home from consideration as a personal asset when applying for Medicaid assistance for long-term care needs.[xiii]

Seek guidance from a financial professional to learn more about your rights and opportunities to provide for your family—even in future generations.

Contact CapSouth at 800.929.1001 or visit our website at www.capsouthwm.com to learn more about CapSouth or to speak with an advisor about estate planning.

Investment advisory services are offered through CapSouth Partners, Inc., dba CapSouth Wealth Management, an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable.  CapSouth does not guarantee the accuracy or completeness of the information.  This material has been prepared for planning purposes only and is not intended as specific tax or legal advice.  Tax and legal laws are often complex and frequently change.  Please consult your tax or legal advisor to discuss your specific situation before making any decisions that may have tax or legal consequences.

This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth Partners). The policies and procedures governing these third-party sites may differ from those effective on the CapSouth company website, as outlined in these Disclaimers. As such, CapSouth makes no representations whatsoever regarding any third-party content/sites that may be accessible directly or indirectly from the CapSouth website. Linking to these third-party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent Registered Investment Advisory firm. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences.

[1] https://www.investopedia.com/articles/wealth-management/122915/4-reasons-estate-planning-so-important.asp

[1] https://www.nolo.com/legal-encyclopedia/why-avoid-probate-29861.html

[1] https://estate.findlaw.com/wills/what-happens-if-i-die-without-a-will-.html http://money.cnn.com/2016/04/28/pf/dying-without-a-will-prince/index.html

[1] https://www.thebalance.com/what-does-a-guardian-or-conservator-of-a-minor-do-3505167

[1] https://www.thebalance.com/what-is-asset-protection-3505066

[1] https://www.thebalance.com/how-to-minimize-death-taxes-3505688

[1] https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax

http://www.pgdc.com/g/boston-foundation/news/2018-estate-gift-and-gst-tax-lifetime-exclusion-11180000-taxpayer

[i] https://www.investopedia.com/articles/wealth-management/122915/4-reasons-estate-planning-so-important.asp

[ii] https://www.nolo.com/legal-encyclopedia/why-avoid-probate-29861.html

[iii] https://estate.findlaw.com/wills/what-happens-if-i-die-without-a-will-.html http://money.cnn.com/2016/04/28/pf/dying-without-a-will-prince/index.html

[iv] https://www.thebalance.com/what-does-a-guardian-or-conservator-of-a-minor-do-3505167

[v] https://www.thebalance.com/what-is-asset-protection-3505066

[vi] https://www.thebalance.com/how-to-minimize-death-taxes-3505688

[vii] https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax

http://www.pgdc.com/g/boston-foundation/news/2018-estate-gift-and-gst-tax-lifetime-exclusion-11180000-taxpayer
http://web20.nixonpeabody.com/trusts/Lists/Posts/Post.aspx?ID=276

[viii] https://blog.taxact.com/family-loans-lend-my-kids-money/

[ix] https://www.ncoa.org/news/resources-for-reporters/get-the-facts/healthy-aging-facts/

[x] https://www.ncbi.nlm.nih.gov/books/NBK396397/

[xi] https://www.irs.gov/businesses/small-businesses-self-employed/family-help

[xii] https://www.thebalance.com/enhanced-life-estate-deed-3505518

[xiii] https://www.agingcare.com/articles/protecting-parents-home-from-medicaid-183157.htm

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