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R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
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Experience:  Over 20 Years experience
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I will be inheriting about $400,000 soon. I am 48 and single.

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I will be inheriting about $400,000 soon. I am 48 and single. I have about $85,000 in a traditional IRA, and $200,000 in a regular brokerage account. I am in social work and earn about $32,000 a year.
My mortgage is about $81,000 with an $810.00 monthly payment. (5/1 ARM, 4.25%, in my 2nd year) No other debt.
My question is: When I inherit the money, should I pay off my mortgage?

Randalltax :

Hi and thanks for asking for me today.


 


 

Randalltax :

In a strictly financial sense, the trade-off is a 4.25% rate for borrowing money (which can go up after you rfirst 5 years) versus what you can earn on your investments.


 


Keep in mind that interest paid is about $3400 a year currently, and may not be enough to make a difference in itemized deductions at tax time, so the interest is not offset by any (or much) tax savings.


 


With that in mind, can you get a "safe" return of 4.25% or better now? Probably not. CDs are lucky to be paying 0.5% Other investments may likely fare better, but right now it's a big question as to what risk you would need to undetake to get at least a 5% return (before taxes) to yield at least a 4.25% return.


 


On the other hand, if you feel you can use that inheritance to leverage an investment (for example, a rental property), then you may be better off investing as much as you can and using the income to help pay your mortgage.


 

Randalltax :

In this case, I would say you have your choice based on your comfort of investing that $81K in something other than your mortgage, or getting rid of that montly obligation. My general advice is that a mortgage is fine as long as your income supports the monthly payments without being a burden. If you were to lose your job tomorrow, you still have enough cash to keep making payments as long as needed.


 

Randalltax :

There are basically two good uses of debt: Use it to buy something that increases in value or to purchase and live in your home. Any other debt is dangerous and should be avoided.


 

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