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R. Klein, EA
R. Klein, EA, Enrolled Agent
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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?
Submitted: 2 years ago.
Category: Tax
Expert:  R. Klein, EA replied 2 years ago.

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.


 

R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 2927
Experience: Over 20 Years experience
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