I just did my tax returns, and when I compared them with last year’s, it was readily apparent that as I get close to paying off my mortgage (I’m about five years away), I am paying less interest, and therefore getting less of a deduction.
I find myself wondering what I should be doing (if anything) to lower my taxes when I finally pay my mortgage off.
Quite frankly, I never thought about it.
I know some people buy second properties, but I don’t really have any interest in that.
I’ve heard about the proposed tax-free savings accounts, which I would definitely make use of if they come to be.
I already contribute the maximum to my employer’s tax-deferred retirement fund (not an IRA, but similar to one).
Are there any financial instruments commonly used in my situation?
I’d Strongly recommend looking into the Roth IRA. Lots of advantages.
Also, remember that any action you take should NOT be done for tax reasons alone. Taxes are only a percentage. Make sure whatever you do makes sound sense to you. Also, you didn’t mention how old you are (how close to retirement) and what your level of risk tolerance is. Whatever other advice you get, balance that with your own personal risk tolerance. You gotta sleep at night.
Have you considered re-financing your mortgage, or taking a second?
No law says you have to pay off your mortgage. If you want to keep getting the tax discount, you can pull out the equity you have in the house. I’d talk to an accountant before doing it, but it might work.
Annie-Xmas - You do realize that once the mortgage is paid off, he won’t be making mortgage payments any more, don’t you? And those mortgage payments are much larger than the tax savings you get by deducting the interest. He’s in the painful time now where more and more of the payment goes to principal, but once he’s done, he gets to pocket a lot more income, even if he pays more in taxes afterwards.
Refinancing your mortgage or taking a second mortgage to lower your taxes is insane. There’s no possible way to come out ahead doing that - the tax savings are a percentage of interest paid, so you’re always paying out more in interest than you’re saving in taxes.
I’m 45, and will be able to retire in 11 years. In addition to contributing to my tax-deferred retirement plan, I also contribute to a Roth IRA. If I understand the way a Roth works, I pay tax on the money before I deposit it, but the interest earned is never taxed. If this is the case, it doesn’t act to shelter my present income from taxes, which is my goal.
The second mortgage is worth looking into. I presume the goal is to invest the money borrowed, in which case success would depend on earning a higher rate of interest than the rate of the mortgage (minus the interest deduction ). I’m fairly risk-averse, so I’d have to think about this one.
It’s not always insane, muldoonthief: you can succeed at it, but it’s a gamble.
If I can get a fixed-rate mortgage when rates are low (and they are pretty low now), and then rates go up and I’m able to get higher returns on the money I borrowed, it works.
The question is whether I’m willing to risk my money that this will happen.
That is my understanding of the Roth IRA as well. I wish we had a similar retirement savings opportunity in Canada. Sadly, we don’t. Our RRSPs are only a vehicle for deferring tax. To go along with this, we also can’t deduct interest on mortgage payments as an expense. Sigh.
Don’t do the second mortgage. MAYBE it could pay off…but maybe it couldn’t.
Remember, you get to deduct your mortgage interest. Sweet. But that deduction only saves you about 1/3 of it off your taxes. So 2/3 of your interest is just gone gone gone.
If you feel you must take out a second mortgage make sure you use it. If you want a mortgage interest deducation make sure to have a home equity line and buy things with that. You can thereby deduct interest for cars, home improvement, travel, college for the kids, whatever.
I don’t know your situation – talking to a certified financial planner is always a good idea & they can tailor a plan to suit your needs. I assume that where you really need some breathing room is retirement – because that is most common. I will spin you a scenario where a 2nd mortgage makes sense:
You take out, say $50,000, in a 15 year second mortgage at 5.25%
You invest the money in a mutual fund – you could get lucky, pick the right one and make a great return. You could pick a poorly as long as you did not pick INSANELY – you will lose a few thousand net of your principal. What historically is most likely to happen though is that you will get a return a few parentages above the prime rate. You will be Taxed on your gains. You will get a small interest deduction that may meet the taxes.
You are risk adverse – in 11 years you will retire. Your mortgage will be paid off and A. you could have no mortgage debt and if you took your 1st mortgage payment and invested it for 6 years you might have X in savings, or B. you could have no 1st mortgage debt and if you took your 1st mortgage payment and invested it for 6 years you might have X in savings + $50,000 that has been parked in a mutual fund for 11 years. Here it is obvious (stay with me I went a long way to make this point) if nothing else, the 2nd mortgage used this way is a good tool to force savings. You could even take a peice of that 50K, pay off the 2nd and still go into retirement with more cash.
Speak to a CFP, that is the best advice anyone can give you – make sure he is reputable.