I’m 58, have $1.5 million saved and a small mortgage: should I pay it off before retirement?
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Picture this: James is 58 years old. He has accumulated about $1.5 million in retirement accounts and still has a modest mortgage on his home.
He doesn’t like the idea of taking on debt into retirement, and the thought keeps coming up: Should he just take a large withdrawal from his IRA or 401(k), pay off the house, and be done with it?
On the surface, this decision seems responsible. No mortgage. No monthly payment. One less obligation once the work is completed.
But this decision is not just about eliminating debt. It sits at the intersection of tax math, market risk, and psychology, and one bad decision can quietly cost James six figures. The right answer depends less on instinct and more on timing.
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The most obvious solution (withdrawing $200,000 or $300,000 from retirement accounts to wipe out the mortgage) is also the most expensive.
At age 58, James is still under 59½, which means most IRA and 401(k) withdrawals trigger a 10% early withdrawal penalty, in addition to regular income taxes. This penalty alone takes a significant toll before taxes even come into play.
A withdrawal of $300,000 is a useful example.
Between the 10% penalty and the federal income tax in his likely 2026 tax bracket (22-24%), it’s entirely possible that $100,000-$170,000 of that withdrawal disappears into the IRS before a single dollar goes toward the mortgage.
James liquidates much of his retirement savings, but only a fraction of it actually pays off the house.
This is just the first level of cost.
There’s a secondary impact that most people overlook: large withdrawals inflate James’ taxable income, which can affect many aspects of his financial life, even years later.
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Social Security Taxation: If James plans to claim benefits at age 62 or later, the additional income pushes him into the “tax torpedo” zone where 85% of his benefits may become taxable. This creates an effective marginal tax rate of over 20% on the IRA withdrawal.
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Health insurance premiums: A withdrawal of $300,000 could trigger income-related monthly adjustment amount (IRMAA) surcharges, increasing his Part B and D premiums from $80 to $140 and more per month for years.
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Lost composition: Once that money is gone, it no longer accumulates in tax-advantaged accounts. Over 15 years, with 7% growth, $300,000 could become $850,000. This loss of growth compounds the true cost of removal.
