Why Paying Off the Mortgage Before Retiring With IRA Money Backfires

A $150K mortgage balance can cost $215K to clear from an IRA

Two mistakes usually show up as a pair. The first treats the loan balance as the price: at an assumed 30 percent tax, clearing $150K takes about $215K out of a traditional IRA, and $64.5K of that goes to tax. The second forgets that Medicare looks back two years, and that Form SSA-44 won't undo the spike. For a single filer whose usual MAGI is $100K, the higher Part B premium adds about $5,356. Together that's roughly $69,900 on top of the balance. Run the gross-up and the premium check before anyone calls the lender, and see whether your payoff-year MAGI stays under $109,000 single or $218,000 joint.

Can I clear the loan from my IRA without a Medicare jump at 73?

Usually not in a single year: a payoff that pushes your MAGI above $109,000 single or $218,000 joint raises your Medicare Part B premium two years later. For a single filer in the under-$500,000 tier, Part B moves from $202.90 to $649.20 monthly. Spreading withdrawals over several years or using taxable cash avoids that jump.

For illustration, hypothetical Pavel, 71, a divorced retired pharmacist with $2.1M almost entirely in one traditional IRA, opens his January Form 1098. It shows $150K left at a fixed 3 percent, a $1,200 monthly payment and about $4,400 of interest. That interest lowers his tax by nothing, because the 2026 IRS standard deduction for a single filer is $16,100 and he doesn't itemize. Paying off the loan loses no deduction, and keeping it saves no tax.

Step one: gross withdrawal equals balance ÷ (1 − tax rate), so $150,000 ÷ 0.70 is about $215K. Step two: tax is $215K × 0.30, about $64.5K, leaving roughly $150K for the lender. Step three: MAGI becomes $100K plus $215K, or $315K, which sits in the under-$500,000 single tier. Step four: two years later, at 73, Part B costs $649.20 instead of $202.90. That's $446.30 × 12, or $5,356, charged the same year his required distributions begin. Form SSA-44 doesn't cover a voluntary withdrawal.

Now the paycheck side. With the payment, Pavel needs $6,000 monthly; without it, $4,800. Keeping the loan costs about $19,200 of IRA withdrawals annually ($1,600 monthly at an assumed 25 percent tax) to net the $14,400. Before Tolleson Wealth Management suggests a payoff, it sets the paycheck both ways and checks what a down-market trim would do. A 10 percent guardrail cut on $6,000 is $600. The $1,200 mortgage can't be trimmed, so all $600 comes out of the flexible $4,800: a 12.5 percent cut to travel and everything else. Plug your own balance and rate into our calculator to see your version of these steps.

Ask the lender for a payoff letter with a good-through date. Pull MAGI from last year's Form 1040, run the gross-up, and check which Part B tier the new total lands in. Decide before December 31 and set the IRA withholding yourself, since IRA withholding is elective while a direct 401(k) distribution has 20 percent withheld by law. The Part B premium two years later is the row most readers have never seen.

Pavel's Form 1098

The paycheck with and without the payment

First moves, in order

Should I pay off the mortgage before retiring, keep paying, or clear it from the IRA later?

If you're still working, fill your catch-ups first, then save for the payoff in a taxable account. If you're retired with most savings in a traditional IRA and a low fixed rate, keep paying. Clear the loan from the IRA only when the withdrawal keeps your income under the first Medicare line.

From 10 to 15 years out, the choice comes down to compounding and the catch-up years. For 2026 the IRS lets workers 50 and older add $8,000 to a 401(k), a $32,500 total, and workers 60 to 63 can add $11,250. Hypothetically, $8,000 pre-tax at an assumed 22 percent tax saves $1,760 that year, while the same $8,000 sent to a 3 percent loan saves about $240 of interest in year one. For illustration, $8,000 a year invested for 12 years at an assumed 5 percent grows to about $127K, though an account can also fall below what you put in. The honest limit: catch-ups must be Roth if prior-year FICA wages topped $150,000, which removes the upfront saving.

People say 'mortgage interest is deductible,' but it lowers federal tax only if you itemize past $16,100 single or $32,200 joint. People say 'I can always put the IRA money back,' but a 60-day rollover is allowed only once per 12 months across IRAs. People say 'Medicare forgives a one-time spike,' but SSA-44 lists life-changing events, and a voluntary withdrawal isn't one.

Prepaying from salary suits someone still earning, with catch-ups already filled and a loan that would otherwise run past retirement. Keeping the payment suits a retiree like Pavel, with nearly everything in a traditional IRA and a low fixed rate. An IRA payoff, possibly spread over several years, suits someone whose MAGI stays under the first IRMAA line even with the withdrawal, or who holds taxable cash for the tax. The math here assumes a fixed rate, a single filer and illustrative tax rates, and it ignores state tax, variable loans and reverse mortgages. If you can pay in cash without touching the IRA, or simply sleep better debt-free, the answer can reasonably change.

Option one: prepay from salary

What people say versus what the rule says

Who each option fits

Do my children inherit the mortgage along with the house?

Generally yes, they inherit the house with its loan, and federal law generally lets a relative who inherits a home keep the existing mortgage instead of repaying it all at once. Pavel's two adult children would get either a paid-off condo plus an IRA that's $215K smaller, or the house with its loan plus the larger IRA.

Every dollar of that IRA is taxed at their own rates as they draw it (the inherited IRA 10-year rule has its own page). For married readers, a surviving spouse can still file jointly for the year of death but usually files single after that, so from then on the Part B line drops from $218,000 to $109,000.

One payoff question for Tolleson Wealth Management before age 73

Ask this: at my income, what does each year's payoff withdrawal add to my tax bill and to my Part B premium two years later? And how far would my paycheck floor fall if the loan were gone? Bring last year's Form 1040 and your Form 1098, and the Tolleson Wealth Management team will run both answers with you at your annual meeting, by video call or phone.