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Dear Dr. Don,

My wife and I are in our early 50s and owe $23,000 on our 15-year mortgage. The home loan should be paid off within the next three or four years if we keep making the planned additional principal payments. I have stocks that I could sell and pay down the mortgage. If I did that, it would reduce our monthly payments by $1,000.

Last year, with the reduced interest paid, we barely had enough in deductions to itemize on our income taxes. My retirement funds consist of a 401(k) plan after making 30 years of contributions, including company matches, and a company pension plan. My wife has a 401(k) plan that she has contributed to for the past five years.

Would we see a better tax scenario if we invested in an individual retirement account for my wife with the money we would be using to make our mortgage payment?

Thanks,

— Neal Net-Benefit

Dear Neal,

Like you, a lot of homeowners find that they can’t fully utilize the mortgage interest deduction, and that their interest deduction mostly just replaces the standard deduction. That’s especially true in the final years of a mortgage.

Selling your taxable stock position has its own tax impact. As I see it, you’re suggesting that you sell the stock position to pay off the mortgage and then use the money that was budgeted for the mortgage to put into retirement savings for your wife.

She’s in her 50s so she should qualify to make the catch-up contributions plus the annual contributions. In 2014 and 2015, those limits are a combined $6,500 per year. While she has the ability to contribute given adequate compensation, her ability to make tax-deferred contributions to a traditional individual retirement account may be limited based on her income because her company offers a 401(k) plan. Roth IRA contributions may also be limited based on your filing status and your income. Taxable contributions to a Traditional IRA may be converted to a Roth IRA.

If your wife’s 401(k) plan includes company-matching contributions, she should contribute up to the limits of the match before looking to contribute to other tax-advantaged retirement accounts.

I can’t tell you with any certainty whether you’ll be better off cashing in your stocks and then replacing that investment by putting $1,000 a month in a tax advantaged retirement account with unnamed investment choices.

Compare your expected after-tax return on the stock over the next three to four years against the interest rate on your mortgage. Ignore the tax deduction on the mortgage, since you’re able to fully utilize it and that usage will continue to decline over time. Look at the tax bill that will come due in the year that you sell the stock. Consider working with a tax professional to gauge the income tax impacts. My sense is that you are in too big of a rush to be mortgage-free when the finish line is already in sight.

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