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I am about to retire and my wife already has. we want to purchase a home to live in while we age our current home has to many steps. Will it be more tax efficient to take money out of retirement accounts and pay cash or to take out a loan with todays low rates? Which way will cost the least?
Asked by a 61 year old man from Newton, IA on 8/22/2016
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Theoretically, the best answer will be the lower of (1) the mortgage interest rate adjusted for the tax deduction or (2) the after-tax return on your investments because any loan is a negative investment. But there are other conditions. You will always need enough savings left after paying cash to meet emergency and replacement needs the rest of your life. For many people that means take the loan. That said, the loan is a burden with heavy penalties if you miss payments because of a health or other costly event. Further, given the choice of paying cash for a home or using the savings to support delaying the start of social security for a few years, the latter will almost always come out the best, again assuming enough is left for emergencies or replacements of cars, roof, etc. without taking out a loan.
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