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Another 'should I pay off mortage?' thread

Posted: Tue Jun 16, 2020 2:18 pm
by Admiral Fun
Dear Bogleheads,

We have 7 years left on a 15 year mortgage, fixed 3%, with a balance of $122,400. No plans to sell our house.

We are considering converting $122,400 bonds-->stocks in 401k, and then selling the same amount of stocks from taxable (selling about 20% of taxable account). Instead of paying a mortgage, we would buy $1550 monthly in bonds in 401k.

Here's how it would work out in 7 years assuming 2% returns in bonds...

Option A: Status Quo
Interest earned: $18,407 (2% return on $122,600 over 7 years)
Interest paid on mortgage: $13,000
Annual carry over loss of $3000 for 7 years (22% fed tax bracket)
Total after year 7: $5407 + value of carryover loss

Option B: Pay off mortgage
Interest earned: $17,262 (2% return on $1550 contributed monthly for 7 years with $0 starting balance)
Interest paid on mortgage: $0
Capital gains tax: $2000 after offsetting other capital losses
Total after year 7: $15,262

Seems like there is a decent argument for paying off the mortgage, but certainly not a slam dunk decision. Am I looking at the numbers in the right way? How should I value the captial losses that I currently have? What would YOU do?

-Admiral Fun

Re: Another 'should I pay off mortage?' thread

Posted: Tue Jun 16, 2020 2:24 pm
by retired@50
What's the interest rate on the mortgage?

Regards,

Re: Another 'should I pay off mortage?' thread

Posted: Tue Jun 16, 2020 2:26 pm
by stan1
What percentage of your net worth is the $122K?

If it is more than 10% I'd keep investing.

If it is less than 10% it won't make much of a difference.

What did we do? We paid off our mortgage when it was about 7% of our net worth. We sold some tax inefficient active mutual funds to do so and did burn down capital losses from 2008. We have had $3,000 annual losses to write off on our taxes every year since 2008 and now have at least another decade worth so I don't have any regrets.

Re: Another 'should I pay off mortage?' thread

Posted: Tue Jun 16, 2020 2:33 pm
by Meg77
I'm not sure how the capital losses should come into play (presumably you'll have those anyway and can use them to offset other gains. Similarly taking the capital gains into account that you'd incur to sell the stocks and pay off the mortgage just muddies the calculation. It's a small amount relative to the overall savings anyway (especially if you have losses to offset them).

In general, it usually makes sense at least on paper to pay off a mortgage (or really any debt) with bonds that you own or instead of buying bonds. This is particularly true if you have enough cash flow that you're accumulating after tax investments that you can access in order to do that. (So you're not giving up tax advantaged space to do it or raiding a retirement account.)

That said, I'm wrestling with this very thing. If the only two options in the financial universe were to buy bonds or repay my mortgage, the choice would be clear. The "problem" is that there are other conceivable uses of my cash, including yet unimagined investment opportunities or expenses (do we want to upgrade the house in the next couple of years? buy a rental? buy more stocks if the market tanks another 30% on a second virus wave?). So I'm just sitting on an increasingly large pile of taxable cash as it stands.

Re: Another 'should I pay off mortage?' thread

Posted: Tue Jun 16, 2020 3:10 pm
by Admiral Fun
retired@50 wrote: Tue Jun 16, 2020 2:24 pm What's the interest rate on the mortgage?

Regards,
3% fixed. I edited the original post
stan1 wrote: Tue Jun 16, 2020 2:26 pm
What percentage of your net worth is the $122K?

If it is more than 10% I'd keep investing.

If it is less than 10% it won't make much of a difference.

What did we do? We paid off our mortgage when it was about 7% of our net worth. We sold some tax inefficient active mutual funds to do so and did burn down capital losses from 2008. We have had $3,000 annual losses to write off on our taxes every year since 2008 and now have at least another decade worth so I don't have any regrets.
The mortgage is about 7% of our net worth.
Meg77 wrote: Tue Jun 16, 2020 2:33 pm I'm not sure how the capital losses should come into play (presumably you'll have those anyway and can use them to offset other gains. Similarly taking the capital gains into account that you'd incur to sell the stocks and pay off the mortgage just muddies the calculation. It's a small amount relative to the overall savings anyway (especially if you have losses to offset them).

In general, it usually makes sense at least on paper to pay off a mortgage (or really any debt) with bonds that you own or instead of buying bonds. This is particularly true if you have enough cash flow that you're accumulating after tax investments that you can access in order to do that. (So you're not giving up tax advantaged space to do it or raiding a retirement account.)

That said, I'm wrestling with this very thing. If the only two options in the financial universe were to buy bonds or repay my mortgage, the choice would be clear. The "problem" is that there are other conceivable uses of my cash, including yet unimagined investment opportunities or expenses (do we want to upgrade the house in the next couple of years? buy a rental? buy more stocks if the market tanks another 30% on a second virus wave?). So I'm just sitting on an increasingly large pile of taxable cash as it stands.
If we realize capital gains to pay off the mortage, we will no longer be able to deduct the $3000/yr. I estimate that we would realize $35,000 in capital gains, $20,000 of which we can offset with existing lossses. We would then pay capital gains on the remaining $15,000. We are basically giving up the TLHing we did in march -- not sure how to put a value on that.

Re: Another 'should I pay off mortage?' thread

Posted: Tue Jun 16, 2020 3:27 pm
by bryanm
Unless you need the liquidity (and I assume you don't, as your net worth is > $1MM), you should pay off the mortgage. Giving up an asset yielding 2% to pay off an asset costing 3% is basically a no-brainer. (Seems to hold true even if you assume you're deducting mortgage interest, given your current bracket.)

On the question of tax-loss harvesting, it really depends on when you sell those assets. If you assume you're going to sell them eventually, then you've put the loss-harvesting to good use now (increasing your basis and reducing taxes when you sell). You're probably right that losing the rolling deduction is some negative, but I doubt it outweighs the benefit of getting rid of debt that costs more than your expected yield on investment.

Re: Another 'should I pay off mortage?' thread

Posted: Tue Jun 16, 2020 3:33 pm
by KlangFool
OP,

What is your AA before and after paying off the mortgage?

KlangFool

Re: Another 'should I pay off mortage?' thread

Posted: Tue Jun 16, 2020 6:39 pm
by grabiner
Your payoff gives a risk-free return which is essentially the difference between municipal-bond and mortgage rates, because you keep the same stock exposure. (You don't hold municipal bonds in your taxable account, but holding munis in taxable and stocks in a 401(k) has about the same expected return as holding stocks in taxable and bonds in a 401(k).)

This has to be offset against the tax cost; what is the total capital gain on the stock sale? Part of the gain is taxable now, but the part that is offset by capital losses is also a tax cost, as these losses would offset other gains or ordinary income in the future.

I was in the same situation when I paid off my mortgage. I waited until March to do the payoff, because with the market decline in March, I had no capital gains. It wasn't worth doing the payoff if I had to realize gains on the stock.

Re: Another 'should I pay off mortage?' thread

Posted: Tue Jun 16, 2020 7:21 pm
by Lazareth
I anguished many months given the pros and cons here in the forum but we are VERY happy with the eventual decision to pay it off last summer.
Our decision was made easier by the higher standard deduction. It was like buying a bond that pays about 4% after-tax guaranteed.

We sold mostly equity funds from the taxable account to pay for it. The total portfolio went from 60/40 to about 50/50. The de-risking was appropriate for our mid-60's age.

Ours was a 3.5%, 15 yr mortgage, with $155K balance and 7 years left. Today we're back up to our pre-payoff total savings of $1.4 million in our three-fund Boglehead-type taxable and (mostly) retirement accounts portfolio. We still enjoy working so not drawing on savings yet. We have no plans to leave the house.

Re: Another 'should I pay off mortage?' thread

Posted: Wed Jun 17, 2020 10:04 am
by Admiral Fun
KlangFool wrote: Tue Jun 16, 2020 3:33 pm OP,

What is your AA before and after paying off the mortgage?

KlangFool
Paying the mortgage will take us from 12% to 6% bonds, and in 7 years will have built bonds back up to current levels. We have a high risk tolerance and pretty much hate bonds.

Re: Another 'should I pay off mortage?' thread

Posted: Wed Jun 17, 2020 10:20 am
by Admiral Fun
bryanm wrote: Tue Jun 16, 2020 3:27 pm On the question of tax-loss harvesting, it really depends on when you sell those assets. If you assume you're going to sell them eventually, then you've put the loss-harvesting to good use now (increasing your basis and reducing taxes when you sell). You're probably right that losing the rolling deduction is some negative, but I doubt it outweighs the benefit of getting rid of debt that costs more than your expected yield on investment.
Assume that I will sell eventually. Can you clarify how I have put the TLH is good use? If I realize gains now doesn’t that undo all the benefits of the TLHing that I did in March?

Re: Another 'should I pay off mortage?' thread

Posted: Wed Jun 17, 2020 11:19 am
by 3funder
I'm not a fan of paying off one's mortgage early unless there is a pressing financial need to do so. At 3% fixed, I see no reason to pay yours off early. You already have a 15-year term, so what's the point of paying it down so quickly? Invest the difference in stocks.

Re: Another 'should I pay off mortage?' thread

Posted: Wed Jun 17, 2020 11:24 am
by poker27
So, I'm in a similar boat...

I have a 2.875% rate, and have been paying the balance down over the past year, rather then adding to my taxable account. I currently have enough in taxable bonds to cover the difference, but haven't bit the bullet yet.

Assuming we dont see a huge crash again in stocks, I'll continue to pay down the mortgage, slowly, and will make a lump sum at some point.

I did feel 'better' about having a good chunk of cash in bonds when the market was free falling, and nobody knew what was going on. So having bonds earning minimal $ during a serious is event is better than having a paid off house, IMO.

Re: Another 'should I pay off mortage?' thread

Posted: Wed Jun 17, 2020 12:22 pm
by Cpadave
Last year we also looked into paying off our mortgage for the same reason, we hated bonds. With tax benefit gone for us, we decided to pay off the mortgage with 7 years left on 15 years mortgage. So far I am very happy about our decision. It also feels great not having the big payment every month.

Re: Another 'should I pay off mortage?' thread

Posted: Wed Jun 17, 2020 12:22 pm
by bryanm
Admiral Fun wrote: Wed Jun 17, 2020 10:20 am
bryanm wrote: Tue Jun 16, 2020 3:27 pm On the question of tax-loss harvesting, it really depends on when you sell those assets. If you assume you're going to sell them eventually, then you've put the loss-harvesting to good use now (increasing your basis and reducing taxes when you sell). You're probably right that losing the rolling deduction is some negative, but I doubt it outweighs the benefit of getting rid of debt that costs more than your expected yield on investment.
Assume that I will sell eventually. Can you clarify how I have put the TLH is good use? If I realize gains now doesn’t that undo all the benefits of the TLHing that I did in March?
Thinking about this more, I believe you are right. It basically undoes your TLH. However, I wouldn't let the tax-tail wag the return-dog. The value of TLH is deferred taxes (assuming you sell later). So you save taxes now and you pay taxes later. Let's run with your 2% ROI number, since we know you're going to invest some in bonds anyway. If that's the case and we assume your tax bracket is fixed, then you're getting a benefit of $3000*.22 = $660 each year for seven years, or $4620. But, we assume that you'll have to pay 22% on the 7*$3000 anyway eventually, which is the same amount ($4620). So the real benefit to TLH is that you get $660 to invest each year for 7 years, with the investment riding until you sell. You might think of it as the gov't giving you an interest-free "loan" of $4620, which you eventually have to pay back later.

Let's assume you hold for 15 years, and to make things simple let's say you could take the entire deduction now. You earn about $1500 in capital gains on the investment, which you then pay taxes on, leaving you with a bit over $1000 in value for your TLH. (Lot's of assumptions here that make this an upper bound estimate, like gaining the whole amount up front and not paying capital gains taxes on the amount until sale.)

Compare our $1000 in TLH benefit to the cost of a 1% loss on the mortgage over 7 years (because you're investing at 2% while paying 3%, for a net negative 1% return). From your original post (whichi I'll assume is correct), that's a ~$5000 cost for a $1000 benefit. I would probably pay off the mortgage, or plan to invest the money in something with an expected return > 3%.

Re: Another 'should I pay off mortage?' thread

Posted: Wed Jun 17, 2020 12:42 pm
by kd2008
To be contrarian here. Do not pay off your mortgage.

Over the next 7 years you do not make 1% extra each year on 122K by paying off. The 122K number diminishes each year. So the dollar amount of extra 1% you make decreases progressively. If you add inflation, it is still smaller.

You say you hate bonds. Then why pay off mortgage? A single day volatility in stock market can make up year's worth of interest. Heck, yesterday market was down 2.5% at start and ended the day up positive.

In actual dollar amount, you get miniscule benefit for tying up 7% of portfolio. As it is, with your mortgage, you are essentially making principal payments mostly with a small fraction of interest payment.

Re: Another 'should I pay off mortage?' thread

Posted: Wed Jun 17, 2020 12:44 pm
by grabiner
bryanm wrote: Wed Jun 17, 2020 12:22 pm Thinking about this more, I believe you are right. It basically undoes your TLH. However, I wouldn't let the tax-tail wag the return-dog. The value of TLH is deferred taxes (assuming you sell later). So you save taxes now and you pay taxes later.
The other part of the value is the ability for capital losses to offset ordinary income. If you deduct a $3000 capital loss at 22%, and later pay tax on a $3000 capital gain at 15%, you have gained $210 as well as deferring the tax on $450.

So losing six years of $3000 loss carryovers is a cost of $1260, and a loss of tax deferral on $2700, which likely has a total cost of around $2500.

Re: Another 'should I pay off mortage?' thread

Posted: Wed Jun 17, 2020 12:50 pm
by grabiner
kd2008 wrote: Wed Jun 17, 2020 12:42 pm Over the next 7 years you do not make 1% extra each year on 122K by paying off. The 122K number diminishes each year. So the dollar amount of extra 1% you make decreases progressively.
This is an important consideration, as it reduces the dollar benefit. Paying off a $122K mortgage seven years early does not save you 7% of $122K, which would be about $8500; it saves about $5000. (And this is the benefit that must be weighted against the tax cost, because the tax cost is measured in dollars.) However...
In actual dollar amount, you get miniscule benefit for tying up 7% of portfolio.
The amount tied up also decreases over time. When the mortgage balance would have been halved if you kept it, both the amount you tied up with the early payoff and the benefit are halved. Therefore, the fact that the mortgage balance declines over time is mostly irrelevant to the trade-off between guaranteed returns and liquidity.
If you add inflation is it still smaller.
Inflation is irrelevant here because it affects both sides. If inflation is 2%, the real cost of your mortgage is only 1%, but the real return on your bonds is zero because their face value loses 2% of its purchasing power, so you still got a 1% benefit by paying off the mortgage.

Re: Another 'should I pay off mortage?' thread

Posted: Wed Jun 17, 2020 1:02 pm
by bryanm
grabiner wrote: Wed Jun 17, 2020 12:44 pm
bryanm wrote: Wed Jun 17, 2020 12:22 pm Thinking about this more, I believe you are right. It basically undoes your TLH. However, I wouldn't let the tax-tail wag the return-dog. The value of TLH is deferred taxes (assuming you sell later). So you save taxes now and you pay taxes later.
The other part of the value is the ability for capital losses to offset ordinary income. If you deduct a $3000 capital loss at 22%, and later pay tax on a $3000 capital gain at 15%, you have gained $210 as well as deferring the tax on $450.

So losing six years of $3000 loss carryovers is a cost of $1260, and a loss of tax deferral on $2700, which likely has a total cost of around $2500.
Always appreciate the insights Grabiner! Thanks for pointing this out. If we assume that $15000 in cap gains would need to be realized to do this at 15%, that's an additional cost of 2250. I think that still means its a total benefit to pay off the mortgage, but it's a lot closer than I realized. And if mortgage interest is deductible, that might tilt the outcome the other way.

Re: Another 'should I pay off mortage?' thread

Posted: Wed Jun 17, 2020 1:06 pm
by Admiral Fun
Thanks for all the perspectives everyone - this really helped me think it through. As I suspected, there is no clear answer. I'm now leaning toward not paying off the mortgage (a coin toss goes defaults to the lazier decision).

That way I keep liquidity, I avoid paying taxes + keep the value of the TLH, and if Bonds return >2% in the next 7 years I could still end up ahead.

Re: Another 'should I pay off mortage?' thread

Posted: Wed Jun 17, 2020 3:22 pm
by grabiner
Admiral Fun wrote: Wed Jun 17, 2020 1:06 pm Thanks for all the perspectives everyone - this really helped me think it through. As I suspected, there is no clear answer. I'm now leaning toward not paying off the mortgage (a coin toss goes defaults to the lazier decision).

That way I keep liquidity, I avoid paying taxes + keep the value of the TLH, and if Bonds return >2% in the next 7 years I could still end up ahead.
And if the stock market falls, you can pay off the mortgage without taking a capital gain.

That is what I did. In August 2019, rates were low enough that it would have been worth paying off my mortgage if I could do it without a capital gain on stock sales, but I couldn't. In March 2020, the stock market fell, so I was able to pay off my mortgage while selling for capital losses and trivial gains. (And just as you were considering, I wasn't pulling out of a down stock market; I sold stock in my taxable account and sold bonds in my employer plan to buy more stock, so I kept the same dollar exposure.)

Re: Another 'should I pay off mortage?' thread

Posted: Wed Jun 17, 2020 6:44 pm
by lionroar22
If one were to pay with new cash or by selling an asset that was either a Cap Loss or breakeven, and assuming being liquid were not an issue, would it just be a decision of what generated the most bang for buck (paying off or investing)? And if that choice was pay the most or a CD/Bond fund, you would need to subtract your tax bracket from the fixed to compare apples-2-apples? For example a 3% mort would be a true 3%, whilst a 3% CD or Bond Fond yield would be 2.4% assuming a 20% tax bracket? Just wanna make sure I understand this 100%. :happy

Re: Another 'should I pay off mortage?' thread

Posted: Wed Jun 17, 2020 6:48 pm
by Hyperchicken
grabiner wrote: Wed Jun 17, 2020 3:22 pm And if the stock market falls, you can pay off the mortgage without taking a capital gain.
Waiting for the market to fall before selling seems counter-intuitive - does the math really add up?

Re: Another 'should I pay off mortage?' thread

Posted: Wed Jun 17, 2020 7:29 pm
by Admiral Fun
grabiner wrote: Wed Jun 17, 2020 3:22 pm And if the stock market falls, you can pay off the mortgage without taking a capital gain.

That is what I did. In August 2019, rates were low enough that it would have been worth paying off my mortgage if I could do it without a capital gain on stock sales, but I couldn't. In March 2020, the stock market fell, so I was able to pay off my mortgage while selling for capital losses and trivial gains. (And just as you were considering, I wasn't pulling out of a down stock market; I sold stock in my taxable account and sold bonds in my employer plan to buy more stock, so I kept the same dollar exposure.)
The dollar value of stocks remains the same, but isn't there also a risk that shifting stocks to 401k ultimately increases taxes? By shifting the stock from taxable to tax deferred, you would likely be taxed at ordinary income rate rather than capital gains rate on any gains.

Re: Another 'should I pay off mortage?' thread

Posted: Wed Jun 17, 2020 9:04 pm
by bryanm
Admiral Fun wrote: Wed Jun 17, 2020 7:29 pm The dollar value of stocks remains the same, but isn't there also a risk that shifting stocks to 401k ultimately increases taxes? By shifting the stock from taxable to tax deferred, you would likely be taxed at ordinary income rate rather than capital gains rate on any gains.
This is a common misconception, but in fact you can't convert capital gains to ordinary income in this way. The money in your taxable account has already incurred ordinary income taxes, and incurs capital gains too. The money in your 401k incurs ordinary income taxation at the end, which (assuming you stay in the same bracket) is the same on a percentage basis as the taxes paid on your the money taxable account. So you always save capital gains, no matter what.

Another way to think about this is to assume you have a Roth 401k. Since you don't pay taxes on withdrawals for a Roth, it's easy to see how the problem of "converting capital gains to ordinary income" doesn't occur. However, Roth and Traditional accounts provide the same benefit with respect to capital gains tax (See Wiki). Thus, this is also a non-issue with a Trad 401k.

(Sidenote: You might think that putting higher-gains assets like stocks in your 401k increases your tax burden in the end, due to higher gains that are then taxed at ordinary income rate. However, if you tax-adjust your asset allocation, that ends up not happening. See example in the wiki.)

Re: Another 'should I pay off mortage?' thread

Posted: Wed Jun 17, 2020 10:07 pm
by grabiner
Hyperchicken wrote: Wed Jun 17, 2020 6:48 pm
grabiner wrote: Wed Jun 17, 2020 3:22 pm And if the stock market falls, you can pay off the mortgage without taking a capital gain.
Waiting for the market to fall before selling seems counter-intuitive - does the math really add up?
Only because I (and the OP, in my suggestion) aren't actually selling stocks. When the market fell, I sold taxable stock (tax loss harvesting) and bought stock in another account, keeping my stock market exposure.
Admiral Fun wrote: Wed Jun 17, 2020 7:29 pm
grabiner wrote: Wed Jun 17, 2020 3:22 pm That is what I did. In August 2019, rates were low enough that it would have been worth paying off my mortgage if I could do it without a capital gain on stock sales, but I couldn't. In March 2020, the stock market fell, so I was able to pay off my mortgage while selling for capital losses and trivial gains. (And just as you were considering, I wasn't pulling out of a down stock market; I sold stock in my taxable account and sold bonds in my employer plan to buy more stock, so I kept the same dollar exposure.)
The dollar value of stocks remains the same, but isn't there also a risk that shifting stocks to 401k ultimately increases taxes? By shifting the stock from taxable to tax deferred, you would likely be taxed at ordinary income rate rather than capital gains rate on any gains.
The way I deal with this is to adjust for the fraction of each account which belongs to the IRS and state. I own 100% of my Roth IRA, but only 69% of my deductible employer plan because I expect to retire at a 31% marginal tax rate (assuming the 2018 tax cuts expire in 2026, I will be in a 25% federal and 8% state tax bracket, with state tax deducted from federal) And I own 74% of my taxable account; while gains are taxed at 21% (15% plus 8% less 2% federal deduction on state tax), I lose more to compounding of the tax on dividends. Therefore, I added a slightly larger dollar number, but the same after-tax value.

Conversely, if I made the same shift in my Roth IRA, I would have added a smaller dollar number to keep the same stock exposure. I didn't do this because my Roth IRA is already 100% stock, but I do make the same adjustment across asset classes; the REITs in my Roth IRA are targeted to be 10% of the after-tax value of the portfolio, which makes them less than 7% of the nominal dollar value.

Re: Another 'should I pay off mortage?' thread

Posted: Wed Jun 17, 2020 10:41 pm
by av111
bryanm wrote: Tue Jun 16, 2020 3:27 pm You should pay off the mortgage. Giving up an asset yielding 2% to pay off an asset costing 3% is basically a no-brainer.
This seems logical if your alternative is to invest in risky instruments like stocks or bonds both of which can lock your money and lose value. Additionally paying off mortgage de-risks you by reducing fixed costs every month

Now if you had an opportunity to get 10 or 20% return with high probability and low involvement , keeping the mortgage to put money there would be a great idea.

Re: Another 'should I pay off mortage?' thread

Posted: Fri Jun 19, 2020 8:33 am
by Admiral Fun
It looks like the fully liquid TIAA Cref Traditional in spouse’s 403b is returning 3%, which exactly offsets the 3% mortgage. It seems like a no-brainer to convert total bond market to (GSRA) TIAA trad and then NOT pay off the mortgage.

Is there any reason not to do this?
bryanm wrote: Wed Jun 17, 2020 9:04 pm
Admiral Fun wrote: Wed Jun 17, 2020 7:29 pm The dollar value of stocks remains the same, but isn't there also a risk that shifting stocks to 401k ultimately increases taxes? By shifting the stock from taxable to tax deferred, you would likely be taxed at ordinary income rate rather than capital gains rate on any gains.
This is a common misconception, but in fact you can't convert capital gains to ordinary income in this way. The money in your taxable account has already incurred ordinary income taxes, and incurs capital gains too. The money in your 401k incurs ordinary income taxation at the end, which (assuming you stay in the same bracket) is the same on a percentage basis as the taxes paid on your the money taxable account. So you always save capital gains, no matter what.
Thanks for clearing this up - very helpful.

Re: Another 'should I pay off mortage?' thread

Posted: Fri Jun 19, 2020 9:01 am
by grabiner
Admiral Fun wrote: Fri Jun 19, 2020 8:33 am It looks like the fully liquid TIAA Cref Traditional in spouse’s 403b is returning 3%, which exactly offsets the 3% mortgage. It seems like a no-brainer to convert total bond market to (GSRA) TIAA trad and then NOT pay off the mortgage.

Is there any reason not to do this?
You still get a slight gain by paying off the mortgage, assuming you are maxing out the 403(b). My assumption is that paying down the mortgage means investing less in stock in a taxable account, and adding an equal amount in stock in the 403(b) rather than fixed income. (Given that you have TIAA Traditional, which is an unusually good fixed income option, you want to hold fixed income there and stock in a taxable account.)

If you don't pay down the mortgage, you have stock in a taxable account. If you pay down the mortgage, you get a 3% return on the mortgage, give up a 3% return on TIAA Traditional, and have stock in a tax-deferred account. Your gain is the tax that you would otherwise pay on stock dividends and capital gains.

However, I wouldn't pay down the mortgage in this situation. Mortgage payments are guaranteed to earn 3%. TIAA Traditional has a floor of 3%, but will earn more than 3% if rates rise, and unlike a bond fund, will not lose money if rates rise. Thus you give up a valuable option.