should I sell my taxable investments to pay off mortgage?

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eye.surgeon
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should I sell my taxable investments to pay off mortgage?

Post by eye.surgeon »

Seeking advice from fellow Bogleheads.

I'm 2 years into a 5/30 mortgage at 4.25%, balance is $494k on a $2m home. I have $500k in taxable investments in a Vanguard brokerage account. Savings is 100k in cash, $1.5m in retirement accounts, other assets about $1.5m (medical practice, commercial real estate, surgery center) age 55 with 10-15 years to retirement, income is 6 figures and stable job as a physician. I'm in the highest tax bracket in a high tax state that limits mortgage interest deduction to $10k (California).

Wondering if I should sell my taxable investments and pay off my mortgage, or just chip away at it for a few years until it's paid off.
Last edited by eye.surgeon on Mon Jun 10, 2024 7:33 pm, edited 2 times in total.
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bombcar
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Re: should I sell my taxable investments to pay off mortgage?

Post by bombcar »

Build a spreadsheet.

Likely that can show you the various options.

You need to know the cap gains taxes you’d have to pay, the cash flow, etc.
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Re: should I sell my taxable investments to pay off mortgage?

Post by JBTX »

At 4.25, probably not. I’d keep the mortgage.
toddthebod
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Re: should I sell my taxable investments to pay off mortgage?

Post by toddthebod »

What's your plan with the monthly mortgage money, put it back in the taxable brokerage account you just emptied?
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eye.surgeon
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Re: should I sell my taxable investments to pay off mortgage?

Post by eye.surgeon »

toddthebod wrote: Mon Jun 10, 2024 7:32 pm What's your plan with the monthly mortgage money, put it back in the taxable brokerage account you just emptied?
Yes.
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WillRetire
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Re: should I sell my taxable investments to pay off mortgage?

Post by WillRetire »

It might make sense to pay it off if your realized capital gains are low. What are the brokerage holdings that you would sell and what would the realized gains be?

The stock market & the housing market feel to me like the conditions of 2008, like something is about to break. If there's a major crash in 2024 or 2025, I'd wish I had sold stocks in 2024 & paid off the mortgage. But that's me. I realize this is not a boglehead view. This market is really high.
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eye.surgeon
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Re: should I sell my taxable investments to pay off mortgage?

Post by eye.surgeon »

WillRetire wrote: Mon Jun 10, 2024 7:50 pm It might make sense to pay it off if your realized capital gains are low. What are the brokerage holdings that you would sell and what would the realized gains be?
It's Vanguard total market fund, sale would be taxed as long term capital gains. $190k of that $500k is gains.
Last edited by eye.surgeon on Mon Jun 10, 2024 8:08 pm, edited 2 times in total.
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Re: should I sell my taxable investments to pay off mortgage?

Post by Dottie57 »

WillRetire wrote: Mon Jun 10, 2024 7:50 pm It might make sense to pay it off if your realized capital gains are low. What are the brokerage holdings that you would sell and what would the realized gains be?

The stock market & the housing market feel to me like the conditions of 2008, like something is about to break. If there's a major crash in 2024 or 2025, I'd wish I had sold stocks in 2024 & paid off the mortgage. But that's me. I realize this is not a boglehead view. This market is really high.
It doesn’t feel like 2008 housing to me. Loans were being made to people who could not afford them ( sub prime loans ?). No information similar to that is coming out now. I think housing is high priced now due to lack of inventory. Until inventory is sufficient prices will remain high.

If OP has cash flow, start paying more. Knock it down, pay less interest, be done earlier.
Last edited by Dottie57 on Mon Jun 10, 2024 8:13 pm, edited 1 time in total.
LuckyInLife
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Re: should I sell my taxable investments to pay off mortgage?

Post by LuckyInLife »

eye.surgeon wrote: Mon Jun 10, 2024 7:22 pm

I'm in the highest tax bracket in a high tax state that limits mortgage interest deduction to $10k (California).

Do you have a source for this? I am in California and have never heard of this, but I do not currently have a mortgage. I thought that California just followed the 2017 federal tax changes.
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Re: should I sell my taxable investments to pay off mortgage?

Post by WillRetire »

eye.surgeon wrote: Mon Jun 10, 2024 8:01 pm
WillRetire wrote: Mon Jun 10, 2024 7:50 pm It might make sense to pay it off if your realized capital gains are low. What are the brokerage holdings that you would sell and what would the realized gains be?
It's Vanguard total market fund, sale would be taxed as long term capital gains. $190k of that $500k is gains.
Ok, so the taxes on the gains would be approximately $61k at the top LTCG rates: 20% federal and 12.3% CA. I'm not familiar with CA but a quick google search suggests the tax rate could be higher than 12.3%.
Net proceeds would be about $438k. You probably have other funds elsewhere to pay the taxes when they're due.

The extra taxes (my guesstimate is $61k) is the price you're paying to pay off the mortgage debt AND de-risk from the stock market. Seems a little steep, but might be worth it, especially if you are looking to reduce stock market exposure anyway (and I don't think you've stated that one way or another).

When in doubt, do nothing :happy
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Re: should I sell my taxable investments to pay off mortgage?

Post by WillRetire »

Dottie57 wrote: Mon Jun 10, 2024 8:07 pm
WillRetire wrote: Mon Jun 10, 2024 7:50 pm It might make sense to pay it off if your realized capital gains are low. What are the brokerage holdings that you would sell and what would the realized gains be?

The stock market & the housing market feel to me like the conditions of 2008, like something is about to break. If there's a major crash in 2024 or 2025, I'd wish I had sold stocks in 2024 & paid off the mortgage. But that's me. I realize this is not a boglehead view. This market is really high.
It doesn’t feel like 2008 housing to me. Loans were being made to people who could not afford them ( sub prime loans ?). No information similar to that is coming out now. I think housing is high priced now due to lack of inventory. Until inventory is sufficient prices will remain high.

If OP has cash flow, start paying more. Knock it down, pay less interest, be done earlier.
Recessions & depressions & crashes happen for lots of reasons. Subprime collapse was one of many causes of the great recession.

Let's not debate the future. I suggested to the OP some ways to think of this decision.
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Re: should I sell my taxable investments to pay off mortgage?

Post by Darth Xanadu »

WillRetire wrote: Mon Jun 10, 2024 8:22 pm
eye.surgeon wrote: Mon Jun 10, 2024 8:01 pm
WillRetire wrote: Mon Jun 10, 2024 7:50 pm It might make sense to pay it off if your realized capital gains are low. What are the brokerage holdings that you would sell and what would the realized gains be?
It's Vanguard total market fund, sale would be taxed as long term capital gains. $190k of that $500k is gains.
Ok, so the taxes on the gains would be approximately $61k at the top LTCG rates: 20% federal and 12.3% CA. I'm not familiar with CA but a quick google search suggests the tax rate could be higher than 12.3%.
Net proceeds would be about $438k. You probably have other funds elsewhere to pay the taxes when they're due.

The extra taxes (my guesstimate is $61k) is the price you're paying to pay off the mortgage debt AND de-risk from the stock market. Seems a little steep, but might be worth it, especially if you are looking to reduce stock market exposure anyway (and I don't think you've stated that one way or another).

When in doubt, do nothing :happy
Your loan to value is pretty low, and the rate is a reasonable 4.25%; I can't imagine you're paying a whole lot of interest in absolute dollars every month. You have a stable job and you plan to work at least 10 more years.

I would likely direct excess cash flow at the mortgage if the debt is bothersome to you.
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Re: should I sell my taxable investments to pay off mortgage?

Post by grabiner »

eye.surgeon wrote: Mon Jun 10, 2024 7:22 pm Seeking advice from fellow Bogleheads.

I'm 2 years into a 5/30 mortgage at 4.25%, balance is $494k on a $2m home.
I don't know how much of this mortgage interest is deductible; this depends on how much you contribute to charity, since the interest plus $10K SALT is just barely over the standard deduction. The return on a payoff can be somewhere between 2.5% and 3.5%. The duration of the payoff is three years, since the mortgage will refinance at the market rate when the ARM resets. (In three years, you will probably want to either pay it off or refinance to a fixed-rate mortgage.)

Thus the most fair comparison would be to a CA muni fund with a three-year duration. There isn't such a low-cost fund, but the yield on Vanguard Limited-Term Tax-Exempt is 3.50%, and the higher yield from using longer-term CA muni funds is a fair trade-off between return and risk.

Thus, even without the capital-gains tax on stock sales, you don't gain anything now by paying off the mortgage rather than investing the whole thing in bonds. And a partial paydown is worse, because you eliminate the federally deductible interest first. It's better to direct all new money, including dividends, to a "mortgage payoff fund" invested in municipal bonds; I would recommend Vanguard CA Intermediate-Term Tax-Exempt, which has a bit more interest-rate risk. In three years, when the ARM resets, you can decide based on muni and mortgage rates whether to pay the mortgage down or off, or to refinance it to a fixed-rate mortgage.
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Re: should I sell my taxable investments to pay off mortgage?

Post by Metsfan91 »

eye.surgeon wrote: Mon Jun 10, 2024 7:22 pm Seeking advice from fellow Bogleheads.
...

Wondering if I should sell my taxable investments and pay off my mortgage, or just chip away at it for a few years until it's paid off.
Keeping the mortgage would be the best. Automate monthly payment for convenience.
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Re: should I sell my taxable investments to pay off mortgage?

Post by eye.surgeon »

grabiner wrote: Mon Jun 10, 2024 8:34 pm
eye.surgeon wrote: Mon Jun 10, 2024 7:22 pm Seeking advice from fellow Bogleheads.

I'm 2 years into a 5/30 mortgage at 4.25%, balance is $494k on a $2m home.
I don't know how much of this mortgage interest is deductible; this depends on how much you contribute to charity, since the interest plus $10K SALT is just barely over the standard deduction. The return on a payoff can be somewhere between 2.5% and 3.5%. The duration of the payoff is three years, since the mortgage will refinance at the market rate when the ARM resets. (In three years, you will probably want to either pay it off or refinance to a fixed-rate mortgage.)

Thus the most fair comparison would be to a CA muni fund with a three-year duration. There isn't such a low-cost fund, but the yield on Vanguard Limited-Term Tax-Exempt is 3.50%, and the higher yield from using longer-term CA muni funds is a fair trade-off between return and risk.

Thus, even without the capital-gains tax on stock sales, you don't gain anything now by paying off the mortgage rather than investing the whole thing in bonds. And a partial paydown is worse, because you eliminate the federally deductible interest first. It's better to direct all new money, including dividends, to a "mortgage payoff fund" invested in municipal bonds; I would recommend Vanguard CA Intermediate-Term Tax-Exempt, which has a bit more interest-rate risk. In three years, when the ARM resets, you can decide based on muni and mortgage rates whether to pay the mortgage down or off, or to refinance it to a fixed-rate mortgage.
Helpful, thanks.
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Re: should I sell my taxable investments to pay off mortgage?

Post by WeakOldGuy »

I would expect the standard deduction to go back to pre 2017 levels in 2026. So the mortgage interest deduction for federal taxes will be worth a lot more in 2026 given your high income.

I would not pay off that mortgage.
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Re: should I sell my taxable investments to pay off mortgage?

Post by soccerrules »

im in the camp of "probably not" at 4.25% -- you are likely earning more from your investments in your Taxable account.

Do you foresee any yearly bonuses or equity payouts that would provide additional dollars to either invest or payoff debt? I might consider additional income like this to knock out some of the mortgage, but then again investing in VTI /VTSAX over the next 10+ years will likely reward you with more than a 4.25% return.

Either way just don't spend it on consumer goods.

As another poster mentioned regarding itemized deductions or standard deductions. This a little away from your question.
If you do have charitable giving and are bumping up against the standard deduction each year you might look into "bunching" your itemized deductions (charitable contributions) . You can set up a donor advisor fund == donate appreciate stocks/MF shares from your taxable account in 1 tax year for 2 years worth of charitable donations. You do not pay cap gains on the appreciated stock and realize the full value as a deduction. Then distribute donations how you want over the 2 years, or longer. The year you make the donation to the DAF you get to deduct the full amount donated (2 years worth) , plus Prop tax and mortgage interest. Then the next tax year you take the standard deduction, the following year you repeat the bunching.
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Re: should I sell my taxable investments to pay off mortgage?

Post by muffins14 »

Surely you’re deducting all the interest on your federal taxes? So the rate is much lower than 4.25%

I would also challenge you to share some documentation for the claim that the highest CA bracket can claim only 10k in mortgage interest as a deduction, as I have never heard that before
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Re: should I sell my taxable investments to pay off mortgage?

Post by cchrissyy »

if i didn't want to have the loan, i would chip away at it from monthly income, not by selling the investments.
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Re: should I sell my taxable investments to pay off mortgage?

Post by Pepper11 »

Agree with most above.

Additionally, if you have any inclination that you may retire before 59.5, a taxable account with provide significantly more flexibility for you to do so.
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Re: should I sell my taxable investments to pay off mortgage?

Post by EnjoyIt »

JBTX wrote: Mon Jun 10, 2024 7:30 pm At 4.25, probably not. I’d keep the mortgage.
You can currently get 5.25% from a money market account. Yes I realize there are taxes involved, but some of that mortgage interest is tax deductible as well.

I would expect a portfolio of stocks and bonds to outperform 4.25% mortgage over the next few decades.

The only reason I would choose to pay it off is if I was financially independent or close to it. Give it another 5-7 years and then re-evaluate.

Edit: I wanted to add. Having a sizable taxable account allows far more flexibility than a paid off home. Although you plan on another 10-15 years of practice, and I hope you get it, nothing is certain. I know plenty of doctors who had circumstances in their life which curtailed their income. Now if your mortgage was 7.5% I would say pay it off ASAP and don't look back.
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Re: should I sell my taxable investments to pay off mortgage?

Post by cmr79 »

Pepper11 wrote: Tue Jun 11, 2024 1:14 pm Agree with most above.

Additionally, if you have any inclination that you may retire before 59.5, a taxable account with provide significantly more flexibility for you to do so.
This.

OP already has $1.5M in their home, $1.5M in their practice/commercial real estate, and $1.5M in retirement accounts. None of these are particularly liquid should something happen, regardless of how stable OP's income is. Why convert $500k of the $600k liquid into more illiquid real estate at increased tax expense and negative long-term expected gains?
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Re: should I sell my taxable investments to pay off mortgage?

Post by WillRetire »

OP: In your initial post, you wrote:
I'm 2 years into a 5/30 mortgage at 4.25%, balance is $494k on a $2m home.
Is this an adjustable rate mortage with the 1st 5 years fixed at 4.25% ? What does the rate adjust to after 5 years?

Much of the advice given here may assume 4.25% fixed for the duration of the loan, 30 yrs.
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Re: should I sell my taxable investments to pay off mortgage?

Post by doobiedoo »

eye.surgeon wrote: Mon Jun 10, 2024 7:22 pm ..
I'm 2 years into a 5/30 mortgage at 4.25%, balance is $494k on a $2m home.
I have $500k in taxable investments in a Vanguard brokerage account.
Savings is 100k in cash, $1.5m in retirement accounts, other assets about $1.5m (..) age 55 with 10-15 years to retirement,
income is 6 figures and stable job as a physician.
I'm in the highest tax bracket in a high tax state that limits mortgage interest deduction to $10k (California).

..if I should sell my taxable investments and pay off my mortgage, or just chip away at it for a few years until it's paid off.
I never sold any taxable investments to pay off my mortgage.

My mortgage was in the 1990s, so lots of things were different back then.
Tax rates, tax brackets, LTCG rates, mortgage rates, tax laws were all different from today.
Many nerds would say build a spreadsheet and do the analysis.
I'm a nerd, but I never did that.

My bottom line was:
A. I couldn't stand the tax hit from selling investments when I already paid high taxes.
B. I hated being in debt.

So I paid extra on the mortgage every month, doubling or even tripling the mortgage payment.
A couple of times I paid an extra $50k or so when I had a windfall.
And I refinanced several times to get a lower interest rate.
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