You Rushed to Pay Off Your House. Nobody Told You There’s a Mortgage on Your IRA.

By: J. Barry Watts, Expert Tax Strategist and Retirement Designer

Ask a man whether he owns his house and he’ll say yes. Press him a little and he’ll amend it: well, me and the bank. That’s what a mortgage is, and it’s why so many people race to burn it before they retire. I wouldn’t want a house payment once I’m done working. I understand the instinct entirely.

So let me ask a second question. Do you own your IRA?

People look at me like I’ve lost my mind. Of course I own my IRA. Well — you and the IRS. Roughly a third of the balance in that account is money that belongs to the Internal Revenue Service and simply hasn’t been collected yet. They are letting you hold it. They will be back for it. Somebody pointed out to me once that if you spell out I-R-S, it reads theirs, and I’ve never been able to unsee it.

Your IRA has a mortgage on it. And just as I’d have you pay off the note on your house before you retire, I teach retirees to pay off the note on their retirement account. Most people have never heard the idea put that way, and it is one of the most consequential things I get to say to anybody.

Ready Is Four Things, Not One

Before we get to any of that, understand that retirement readiness has more than one dimension, and people almost always assume I mean only the first.

There is financial readiness, and yes, that’s what we’re hired for. But there is also psychological readiness — are you prepared not to go to work, not to see your buddies, not to move through the sequence of a day you’ve followed for forty years? There is emotional readiness: can you stop being whoever you were in that role and still be you? And there is relational readiness, which nobody sees coming. Your wife may not be ready for you to retire. Your retirement can be a genuine challenge to the relationship at home.

We help mostly with the financial piece, but it matters to know the other three exist, because a plan that solves only the money can still leave a person miserable. It is every bit as important to know what you are retiring to as what you are retiring from.

It Was Never About the Amount of Money

Here’s a question I get constantly: how do I know whether I’ve saved enough to cover my expenses?

It’s a backwards question, and I say that gently. It’s focused on an amount of money — a million, two million, ten million, whatever the number in your head happens to be. The amount of money is not what’s critical. The amount of income is. And what most people don’t know how to do is turn one into the other. That’s the step where they stumble, and turning lump sums into income that lasts a lifetime is exactly what we do.

Now, when I mention a written budget, I can watch a person’s ear go deaf. Nobody wants to budget. But functionally you already have one, because you can’t spend more than you make — you are not the United States government. So if you have no other way of knowing what you spend, we back into it: how much comes in each month, and is any of it still going to savings? Whatever isn’t being saved is being spent. There’s your number.

Then think realistically about it. We had a case just yesterday where a couple wanted about eight thousand dollars a month in retirement income. When we ran what they could take without running out of money, the honest answer was closer to five. Their hearts are set on eight, and I have to deliver that news next week. I’d far rather deliver it now than have them find out at 81.

And whatever number you land on, it has to grow. Inflation is sneaky in a way that hides from you. Something costs a hundred dollars this year and a hundred three the next, and you can’t quite recall what it cost last year — it seemed about the same. A hundred to a hundred three is nothing. A hundred three to a hundred six is nothing. Do that for enough years and the thing costs a hundred thirty, and now it is very much something. When we build an income plan we show every single year of retirement, and we set expenses to rise about three percent annually going forward. It’s a big hairy math problem. If you love spreadsheets you can do a fair amount of it yourself. Most people don’t, and shouldn’t have to.

The Tax Nobody Planned On

I am still stunned by how many people have no idea they could ever pay tax on their Social Security.

Here’s how it works. If your combined income runs above thirty-four thousand dollars single or forty-four thousand married, up to eighty-five percent of your Social Security becomes subject to taxation. That doesn’t mean you pay eighty-five percent of your benefit in tax — it means eighty-five cents of every dollar Social Security sends you is exposed to whatever your personal rate turns out to be. And here’s the fly in the ointment: half of your Social Security itself counts toward reaching those thresholds. Tally up the part-time job, the twenty dollars for mowing the neighbor’s yard, the odd repair work at the church, and it adds up faster than you’d think. Those two thresholds have also sat unchanged for decades without any inflation adjustment, which is why more retirees get caught by them every year.

Separately — and this catches people who intend to keep working — if you claim before full retirement age while still earning, you give back a dollar of benefit for every two dollars you earn above the annual limit. That limit sits in the low-to-mid twenty-thousands and adjusts every year, so check the current figure before you plan around it. If you were counting on driving the tram at Silver Dollar City or gassing up boats at the lake, know that going in.

Now the good news. With enough planning in advance, it is possible to arrive in retirement in the zero percent bracket — not guaranteed, not available to everyone, but we see it often enough that a meaningful share of our clients are there. That doesn’t mean they’re poor. You can live very comfortably and pay no income tax, provided your income is structured to come from the right sources. What you cannot do is jump off the train into retirement and expect it by accident.

Which raises the question I like to ask: of all your accounts — his IRA, her IRA, the two Roths, the joint account, the money she inherited from her mother, the proceeds from that piece of ground you sold — which one should you spend first? Does it even matter?

It matters enormously, and there is no universal right answer. If one account earns four percent and another earns six, do you draw from the slow one because it’s growing less, or the fast one because it’s producing more? Easiest is not always best. Least taxable is not always best — sometimes the most taxable account is exactly the right one to touch first. It depends on your brackets, your Social Security, and your Medicare premiums, which all move together. That’s why you need a plan built on the totality of what you own rather than a rule of thumb.

Seventy-Six Thousand Hours

Social Security is probably your largest asset, and almost nobody treats it that way.

Do the arithmetic backwards. Take the monthly check you’d receive and ask how big a pile of money you would need, earning four percent, to send you that check every month for life. It gets to a high six-figure number in a hurry, and in plenty of cases it’s over a million dollars. That is an asset you are managing whether you realize it or not.

Put it another way. Work forty hours a week for forty years and you have put roughly seventy-six thousand hours into Social Security. If you spent seventy-six thousand hours accumulating something, you ought to spend more than fifteen minutes deciding how to start spending it.

The mechanics are straightforward enough. Full retirement age is the hinge — 67 for anyone born in 1960 or later. Claim at 62 and your check is roughly thirty percent smaller, permanently. Wait until 70 and it’s about twenty-four percent larger, permanently. There is no perfect formula, because we’ll only know the right answer once we know when you died. But there are real factors to weigh, and the biggest one usually isn’t about you at all: if you have a spouse whose own earnings record is smaller, she will step into your check when you’re gone. Delaying isn’t only buying yourself a bigger benefit. It’s buying her one for the rest of her life.

A question that comes up more than you’d guess: what if somebody never applied at all? Can they go back for what they missed? Yes — but only six months’ worth, generally only once you’re past full retirement age, and with your ongoing benefit figured as though you’d claimed six months earlier. For a man in his eighties who never filed, six months of back pay is real money, and as my dad, Big Jim Watts down in Republic, would say, that sure beats a poke in the eye with a sharp stick. But the nine and a half years he didn’t collect are simply gone.

The Penalty for Forgetting

Required minimum distributions are the government’s way of finally collecting on that mortgage, and the rules have moved around enough to trip people.

Not everybody starts at 73. I’m 60, and mine won’t begin until 75. Some folks were on the old 70-and-a-half schedule. They moved the goalposts, more than once.

Here’s what you cannot afford to get wrong. Miss a required distribution and there’s a penalty stacked on top of the ordinary tax. It used to be fifty percent of whatever you failed to withdraw, which was brutal. It’s now twenty-five percent, and can be reduced further if you catch it and correct it promptly — but on a ten thousand dollar distribution in a thirty percent bracket, that’s still twenty-five hundred in penalty on top of three thousand in tax. More than half the money, gone, because a date slipped past you.

And even when the timing is right, the distribution itself can do damage — pushing you into a higher bracket, triggering tax on Social Security that wasn’t taxable before, and raising what you pay for Medicare.

Five Ways to Pay for Long-Term Care

There are really only five, and it’s worth knowing all of them before you settle on one.

Self-fund. Write the check. If you can, good for you — but understand the scale. Care runs in the neighborhood of ten thousand dollars a month, twelve months a year, and the average stay runs a few years for men and longer for women. You can eat through north of a half million dollars this way, and even people who can self-fund often find there’s a way to cover the same risk for pennies on the dollar.

Lean on your kids. We’ll come back to this one.

Medicaid, which we should call what it is: the government’s welfare program for people who have no other way to get care. I’ve met proud people who would never take a dime from the government and are somehow eager for Medicaid. It is not how most people would choose to have their care provided.

Long-term care insurance, which has grown so expensive that few can buy it, and which carries a use-it-or-lose-it provision. If you’re fortunate enough to die peacefully in your sleep having never needed care, every premium you paid evaporates.

Life insurance with an accelerated death benefit, which is what I use personally. We all say we hate life insurance, and part of the reason is that it’s misnamed — it’s death insurance. You don’t get paid until you die. Whoever named it life insurance was a knucklehead. But there is a version that genuinely pays while you’re living: it accelerates the death benefit to cover long-term care costs, and it does it on a tax-free basis. Our clients love it, and I’m a believer.

Now, back to the kids. I’m not against family care in principle — I suspect it’s how things ought to be. I’m just not sure our culture is organized for it anymore. Before you check that box, ask whether you’ve actually asked them. And then ask a harder question: if your daughter and son-in-law had to care for you, what would it do to their marriage? Could it stand it?

I had shoulder surgery a couple of weeks before we recorded this. For the first forty-eight hours my wife Kelly, who is a nurse, had to do absolutely everything for me — I could not so much as reach the lever to lean the recliner back. I watched what two days of that took out of her, and she has professional training and a lifetime of love for the patient. Now extend it to years and hand it to your children. And understand that even in a facility, somebody still has to advocate for you.

As for when to plan: earlier is better. I had an engineer in the office recently, forty-three years old and doing well, and we spent his birthday talking about long-term care. The sweet spot runs from your late forties to about 60 and remains workable into your late sixties. After that it’s still possible, just far less effective.

What Medicare Won’t Cover

Medicare is a mess of the government’s own making, and I could rail about it at length and feel justified. Practically, what matters is that Medicare Advantage and Medicare supplements are very different animals, that what suits you and what suits your neighbor will likely differ, and that it’s worth having somebody sort it with you. We keep a full-time Medicare specialist on staff who does nothing else.

One thing to catch before it’s too late: the health savings account. On a high-deductible plan you can fund an HSA, and a married couple past 55 can put in a meaningful sum each year. I treat mine like a large Roth — Kelly and I are simply stacking it up for health costs we know are coming. The thresholds and limits adjust every year, so look up the current figures rather than the ones you remember. And here’s the part people miss: once you enroll in Medicare you can no longer contribute. You have a window before 65, and if you can max it out, you should.

Because Medicare will be there in some form and still won’t cover everything. Out-of-pocket costs across a retirement can run into the hundreds of thousands. My surgery two weeks ago will not be cheaper surgery in twenty years.

The Bottom Line

The rule for all of this is eyes wide open. Some people wring their hands and worry themselves half to death, which isn’t the answer. Others don’t worry at all, and perhaps ought to a little.

Work with a professional retirement planner, and understand that this is not the same job as managing investments. Plenty of people are perfectly good at buying you investments; ask them about tax strategy, or inflation assumptions, or guaranteeing income across a thirty-year retirement, and they’ll get lost and offer to sell you some more investments. Two questions sort it quickly. Are they paid a fee by you, or a commission from the investment sponsor? And what are their credentials in retirement planning? If they pivot to investment management, you have your answer.

It doesn’t have to be us. But it ought to be somebody. Because the note on your house has a payoff date printed on it, and the note on your IRA doesn’t. It just sits there quietly, accruing, until the day the IRS comes to collect.

Barry Watts is a retirement designer and tax strategist with WealthCare Retirement Solutions, the author of the book Watts on Wealth, and the host of a television program and radio show by the same name. Our YouTube channel is also called Watts on Wealth. If you are interested in listening to our podcast, it’s called The Truth about Taxes and Retirement and is available wherever you get your podcasts. Investment advisory services are offered through WealthCare Asset Management, LLC, an SEC registered investment advisor. Tax strategy, tax compliance, accounting, and insurance services are provided through its affiliate, WealthCare Tax Advisors, LLC. Remember: Investing involves risk, including the potential loss of principal, and past performance never guarantees future results. Any references to protection, safety, or lifetime income may refer to fixed insurance products. Insurance guarantees are backed by the financial strength and claims-paying ability of the issuing carrier. This article is for informational purposes only and should not be used as the basis for personal financial decisions without first consulting your personal qualified advisor. Case examples are illustrative of planning work performed for specific clients and are not a promise of similar results.

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