I need $200,000 to pay off my mortgage. I inherited $350,000 and I still have 10 years before I have to retire. Does paying off my mortgage earlier make me lose my tax deduction?

This was the query my client Jimmy Smith posed last week.

While you can come up with a decision pretty easily, investing your money while the market is not doing well is something you would have to reconsider, especially if you want a large nest egg in retirement.

Jimmy was keen enough to consider the possible tax consequences because he does want to pay off his mortgage earlier.

More often than not, people will fail to realize that keeping mortgage payments will not earn them more tax savings. You can ask finance experts how doing so will benefit you and they may even tell you how much the savings will be, but it will be better if you take a look at the numbers yourself.

Tax deductions are generally given when mortgage and all local state income taxes go over $10,000. Married people get around $10,000 worth of deductions from the IRS but that still does not rule out the fact that, considering the limits, most Americans do not qualify for the extra interest deductions by having a mortgage.

I have to say that this is not tax advice and that the situation should still be referred to a finance expert. But if we take a look into the case closely, assuming Jimmy has a tax rate of 25% and if he is lucky enough to end up paying $16,000 for taxes and mortgage interest, we will find out that he will only be getting around $1500 worth of savings.

Is it worthwhile paying all that mortgage interest just to get back an additional $1500 in tax savings at the end of the year? I would rather pay off my mortgage and keep all the mortgage payments for myself rather than worry about the tax savings.

And here’s another point that your financial advisor won’t tell you. In the last 10 years of your mortgage, most of the monthly repayments goes towards principal rather than mortgage interest.

This clearly shows that the tax savings that you are going to get at the end of your mortgage will be very minimal and, as your mortgage comes to a close, you will realize that you are not going to enjoy the benefits that you thought you would have had.

If you do the tax calculations yourself, given your situation, you will find in some cases that you would be spending four times the amount in interest and only getting back if you are lucky 25% in tax savings. Would you prefer to keep a significant portion of your own money or get 25% back depending on your situation in tax savings?

It will be a very different situation once you retire.

You will use your retirement dollars to pay for your monthly mortgage. So when your mortgage payment is around $1200 a month, you will need to get use $1800 of your retirement dollars to pay off your mortgage.

Tax consequences for mortgage deductions upon retirement are largely situational. If and when your income decreases upon retirement, chances are you would not meet the criteria for getting more than the standard $10,000 tax deduction. By then, tax consequences will be so little, youd find them almost negligible and you would lose all the benefits of having a mortgage payment.

In Jimmy situation, he doesn’t need to worry about the tax cut consequences of paying off his mortgage. When he retires he has peace of mind knowing that all the retirement savings are his to keep.