Paying Off a Mortgage With An Inheritance

[Mark Sacandy]

At great personal cost, it appears that my wife and I will be receiving an inheritance sufficient to pay off our house and possibly allow me to retire very soon.  What are the tax implication of such a transaction?  Would there be any benefit (or is it even possible) to borrow from my 401k to pay off the house and then repay myself?  I can't see how such a thing would be beneficial, but that's why I'm asking.

[Daniel Murphy]

Sorry to hear about your loss... 

Paying off your house will have no tax consequence, other than the loss of the interest deduction. Which, you'd want to look at your 2022 taxes to see if you itemized, or claimed the standard deduction. If you claimed the standard deduction, there would be no tax consequence whatsoever. 

The 401k loan is a bit more open-ended & complicated.  Depending on the interest rate of your loan, I generally lean away from paying off your mortgage as the potential return you could see in another investment would likely be greater than the rate of paying your mortgage off.  However, mortgages are one of the financial topics that illicit more emotional responses than nearly any other. 

The fact that you're looking to pay off your home and potentially retire shows me, this is emotionally important to you.  If that's the case, go ahead... Give yourself the "win", especially when it comes from a personal loss.  This can make paying off your mortgage feel so much better...