Which is better -- up 401K or pay more on mortgage?

[branv]

Thank you so much everyone! You've all given me a lot of helpful information.

Love the Budget Board!

 

[brerrabbit]

The typical answer is exactly what you mentioned in an earlier post. Where are you making the most return? If your return on you 401 is greater than the interest rate on you mortgage then it should go to the 401. Also keep in mind that the extra money on the mortgage will not generate additional tax savings but the additional money contributed to the 401 will. When you think about how corporations and businesses make their investment decisions they do it the same way. The have limited capital (in your case salary) and have to choose between competing investments (in your case your house investment vs your retirement savings). They do so by ranking the expected ROR on the projects and typically the highest return investments get the capital.

While Dave Ramsey has a great program that many people could benifit from I do not agree at all with his philosophy of pay off the mortgage no matter what. Your house is an investment period, end of sentence. While you live there and love it you still have to accept it is an investment and can very easily loose value. If you cost is 4 7/8% or what ever you said why would you ever invest in that if you could get greater return elsewhere? That would be like saying I want to money in a traditional savings account paying 1/2% instead of a money market account paying 5%. That decision is easy and so should the mortgage vs 401. I say if you have extra money max the 401 and when you hit the ceiling on it put the extra money in a Rothe IRA.

Many people who put money into the mortgages prior to the housing meltdown would be a lot better off today if they had put some of that money into savings or 401(k)'s.

 

[BrightScouter]

For everyone saying to put the money into a 401k, ask your self a question. If my house was paid off, would I take out a mortgage at these very low rates to invest in a 401k or Roth IRA? If you would, then fund the 401k or Roth. If not, fund the mortgage.

I realize you are reducing federal income tax if you have a mortgage. But you are reducing taxes by your tax bracket, some might be 25% of the interest paid for instance, by paying someone interest. In other words, by paying a bank $4000 in mortgage interest this year, you get to save $1000 off your taxes. Is it worth it?

 

[timmac]

For everyone saying to put the money into a 401k, ask your self a question. If my house was paid off, would I take out a mortgage at these very low rates to invest in a 401k or Roth IRA? If you would, then fund the 401k or Roth. If not, fund the mortgage.

I realize you are reducing federal income tax if you have a mortgage. But you are reducing taxes by your tax bracket, some might be 25% of the interest paid for instance, by paying someone interest. In other words, by paying a bank $4000 in mortgage interest this year, you get to save $1000 off your taxes. Is it worth it?

This is a good point. It's important to also remember that even though a mortgage might be a low interest rate, any principal you pay off now, you won't be paying that low interest rate for the next X years (where X = # of years left in your mortgage). The total interest for every $1,000 of a mortgage could easily be another $1500.

 

[wdwfan16]

For everyone saying to put the money into a 401k, ask your self a question. If my house was paid off, would I take out a mortgage at these very low rates to invest in a 401k or Roth IRA? If you would, then fund the 401k or Roth. If not, fund the mortgage.

I realize you are reducing federal income tax if you have a mortgage. But you are reducing taxes by your tax bracket, some might be 25% of the interest paid for instance, by paying someone interest. In other words, by paying a bank $4000 in mortgage interest this year, you get to save $1000 off your taxes. Is it worth it?

But you are forgetting that if I put that $4K into my 401K I also get a 25% tax break, so another $1K and all that money can grow tax free.

I would not take out a loan to put money into my 401K but I certainly would not wait to be debt free to start saving for retirement.

 

[CherylA]

Pardon my lack of knowledge here but where would I purchase a ROTH IRA? Are they all the same, do you "shop around"? Do I just go to the bank where I do my business and buy one? Do I put the money into it all at once or a bit at a time? I am interested in ramping up my retirement savings and this seems like the best choice for me given that hubby and I are both putting into our 401Ks the min amount to get the full match from our employers.

 

[QVCshopper]

Pardon my lack of knowledge here but where would I purchase a ROTH IRA? Are they all the same, do you "shop around"? Do I just go to the bank where I do my business and buy one? Do I put the money into it all at once or a bit at a time? I am interested in ramping up my retirement savings and this seems like the best choice for me given that hubby and I are both putting into our 401Ks the min amount to get the full match from our employers.

I'd go with an established mutual fund company like Vanguard or Fidelity. When you start an IRA, you can select it as a Roth. I used to work at Vanguard and have most of my investments there, but I also have some at Fidelity. They are many more companies, but Vanguard has low costs, which makes them my favorite. Go read their websites to find out more -- retirement is a whole new world.

 

[Lisa loves Pooh]

Well---
all I know is Dave Ramsey's advice--take it with a grain of salt if you wish....

You would max out your 401K stuff (I think he suggests up to 15% of income, but I don't remember)---THEN after all of your other stuff is cared for (i.e. if you were sending the kids to college, saving for that), the last thing you would do is to work towards paying off the mortgage.

I think the logic is--the mortgage will get paid one way or the other and you don't want to sacrifice retirement growth opportunity to pay off the mortgage a little early.

And Dave is anti-debt and he still has paying the house AFTER maxing retirement. He just doens't have you put ALL the extra money at retirment. Additional investing is after teh house is paid.

 

[2TxAgs]

We've been pre-paying a bit ($100/mth) on our mortgage for years. We also have $$ going to a 401k and IRAs. I look at the mortgage extra as the 'fixed income' part of my investment money. I'm guaranteed to make 6% on what I prepay, with no guarantees for value increases in any of my other investments. It's another way to diversify and a relatively small extra investment in house payments will result in a LOT of interest saved over time.

Works for us...

 

[amyy]

You have all convinced me to put a bit into a Roth. I can't give up making an extra house payment a year because the thought of paying it off 7 years early is to comforting. I grew up in a family that paid cash for our house, every car etc and I can't break out of that. Yet I can still put a bit into a Roth and just emailed my 403b "guy". I can't put a lot in but I suppose every bit helps. thanks

 

[ohlas]

My interest rate on the house is locked at 4 3/8%, my 401K had a 31% gain for 2009. I get to deduct interest on my home, reducing my federal taxes. My money deposited into the 401K is done on a pre tax basis, lowering my taxable income by nearly 10K a year.

I would be nuts to pay extra on my mortgage now.

but the irs only lets you take off 5k allowance unless you make under x amount to invest more happen to me every year...

 

[mollybug2]

I vote for 401k...

 

[PatsMom]

The answer to the question of what is the best way to save for retirement and where to allocate cash flow margins is complicated. So much depends on future plans, anticipated income increases as your career goes on, etc. I would suggest seeking help from a qualified financial planner - definitely NOT from Dave Ramsey!

 

[Grumpy's Gal]

Id financial aid for college in your future?

put it in a retirement acct -- it won't count against financial aid most of the time. Sometimes, home equity will.

 

[budbeerlady]

After taking a bigger hit than normal on my taxes (grr, still smoldering over it!) I vote for starting the Roth IRA. I met with someone today to talk more about it and hope to have it up and running really soon. Taxes are NOT going to go down anytime soon after we have bailed out everyone and ran up a huge debt. So my 401K will also take that tax hit, my Roth will not. The house is cruising along at its pace and will be done in 10 years.

 

[Piglet4Ever]

Dh is in the military and we have a savings plan that we put money into every month but it's not a 401K. That being said next week we are going to pay off our house mortgage and we couldn't be happier. We have figured out that we are going to save ourselves $150,000 in interest payments on our 30 yr loan by having it paid off now. We will be putting the amount we would have paid on mortgage into savings each month. It's really up to you to do what we think is best for your family.