Is it Better to Pay Off you Mortgage or fund your 401k ?
Does paying off your Mortgage beat contributing to your 401K?
Check out what Forbes has to say.
Does Prepaying Your Mortgage Beat Contributing To Your 401(k)?
In a recent column, I pointed out that mortgages can be major financial and tax losers.
In particular, I used my company’s MoneyMax Account personal financial planning software to answer a very simple question: If you have the cash to pay off your mortgage, how much will it raise your lifetime discretionary spending (measured in present value) if you do so?
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The answer, for poor, middle class, and rich households is a ton—generally far more than a year’s after-tax earnings! Imagine having to work for an extra year simply because you failed to spend the half-hour or so required to complete this financial transaction.
My column was based on this case study posted over the summer on our company’s website. It prompted our producing and posting a second case study. The second study asks whether the financial gain from pre-paying your mortgage, whose rate is higher that what you can earn on an equal-maturity Treasury bond, combined with the tax advantages (given the new tax law) to pre-paying your mortgage are sufficiently large to outweigh the tax benefits from contributing to your 401(k). Importantly, the study assumes that reducing your own contribution wouldn’t trigger a reduced employer contribution to your 401(k) account.
Take the example of Hannah and Connor, a 30-year-old married couple making $50,000 each; i.e., $100,000 collectively. They have a $600,000 house with a $480,000 mortgage on which they’re currently paying $2,182 per month in mortgage payments. The question is whether they should stop contributing $1,500 per year, each, to their 401(k) plans and, instead, use these funds to pre-pay their mortgage. The couple realizes their 401(k) comes with lifetime tax breaks, but they also know they’re paying 3.6 percent on their 30-year mortgage (the rate prevailing when we did the analysis), whereas the corresponding return they can earn on 30-year Treasury bonds, which has the same risk, i.e., none, as their mortgage payment, is a far lower 1.944 percent (again, the prevailing rate as of the date of the analysis ).
Something to think about, right?
If you want to see the proven and quickest way to get rid of that mortgage and other debts, schedule your time with me today.
www.rick.debtotwealth.com
Best regards,