Should I pay down my house or put my extra money in to my 401K?

Question

I only have 4 years left to pay on my house. I am approx. 40yrs old. I have about $45,000 in my 401k with an annual return of 8-10%. I also have two kids, one will graduate in 5 years the other one will be in first grade. They both have a college saving fund, but we will be responsible for most of the cost.

What do you think I should do??

We do not itemize deductions for tax purposes. We do not have enough so we just take the standard deduction

Answer 1

First, make sure that you are contributing as much as you can in your 401k. Do you get an employer match? If you do, that is like collecting free money. Also, but contributing to your 401k, you are decreasing the amount of income tax that you pay.

I hope this helps!

If you pay off the house, you will be losing the itemized deduction for mortgage interest on your Schedule A, so you may end up paying more income taxes. With only 4 years left to pay on your mortgage, I assume that you took out a 15 year mortgage? So, you are probably paying mostly principle anyway.

If you qualify, you and your wife should open up Roth IRA accounts. This will also help you to save for retirement. But if you need to do so, you will be able to withdraw from the Roth IRA (provided that you have had the account for 5 years) for your children's college education.

Answer 2

401K.

1. If you have 4 years left on mortgage, most of your payments are going towards paying off the principal, and you are not paying much interest. So won't be saving much interest by paying off early, and you won't get much tax deduction.

2. If you put money in 401k, your company will match your contribution (in most cases), so it's IMMEDIATE 100% gain.

3. Contribution to 401k is tax deductible, so you pay less tax.

4. You can't contribute more than maximum allowed amount each year even if you have extra money. If you do not contribute maximum amount to 401k each year, you can't make it up later.

5. Funds in retirement savings ARE NOT calculated when determining college financial aid eligibility. Your house WILL BE calculated when determining college financial eligibility.

6. You can borrow against your 401K if you need help with kids' college tuition.

Answer 3

You should only put in as much as our company will contribute on our 401K. So, if your company only matches dollar-to-dollar up to 5% of your salary, then just put in 5%. That's free money.

I would pay down your house first, only because the interest you're paying out is probably more than the 'real' return you're getting on your 401K, factoring in your total amount in there already. Plus, after you pay off your house, that's 100% asset that will appreciate over time in your hand.

Answer 4

I'd pay off the mortgage and make the maximum contribution to 401K with company matching. Itemized deduction for mortgage interest may not be much since you only have 4 more years left. After your mortgage is paid off, all income is yours to keep and/or invest, and your equity of the house is 100% of the market value less transaction cost.

My husband and I both are contributing to our 401K and other retirement funds that our employers are offering. We are also working very hard to pay off our mortgage by the end of this year. We figured, we would rather forego the 2,000 in tax refunds and not have to pay 15,000 in interest. The choice for us is very clear. Plus, after paying off the mortgage, we own the house 100% (and that's our equity for whatever use); we're also planning to build up our investment portfolio for future use.

Answer 5

If you pay off the house, you can always open up a line of home equity. You need a lot more than $45,000 in your 401K.

Pay off your house as fast as possible, and start putting maximum contributions into your 401K. On top of that talk to a financial advisor about starting another IRA account.

Answer 6

calculate the money you could earn in 4 years from your 401k and the interest you have to pay for your house

don't just compare the two rates unless the amount in 401 is the same as the money you owe for your house. 10% of 45,000 in 401k is less than 5% of 100,000 you owe for the house

go with the higher amount

Answer 7

What is the interest rate of your loan? If it is less than 8-10%, you'd be giving away money as you could invest that money over the 4 years and come out ahead of the game.

If the rate is higher than 10%, then by all means pay off the house or you will end up losing money.

Answer 8

1.) Don't touch your 401k (the government makes you pay penalities for taking out the money before a ceratain age keep that for your retirement don't touch any savings or IRA's, if you have investments you should use that such as money market funds/savings, CD's make your kids pay for some of their college finances by getting a job or two during college and in between semesters you should be all responsible for your kids they need to learn that sometimes they may have to pay for their own education my grandfather put himself through college by working several jobs at a time and he knew what the value of hard work is make sure that your kids learn too by getting jobs to pay for a least a portion of the college bills.

Answer 9

Personally if you have the option to pay down your house I would do it. Once your house is paid you can always put extra percentages towards your 401K. It will also give you more disposable income to use.

Answer 10

There is not enough information to answer your question.