“I just want to take money out of my 401(k) and pay off my house.” That’s what I hear quite a few of my clients say. Well, there’s a lot to be said about getting rid of one of those monthly nuts we have to crack. But, is it always the best move? Sometimes there are a couple of other more attractive choices. Remember, everyone’s needs are different and the following advice may not be right for you.
If you bought your home when interest rates were down or were able to refinance at one of those great rates, lucky you! For you, not paying off your home may be better. Look at it this way. If you take money out of a qualified retirement plan like a 401(k), IRA, or cash balance pension, you will pay tax on the full amount withdrawn. If you fall into this income category ($77,401 – $165,000), married filing jointly, your tax rate will be 22%. If your interest rate on your mortgage is 4%, you’re 18% behind. Now, if you could safely earn 4%, guess what? Now you’re ahead of the game. Now you get to earn interest on your money, earn interest on the interest, and earn interest on the money that you are not handing over to the IRS because a chunk of your mortgage payment is tax deductible.
Now, the attractiveness of this is not quite as good when you get closer to the end of the mortgage because you lose most of the tax write-off. At that point, consider a payoff. I’ve always told my wife; if I go before you, don’t use the life insurance money to pay off the house. Invest the money, safely, and use it to continue making the mortgage payments.
In future articles, I’ll talk about the pros and cons of a federally-insured reverse mortgage. Have a great March!