Author Topic: Max 401k vs. Paying off home loan?  (Read 1913 times)

Owassogirl1

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Max 401k vs. Paying off home loan?
« on: July 29, 2017, 11:50:02 AM »
Hi there, long time listener first time poster.

I have a question about maxing out my 401k vs. paying off my home loan. By October I will be able to pay off my 401k loan I took out a year ago (I know probably a horrible idea but it is what it is at this point). This will equate to an extra $900/month on my paycheck. I'm debating paying off my house vs. increasing my 401k investment (or other savings options, I'm open).

Here are some facts about me and my financial situation that might be useful:

48 years young
Home loan refinanced in 12/15 for 15 years - 19 payments made so far. $132,000 financed
3.125% interest rate
Already paying an extra $150/month which will put me at paying off by the time I'm 59 10/1/28
Currently contributing 5% to 401k
Company matches 4% dollar for dollar
Balance at $300k
My only debt is the house, the 401k loan (again 401k loan will be paid off in October), and a rental property which is a goldmine. No student loans, no car loan debt etc.
My tax bracket and house interest is such that I gain nothing from the interest paid on my house - standard deduction works better for me.
I do get a significant tax break from the rental, plus deducting any repairs, insurance, taxes etc. Payment is $420 P&I + escrow and I can easily rent it for $800. It has been a fantastic investment. I don't think it makes sense to try and pay it off early so I'm not including a lot of details.

I could:

Payoff house by age 54 using $900/extra per month nets $15k savings in interest

or

Increase 401k by $900/extra per month (pre tax). This would increase my 401k by about $92,000 by age 54 assuming a 8% return

It doesn't seem like I can ever make that money up in my 401k according to my calculations. By age 60 (when I would like to retire) my 401k would be 'down' $147k. This is assuming I start kicking the extra $900 into my 401k after the house is paid off at age 54-60 when I hope to retire.

I'm not sure how to calculate the tax decrease I might have by contributing so much more to my pre-tax 401k.

One more thing about me, I do lack a certain amount of 'discipline.' Contributing to my 401k pre-tax is something I've always been pretty disciplined about. Along with paying my bills and within the last 15 years 'not' buying a new car and paying off other debt. I don't even see it in my check so out of sight out of mind. Savings for things post paycheck is more difficult for me. I "think" I could stick with the plan of putting more money toward my mortgage but the 401k investment option would probably be 'safer.' If that makes any sense.

Thank you for any advice you can provide!





RWD

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Re: Max 401k vs. Paying off home loan?
« Reply #1 on: July 29, 2017, 12:33:38 PM »
At 3.125% you definitely shouldn't pay extra towards your mortgage before maxing your 401k. See also this thread:
https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/

Res Ipsa

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Re: Max 401k vs. Paying off home loan?
« Reply #2 on: July 29, 2017, 03:49:54 PM »
I'm with RWD.  Max out your 401k first.

FINate

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Re: Max 401k vs. Paying off home loan?
« Reply #3 on: July 29, 2017, 04:11:58 PM »
Agree with the others, max out your 401k first. Pre-tax, tax deferred growth, and employer match to boot - about as close to a free lunch as you can get.

MDM

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Re: Max 401k vs. Paying off home loan?
« Reply #4 on: July 29, 2017, 06:09:47 PM »
401k.  It fits the general guidelines in Investment Order.

Owassogirl1

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Re: Max 401k vs. Paying off home loan?
« Reply #5 on: July 30, 2017, 03:27:55 PM »
Thank you all for your input, max out the 401k it is!