If you're flush with cash, you're actively trying to beef up your 401(k) retirement account and pay down your mortgage at the same time. Most people, however, have to make a decision about where to apply the extra cash. Increasing your 401(k) contributions can put you on the road to a comfortable retirement, but applying that money to your mortgage pays it down faster. Decide which route is right for you.
401(k) Maximum Contributions
You can't necessarily contribute all of your money to the tax-deferred 401(k). The IRS places limits on how much you can contribute each year. For 2010 and 2011, the maximum contribution for a traditional or safe harbor 401(k) plan is $16,500. It's just $11,500 for a SIMPLE 401(k). If you've already made the maximum contribution, you can then start paying more towards your mortgage.
Many employers will match employee contributions, up to a certain percent of the salary. If you're leaning toward paying additional money to your mortgage, you should at least save the amount that you'd need to get the maximum matching amount from your employer. This is like a salary bonus.
The biggest advantage of a 401(k) savings plan is that the money that you put into it is tax deferred. This means that you aren't paying taxes on that money as you save it, so you reduce your overall tax bill for the year. It's smart to contribute as much as you can to your 401(k). You also get a tax benefit from your mortgage payments in the form of a mortgage interest deduction. If you're in the early years of your mortgage, LendingTree suggests that reducing your mortgage is not in your best interest since it may reduce the tax benefit of your mortgage interest deduction.
The Emotional Factor
Finances aside, there's an emotional aspect to carrying a lot of debt and your mortgage is a big debt. Paying down this debt could make you feel better than socking away money for retirement. This especially comes into play as you get closer and closer to paying off your mortgage. If paying off your mortgage will make you feel better, that might be the best option for you.
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- The Pros & Cons of 401k Withdrawals
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- Is One IRA Better Than Another IRA?
- Should You Pay Off Your Mortgage or Invest the Money?
- Can I Put All of My Bonus in My 401(k) to Avoid Taxes?