Ben­e­fits of 401(k) ex­ceed mort­gage pay­off

Boston Herald - - COMICS - By JACK GUTTENTAG

A reader asks: “My cur­rent 401(k) bal­ance is about the same as my mort­gage bal­ance. I am 45. Would it make sense to pay off the mort­gage with the 401(k)?”

Bad idea! Look­ing to re­tire­ment, your ob­jec­tive should be to ac­cu­mu­late a 401(k) nest egg of fi­nan­cial as­sets as large as pos­si­ble and pay off your mort­gage as soon as pos­si­ble. You should pur­sue these ob­jec­tives in­de­pen­dently, not sac­ri­fice one to ob­tain the other. That would be a loser, for many rea­sons.

• Early with­drawal costs: Funds with­drawn from a 401(k) be­fore age 591⁄2 trig­ger tax pay­ments on the amount with­drawn plus a 10 per­cent early-with­drawal penalty. While there are ex­cep­tions to the penalty, pay­ing off a mort­gage bal­ance is not one of them. That means pay­ing off a mort­gage bal­ance with a 401(k) bal­ance of the same amount would gen­er­ate a size­able cash out­flow.

• Earn­ings op­por­tu­nity loss on the ex­ist­ing 401(k) bal­ance: An even larger loss from liq­ui­dat­ing your 401(k) is the fu­ture earn­ings on the funds with­drawn. These earn­ings ac­cu­mu­late tax- free un­til you are 70, and at that point you pay taxes only on the amounts with­drawn at your tax bracket at that time, which could be a lot lower than it is now.

• Pos­si­ble earn­ings op­por­tu­nity loss on new con­tri­bu­tions: If your in­ten­tion is to aban­don your 401(k) af­ter drain­ing it, given that you are many years from re­tire­ment, the largest loss would be the tax-de­ferred in­come you could con­trib­ute plus the tax- de­ferred earn­ings on those con­tri­bu­tions. Your ob­jec­tive should be to con­trib­ute as much as pos­si­ble.

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