My back of envelope calcs:
Assumption: it will take all of 20 years to pay back loan - thus 20 year timeline comparison.
Invest in 401k:
$26k @ 1.07 (assumed return ) 20 years less 33% tax at end = approx $67k
Pay 2nd mortgage: $17k (26k less taxes) @ 1.09 20 years =$95k
Pay 2nd mortgage if deductible: $17k @ 1.06 20 years = $54k
If mortgage is deductible then do 401k, if not pay down mortgage.
In reality there is a lot more optionally by not paying down the mortgage
- you may be able to refinance to a lower rate
- if you come into extra money in future years, assuming you contribute in full to all tax advantaged, you could pay down mortgage then. You can always choose to pay down in the future. You can only choose to fund 401k this and next year with this money.
- there is possibility that you could be at a lower rate along the way and Roth convert the 401k or IRA
- you don’t state your age, but if you get than 40ish, the tax deferred (or if converted to Roth ) will have many more years of tax deferred or tax free growth beyond 20 years.
On the flip side the 9%/6% is guaranteed - the 7% estimate (mine) on 401k can vary. This is a pretty big factor.
I’d say on a risk/return basis the mortgage payoff is best bet. However if you felt confident you will be earning (and saving) much more in the future so that you can payoff later I might opt for the 401k, and/or the likely opportunity to refi at lower rate.
Assumption: it will take all of 20 years to pay back loan - thus 20 year timeline comparison.
Invest in 401k:
$26k @ 1.07 (assumed return ) 20 years less 33% tax at end = approx $67k
Pay 2nd mortgage: $17k (26k less taxes) @ 1.09 20 years =$95k
Pay 2nd mortgage if deductible: $17k @ 1.06 20 years = $54k
If mortgage is deductible then do 401k, if not pay down mortgage.
In reality there is a lot more optionally by not paying down the mortgage
- you may be able to refinance to a lower rate
- if you come into extra money in future years, assuming you contribute in full to all tax advantaged, you could pay down mortgage then. You can always choose to pay down in the future. You can only choose to fund 401k this and next year with this money.
- there is possibility that you could be at a lower rate along the way and Roth convert the 401k or IRA
- you don’t state your age, but if you get than 40ish, the tax deferred (or if converted to Roth ) will have many more years of tax deferred or tax free growth beyond 20 years.
On the flip side the 9%/6% is guaranteed - the 7% estimate (mine) on 401k can vary. This is a pretty big factor.
I’d say on a risk/return basis the mortgage payoff is best bet. However if you felt confident you will be earning (and saving) much more in the future so that you can payoff later I might opt for the 401k, and/or the likely opportunity to refi at lower rate.
Statistics: Posted by JBTX — Tue Aug 20, 2024 9:21 pm — Replies 15 — Views 1199