Should I stop contributing to 401k and use money to pay off second mortgage

[Anonymous]

I am wondering if I should stop contributing to my 401k for awhile and use the money to pay off a second mortgage.  Here are the facts:

I'm 41 and am currently contributing 7% of my pay to my 401k.  My employeer matches 50% up to 6% of my contrubution.  Over the past year I've earned 12.2% on my 401k and 4.41 from the inception of the plan.

The second mortgage is for land purchased.  The land is currently for sale but hasn't sold in 5 years.  The second mortgage is at 10% interest rate and there is approximately $48k left on it (payoff at current rate would be in 2023).  Last year approximately 88% of our monthly payments went toward interest.

So would it make sense to stop paying into the 401k and use the money (I estimate approximately $250 a month after taxes) to pay towards the principal on the loan?  

Thanks!

[Anonymous]

My guess is that if you crunched the numbers you would discover that it is almost never a good idea to lose the matching money you are getting from your employer.  That's like knowing a certain route to walk home where you regularly find free $20 bills on the sidewalk, but choosing to take a different route home.  Always lean towards grabbing free money (when you can do so ethically, of course!).

The question becomes more complicated if you are contributing far more than the 6% you describe.  (Certainly it is great to do that.)  Then you have to balance the money you save on the mortgage (the interest rate is very high) vs. the amount that the amount will generate in the next few decades toward retirement.

But as far as I can tell from your post, you are likely just paying the 6% toward your 401k.  (Actually it sounds like you are paying just a tiny bit over that, i.e. 7%)  In which case I'd continue to do that and collect the matching money, and then possibly push the extra 1% toward the high interest mortgage.

The general advice I have seen that makes a lot of sense to me is to prioritize retirement savings as follows:

(1)  Contribute enough to your 401k or TSP to collect all matching funds you can.

(2)  Pay off all high interest loans and credit cards.  The loans need to be very high interest to make this worthwhile.

(3)  Then fund the maximum annual contribution to a Roth IRA with a group like Vanguard or Fidelity.

(4)  Then fund the maximum annual contribution to your 401k.

(5)  Then pay down lower interest installment loans (e.g. a 4% car loan).

That's just very broad advice and any person might tailor it to his own situation.  But I think it's fairly sound.

[iv]

I understand wanting to be rid of the 10% mortgage... but stopping your 401k contributions to do so would cost you rather a lot of money.

Right now, you are contributing 7% directly, but with your employer match this is effectively 10%.

So right off the bat, you're earning a 43% return in your (tax-free) 401k, even before real investment returns.

If you stopped contributing to the 401k completely, you'd lose the employer match, and then you'd end up paying taxes on that 7% (at your top marginal rate), before you would be able to apply what remains to the 10% mortgage.

The exact details depend on your tax bracket and salary level, but even without knowing that, it's clear that switching from the 401k contributions to an early mortgage payoff would cost you quite a bit, rather than saving anything.

The only thing you might consider is dropping your contribution rate down to your employer-match maximum of 6% (ensuring you still claim the max match possible), and apply the 1% difference to the mortgage.  Whether that would be a net positive or negative depends mostly on your tax bracket.

[Anonymous]

How much is vested in the 401k?