Pay off the house leaving only $15k

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TheQuestionGuy
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Pay off the house leaving only $15k

Post by TheQuestionGuy » Fri Jul 01, 2016 3:46 pm

Thinking of paying off the house, but if so it would leave probably a savings of $15k total.

Granted once the house is paid off, that is about $1,500 a month to replenish the savings which should fill back up with $18K/year and aobut $90k in 5 years. Although those amounts are attractive, just not sure if having only $15k left leaves me exposed and unstable.

jjface
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Re: Pay off the house leaving only $15k

Post by jjface » Fri Jul 01, 2016 3:52 pm

Is that $15k including any emergency fund or on top of it?

It would make me nervous but others are different. I've been all in with a house before and things happen that require liquidity.

TheQuestionGuy
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Re: Pay off the house leaving only $15k

Post by TheQuestionGuy » Fri Jul 01, 2016 3:53 pm

Yes, $15K is everything including emergency.

KlangFool
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Re: Pay off the house leaving only $15k

Post by KlangFool » Fri Jul 01, 2016 3:58 pm

OP,

1) Do you have any children going to college in a few years? Will you be taking any student loan? If yes, why are you paying off the mortgage?

2) Are you maxing up your Trad. 401K? If not, why are you CHOOSING to pay a lot more taxes in order to pay off your mortgage? If you are in 25% marginal tax rate bracket, you are paying 25% tax for every dollar going into mortgage prepayment.

KlangFool

Tal-
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Re: Pay off the house leaving only $15k

Post by Tal- » Fri Jul 01, 2016 4:09 pm

Tal votes no.

Normally, I would ask you personal questions about credit, income, spending, assets, interest rates, taxes/mortgage write offs, etc. etc. etc., but this one seems pretty clear cut to me. Nada.

Props to being able to do it, but unless your situation is pretty unusual, I say no.
Debt is to personal finance as a knife is to cooking.

quantAndHold
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Re: Pay off the house leaving only $15k

Post by quantAndHold » Fri Jul 01, 2016 4:12 pm

Unless $15k is 6-9 months living expenses, no. When you have 6-9 months living expenses, and have maxed your IRA/401k for the year, come back and we'll talk. Until then, no.

delamer
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Re: Pay off the house leaving only $15k

Post by delamer » Fri Jul 01, 2016 4:18 pm

Unless you have a very secure job or one that can easily be replaced, only $15,000 in savings leaves you exposed.

Rebecca_S
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Re: Pay off the house leaving only $15k

Post by Rebecca_S » Fri Jul 01, 2016 4:22 pm

We did it, even down to about $5K, but we were DINKs with secure incomes and knew we could easily pay all bills off a single salary if one of us lost a job. That is not a recommendation necessarily, but we were excited to pay it off and had very low monthly bills otherwise.

chx
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Re: Pay off the house leaving only $15k

Post by chx » Fri Jul 01, 2016 4:25 pm

Tal- wrote:Tal votes no.

Normally, I would ask you personal questions about credit, income, spending, assets, interest rates, taxes/mortgage write offs, etc. etc. etc., but this one seems pretty clear cut to me. Nada.

Props to being able to do it, but unless your situation is pretty unusual, I say no.
Chx votes yes.

Assuming that you'll continue to fund tax-advantaged savings to the max. Especially if you are no longer getting any tax deductions from the mortgage vs the standard deduction.

alex_686
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Re: Pay off the house leaving only $15k

Post by alex_686 » Fri Jul 01, 2016 4:25 pm

My gut says no.

Having a mortgage is a form of leverage. That being said, the leverage is modest between the tax advantages and the fixed low interest rate of a mortgage. This does not hold If you have a high interest loan and the cost of refi is high.

One should be able to earn a higher rate of return with a conservative mix of stocks and bonds with minimal risk.

One loses flexibility. 15k would cover most of my emergencies but not all. Loss of job, long term disability, or major illness come to mind. Or perhaps a positive once in a life time opportunity. who knows?

One would have to be high risk adverse and have a strong need for low cash flow to justify this.

soboggled
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Re: Pay off the house leaving only $15k

Post by soboggled » Fri Jul 01, 2016 4:29 pm

Bad idea, liquidity is important because emergencies (and opportunities) happen when you least expect them.
You also do realize on every 401K dollar equally matched by your employer you are getting an immediate 100% return (and 50% even if it only matches partially)?

quantAndHold
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Re: Pay off the house leaving only $15k

Post by quantAndHold » Fri Jul 01, 2016 4:36 pm

chx wrote:
Tal- wrote:Tal votes no.

Normally, I would ask you personal questions about credit, income, spending, assets, interest rates, taxes/mortgage write offs, etc. etc. etc., but this one seems pretty clear cut to me. Nada.

Props to being able to do it, but unless your situation is pretty unusual, I say no.
Chx votes yes.

Assuming that you'll continue to fund tax-advantaged savings to the max. Especially if you are no longer getting any tax deductions from the mortgage vs the standard deduction.
OP says that $15k is everything. So he/she isn't doing tax-advantaged savings at all yet.

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Watty
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Re: Pay off the house leaving only $15k

Post by Watty » Fri Jul 01, 2016 4:38 pm

TheQuestionGuy wrote:Thinking of paying off the house, but if so it would leave probably a savings of $15k total.

Granted once the house is paid off, that is about $1,500 a month to replenish the savings which should fill back up with $18K/year and aobut $90k in 5 years. Although those amounts are attractive, just not sure if having only $15k left leaves me exposed and unstable.
It is usually a good idea to listen to your gut when you have a gut feeling about something.

How much money would make you not feel "exposed and unstable" ?

You could just pay down the mortgage with as much as you can and still leave that amount left in your other investments. The remaining loan amount would be relatively low so the interest you would pay on it would be relatively small even if it delayed getting your house completely paid off for a year or two.

You can also check with your lender to find out if they will "recast your mortgage" (Google this) if you make a large payment on your loan. They are not required to do this but they often will for just a couple of hundred dollars for a processing fee. The way this works is if you pay off 75% of the loan(or whatever percent works for you) then the required mortgage payment would be reduced by the same percentage but the length of the loan and the interest rate would stay the same.

MathWizard
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Re: Pay off the house leaving only $15k

Post by MathWizard » Fri Jul 01, 2016 4:47 pm

The odds of an emergency in a few months is relatively small.
If you have a ROTH, you could always pull contributions in a real emergency.

In the case of job loss, a paid off house means you have reduced your cash flow.

You could use also use a HEL

I think that you could do it.
If you have a low interest rate, you could always wait 6 months to pull the trigger.
If you have a high interest rate, then either refi or pay it off.

TheQuestionGuy
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Re: Pay off the house leaving only $15k

Post by TheQuestionGuy » Fri Jul 01, 2016 5:14 pm

Thanks for the feedback.

Just more info....

Currently putting away 9% to a Roth (post tax) contribution.
Son completed college.
Two incomes here. Wife is with her company for 15 years and me fairly new at recent company almost 3 years.
Currently paying $1000 each month extra and based on that scenario puts us only 3.4 years to pay it off at this pace.
Doing this leaves the savings stagnant and can't really contribute more to 401k without it affecting other stuff.
Getting rid of the mortgage would rebuild savings and allowing the 401k contributions to get a boost too.
Last edited by TheQuestionGuy on Fri Jul 01, 2016 5:24 pm, edited 1 time in total.

icefr
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Re: Pay off the house leaving only $15k

Post by icefr » Fri Jul 01, 2016 5:16 pm

I would pay off the house and then evaluate where you are on the track towards having enough retirement savings. How old are you? 9% to retirement doesn't sound like much unless you're in your 20s which you're not if your wife has been at her job for 15 years.

Grt2bOutdoors
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Re: Pay off the house leaving only $15k

Post by Grt2bOutdoors » Fri Jul 01, 2016 5:26 pm

Time in the job is irrelevant unless you are in a tenured position, otherwise you could be at risk of job loss. What do I mean by tenured?, police officer, military, public school teacher, firefighter with union protection, other life essential occupations. 15 years in private sector can make one be a target for cutbacks.

My vote is for no, with 3.4 years left you are mainly paying principal and very little in way of interest.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

cherijoh
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Re: Pay off the house leaving only $15k

Post by cherijoh » Fri Jul 01, 2016 5:48 pm

quantAndHold wrote:
chx wrote:
Tal- wrote:Tal votes no.

Normally, I would ask you personal questions about credit, income, spending, assets, interest rates, taxes/mortgage write offs, etc. etc. etc., but this one seems pretty clear cut to me. Nada.

Props to being able to do it, but unless your situation is pretty unusual, I say no.
Chx votes yes.

Assuming that you'll continue to fund tax-advantaged savings to the max. Especially if you are no longer getting any tax deductions from the mortgage vs the standard deduction.
OP says that $15k is everything. So he/she isn't doing tax-advantaged savings at all yet.
That isn't how I interpreted that answer. The question was whether it was 15K on top of an emergency fund or everything. So I interpreted it to be $15k total in taxable. OP provides no info on tax advantaged, but I wouldn't interpret that to mean there isn't any. Like a lot of posters, OP has provided the minimum amount of information he/she thinks is necessary. As is often the case, the question really shouldn't be viewed in isolation.

soboggled
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Re: Pay off the house leaving only $15k

Post by soboggled » Fri Jul 01, 2016 5:54 pm

MathWizard wrote:The odds of an emergency in a few months is relatively small.
If you have a ROTH, you could always pull contributions in a real emergency.

In the case of job loss, a paid off house means you have reduced your cash flow.

You could use also use a HEL

I think that you could do it.
If you have a low interest rate, you could always wait 6 months to pull the trigger.
If you have a high interest rate, then either refi or pay it off.
Oh brother.

cherijoh
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Re: Pay off the house leaving only $15k

Post by cherijoh » Fri Jul 01, 2016 5:55 pm

TheQuestionGuy wrote:Thanks for the feedback.

Just more info....

Currently putting away 9% to a Roth (post tax) contribution.
Son completed college.
Two incomes here. Wife is with her company for 15 years and me fairly new at recent company almost 3 years.
Currently paying $1000 each month extra and based on that scenario puts us only 3.4 years to pay it off at this pace.
Doing this leaves the savings stagnant and can't really contribute more to 401k without it affecting other stuff.
Getting rid of the mortgage would rebuild savings and allowing the 401k contributions to get a boost too.
Bad plan IMO. 401Ks have annual limits, so when you fail to invest to the max in any given year you kiss that tax-advantaged space goodbye FOREVER. I would only recommend paying extra on the mortgage AFTER maxing out your tax-advantaged plans.

You also might want to revisit using the Roth option with your 401k plan. It is rarely the best option for two-earner couples in their peak earning years.

cherijoh
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Re: Pay off the house leaving only $15k

Post by cherijoh » Fri Jul 01, 2016 6:12 pm

icefr wrote:I would pay off the house and then evaluate where you are on the track towards having enough retirement savings. How old are you? 9% to retirement doesn't sound like much unless you're in your 20s which you're not if your wife has been at her job for 15 years.
And they have a son who is out of college. By the sound of it, the OP needs to concentrate getting caught up on retirement savings, if they are only contributing 9% of salary to their 401k.
MathWizard wrote:The odds of an emergency in a few months is relatively small.
If you have a ROTH, you could always pull contributions in a real emergency.

In the case of job loss, a paid off house means you have reduced your cash flow.

You could use also use a HEL

I think that you could do it.
If you have a low interest rate, you could always wait 6 months to pull the trigger.
If you have a high interest rate, then either refi or pay it off.
If you lose your job your chances of getting a HELOC are slim. IMO keeping sufficient savings would do you a whole lot more good than having reduced your expenses if you cut it too close. Personally, I wouldn't expose myself to the risk just to pay off a mortgage - even if you think the risk is slim. I know several people who decided to buy a new house and then immediately lost their jobs. Sometimes it comes out of left field.

TheQuestionGuy
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Re: Pay off the house leaving only $15k

Post by TheQuestionGuy » Fri Jul 01, 2016 7:57 pm

Will try to provide what info I can (actually what info i understand).
Tax Rate figure 28%.
We don't qualify to itemize on the tax return so no benefit with the interest of the mortgage.

If the 401k contribution was pre-tax I would see the benefit of contributing more, but since I do the post-tax (not sure of the official term) I wasn't sure there was any benefit.

In my mind I was thinking if the house was paid I would bump my 401k contributions up to maybe 18% while still able to build savings relatively quickly.

KlangFool
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Re: Pay off the house leaving only $15k

Post by KlangFool » Fri Jul 01, 2016 8:04 pm

TheQuestionGuy wrote:Will try to provide what info I can (actually what info i understand).
Tax Rate figure 28%.
We don't qualify to itemize on the tax return so no benefit with the interest of the mortgage.

If the 401k contribution was pre-tax I would see the benefit of contributing more, but since I do the post-tax (not sure of the official term) I wasn't sure there was any benefit.

In my mind I was thinking if the house was paid I would bump my 401k contributions up to maybe 18% while still able to build savings relatively quickly.
TheQuestionGuy,

<<since I do the post-tax (not sure of the official term) I wasn't sure there was any benefit. >>

You CHOOSE the post-tax Roth 401K contribution and pay 28% tax. You could CHOOSE not to pay the 28% tax by contributing to pre-tax Trad. 401K instead.

<< In my mind I was thinking if the house was paid I would bump my 401k contributions up to maybe 18% while still able to build savings relatively quickly.>>

If you DID NOT pre-pay the mortgage, you could had saved 28% tax over all those years by contributing more to the Trad. 401K account.

You pre-pay the mortgage at 12K per year and pay 28% tax aka $3,360.

KlangFool

malabargold
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Re: Pay off the house leaving only $15k

Post by malabargold » Fri Jul 01, 2016 8:08 pm

If you only have 3.4 years to go, you've already paid
almost all the interest, the rest is principal, so
why rush to give back free money?

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Re: Pay off the house leaving only $15k

Post by grabiner » Fri Jul 01, 2016 9:11 pm

TheQuestionGuy wrote:Will try to provide what info I can (actually what info i understand).
Tax Rate figure 28%.
We don't qualify to itemize on the tax return so no benefit with the interest of the mortgage.

If the 401k contribution was pre-tax I would see the benefit of contributing more, but since I do the post-tax (not sure of the official term) I wasn't sure there was any benefit.
In the 28% bracket, it's probably better to use a traditional 401(k). If you are currently contributing, say, $7200, then you could contribute $10,000 to a traditional 401(k) at no extra cost out of pocket. (You would also save state tax, but since you don't itemize deductions, I assume you have no state tax.) You will pay tax on the traditional 401(k) when you retire, but probably at a rate lower than 28%; most workers in a 28% bracket retire in a 25% or even 15% bracket.
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grabiner
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Re: Pay off the house leaving only $15k

Post by grabiner » Fri Jul 01, 2016 9:14 pm

malabargold wrote:If you only have 3.4 years to go, you've already paid
almost all the interest, the rest is principal, so
why rush to give back free money?
Because you get back interest on whatever you pay. If you pay $10,000 extra on a 4% mortgage, you will owe $10,400 less next year, whether the payments you were previously making were mostly principal or interest.

And it's actually more attractive to pay down a mortgage which is almost finished (although I wouldn't recommend the OP pay it all off now because of liquidity), because you get the benefit faster.
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larmewar
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Re: Pay off the house leaving only $15k

Post by larmewar » Fri Jul 01, 2016 11:00 pm

If your total of extra payments have been substantial, you might look a smaller lump sum extra payment combined with a recast (assuming your mortgage allows for a recast. The PI would be the remaining balance over the remaining life of the loan. If a recast doesn't make sense and not itemizing deductions, I would maintain liquidity but be little aggressive in making extra mortgage payments.

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Re: Pay off the house leaving only $15k

Post by Lafder » Fri Jul 01, 2016 11:44 pm

TheQuestionGuy,
Consider taking the time to post all of your holdings, and debts, and ongoing contributions like this

viewtopic.php?f=1&t=6212

It will help you think through your holdings and be sure you are making the most of your hard earned money, and have more perspective on paying off mortgage vs not.

I believe in maxing 401k to the pretax max if you can afford to live on the income left over. If your employer allows post tax 401k, do they allow for a mega backdoor Roth of rolling post tax to a Roth inservice (while working there) ? If no it should be able to be rolled to a Roth when you terminate there.

The post tax to Roth is not under the same income limits as a Roth, and also not counted in the max contribution limits for pretax 401k plus Roth 401k which is 18k or 24k depending on age.

If you are not currently maxing pretax retirements, I would rather you max them, and use the cash you were going to pay down the mortgage with to live on if needed.

As others have mentioned, the pretax amounts are lost each year if not used.

lafder

TheQuestionGuy
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Re: Pay off the house leaving only $15k

Post by TheQuestionGuy » Sat Jul 02, 2016 3:50 am

Thanks again everyone. It stink to find out I have been doing it wrong for so long. :oops:

grabiner wrote:
TheQuestionGuy wrote:Will try to provide what info I can (actually what info i understand).
Tax Rate figure 28%.
We don't qualify to itemize on the tax return so no benefit with the interest of the mortgage.

If the 401k contribution was pre-tax I would see the benefit of contributing more, but since I do the post-tax (not sure of the official term) I wasn't sure there was any benefit.
In the 28% bracket, it's probably better to use a traditional 401(k). If you are currently contributing, say, $7200, then you could contribute $10,000 to a traditional 401(k) at no extra cost out of pocket. (You would also save state tax, but since you don't itemize deductions, I assume you have no state tax.) You will pay tax on the traditional 401(k) when you retire, but probably at a rate lower than 28%; most workers in a 28% bracket retire in a 25% or even 15% bracket.
My thinking (which may be wrong) is if still working during the time when you MUST take money out, I could very well be in a higher tax bracket (salary + 401k, + Roth), right?

On a side note, I did a quick check and and the amount left over would be closer to $25k, but based on what I am reading I am not sure that really matters.

TheQuestionGuy
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Re: Pay off the house leaving only $15k

Post by TheQuestionGuy » Sat Jul 02, 2016 4:13 am

Lafder wrote:TheQuestionGuy,
Consider taking the time to post all of your holdings, and debts, and ongoing contributions like this

viewtopic.php?f=1&t=6212

It will help you think through your holdings and be sure you are making the most of your hard earned money, and have more perspective on paying off mortgage vs not.

I believe in maxing 401k to the pretax max if you can afford to live on the income left over. If your employer allows post tax 401k, do they allow for a mega backdoor Roth of rolling post tax to a Roth inservice (while working there) ? If no it should be able to be rolled to a Roth when you terminate there.

The post tax to Roth is not under the same income limits as a Roth, and also not counted in the max contribution limits for pretax 401k plus Roth 401k which is 18k or 24k depending on age.

If you are not currently maxing pretax retirements, I would rather you max them, and use the cash you were going to pay down the mortgage with to live on if needed.
Duly noted.

No debt and currently living in FL at 50 yrs old.

With saving the 9% (which I just bumped to 12% for now after reading all the replies) the company matches 50% up to 8% and does a 3% contribution whether or not I am doing any retirement which I thought was nice. My wife is doing just 6% to get the free money as her company matches 50% upto 6 %. The extra money going toward the mortgage doesn't allow for her to contribute more.

Everyone talks about pre-tax which makes sense, but have read a number of articles about the importance of Roth post tax which is why I started it when starting my new job. Trying to get the best of both works. The key is try to guess what will be my retirement tax bracket. Unfortunately, the only way to tell if I am doing it right is when it comes time to retire which will be too late to change if my entire thought process is wrong. Also as mentioned in another reply, if still working when force withdraws are required I could be in a higher tax bracket.

As mentioned in my other reply, it looks like the money left over will be more like $25K instead of $15K. I may be in the market for a new vehicle in another year or so as my current one has 133,000 miles and I am driving about 25,000 miles a year.

I find it tough maxing out the 401k when there is a mortgage to pay. Yeah, its a poor mentality and a bit backwards. Its the mentality that if the savings isn't growing then you are doing something wrong. With paying the extra $1000 a month and current contributions the savings is just barely moving. If the house is paid off, I could possibly even max the 401k or Roth contribution as well have the savings increase.

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Re: Pay off the house leaving only $15k

Post by SGM » Sat Jul 02, 2016 5:20 am

Don't beat yourself up for not maximizing your 401k. At age 50 you have time to make up for any earlier decisions. You also have some tax diversity by having Roth and traditional accounts. Congratulate yourself for having a paid off mortgage at 50. That is an accomplishment.

I would pay off the mortgage now and start increasing your tax advantaged accounts. I would also save in taxable for possible conversions later on if you should find yourself in a lower bracket prior to taking SS or prior to taking out RMDs at 70 1/2.

You may need to buy a car next year, but with the additional 18k a year in savings you should be able to handle it easily enough.

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Re: Pay off the house leaving only $15k

Post by grabiner » Sat Jul 02, 2016 11:09 am

TheQuestionGuy wrote:
grabiner wrote:In the 28% bracket, it's probably better to use a traditional 401(k). If you are currently contributing, say, $7200, then you could contribute $10,000 to a traditional 401(k) at no extra cost out of pocket. (You would also save state tax, but since you don't itemize deductions, I assume you have no state tax.) You will pay tax on the traditional 401(k) when you retire, but probably at a rate lower than 28%; most workers in a 28% bracket retire in a 25% or even 15% bracket.
My thinking (which may be wrong) is if still working during the time when you MUST take money out, I could very well be in a higher tax bracket (salary + 401k, + Roth), right?
You don't have to withdraw from your 401(k) while you are still working at that employer, even if you are over 70-1/2. (You do have to take withdrawals from IRAs at 70-1/2.)

There is also the risk issue, which is an advantage for the traditional plan. If you are forced to retire early, or your investments do poorly, you will retire in a lower tax bracket and the IRS will take less of your 401(k). If you keep working for a long time and build up a huge 401(k), you have plenty of money to live on, and the IRS will take more. In contrast, if you contribute to the Roth 401(k), the IRS takes 28% up front, regardless of your balance in retirement.

(edited to fix quoting)
Last edited by grabiner on Sat Jul 02, 2016 12:12 pm, edited 1 time in total.
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rgs92
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Re: Pay off the house leaving only $15k

Post by rgs92 » Sat Jul 02, 2016 11:40 am

Listen to the wise advice of Grt2bOutdoors up above. I also would add that, in the event of income loss, you could not easily refinance or even get a HELOC to undo what you have done to have a nest egg or emergency fund (and this would be an emergency!).
[edit: HELOC = home equity line of credit]

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