MiB Smarter Money » 401K

What Do I Do During a Bear Market? What Do I Invest In?

hank — Wed, 30 Jan 2008 08:19:09 +0000

Photo by: artct45If you’re between 20-40 years old, don’t do anything. Stay where you’re at, markets fluxuate. That is their nature and that should have been something you learned before you got it. If this is your first time hearing about it, don’t worry and more importantly, don’t run. Let the traders panic. That is their job. They’re pounding down 15 cups a coffee per day and enjoy the stress. Let them deal with it. You’re paying a person that the traders are relaying information to in your mutual funds. You’re 3rd tier on that – sit back and enjoy the cheap stocks you’re getting into.If you haven’t sold, you haven’t lost. Stick to your guns and don’t get scared out of the market, recessions happen. But they always come back. As long as you still have a job, you shouldn’t be worrying. If you HAVE lost your job, you should probably not be reading this blog, try this one.

Buy technology stocks and fund. They’ve done really well this year, and think about it. We’re in the technology era; people WANT technology and are willing to pay for it still. As long as you’ve got a good time horizon for investing (10+ years left till retirement) I think you’ve got a good shot to get in at the bottom floor during the recession.

There are special recession ETFs geared towards recession. Look at medical, people always need to go to the doctor. Look at Claymore Securities.

Ultimately, my recommendation is to keep your money headed towards your investments as long as you’ve got a job. Keep your portfolio on track, this is the time when many people are getting out of the game, and as long as you’ve got time on your side, a perfect time for you to capitalize on the low prices being tossed around.

Do you have any secrets you’d like to share? Anything you’ve done in the past? Advice for the future?

Keep Your Investments Separate For Different Goals

hank — Wed, 16 Jan 2008 15:30:14 +0000

How many of you use your 401k for your everything bucket? I’ve overheard friends and family talk about their 401k like their “all for one long term savings account” saying things like, “I’m going to use my 401k for my kids education” or “my 401k is used for both me and my wifes retirements” or the worst to date, “I really need to get a car, I’ll probably borrow against my 401k”. The last one is clearly the worst because a car is a depreciating investment. You’ll never get that one back.

I can see the other 2 MAYBE working; but when you start to dabble the same investment for other pieces you often times lose site of what it is there for. A 401k is there for YOUR retirement; a ROTH IRA is for YOUR retirement. Unless you’re dumping TWICE as much in your 401k, it shouldn’t be set for yourself and your wife. Keep it for you and start something ELSE up for her.

Using it for your kids college education isn’t a HORRIBLE idea either, but take into account that you’re going to likely retire AFTER they go to college. So if you’re double-timing your 401k to education AND retirement, it’s going to look awfully small after the kids take it to school. By that time, it might be too late to know where you want to get with it. I offer the same advice for the person wanting to use the 401k for both he and his wife, make sure you’re dumping a lot into it then.

Just the visual aspect of seeing my kids 529 plans, my 401k, and my ROTH IRA are enough to keep me in line. I know what the investments are for, and what money is going where, and more importantly, why. Simplifying the process can often times remove that “investing blur” that you may have when it comes to saving for your future.

If that isn’t enough to convince you to keep them separate, think of how life is always changing; you have another kid, you have an accident at work forcing you to retire early, big medical bills come up. If you plan on your ROTH covering you in retirement (after 59 1/2) and you have to retire early, is there anything set up for that aspect? Might not be a bad idea to have that emergency fund fired up in that case.

Over time, your investments will change, your mindset will change, your timeframes will change. For those reasons you shouldn’t keep all your (investment) eggs in one basket. Spread them around to different baskets for different goals. If nothing else, it trains you on another aspect of investing when you jump to another ship and increases your financial education significantly.

Photo by: Daquella manera

Why Is It So Taboo To Talk About Salary And Compensation?

hank — Tue, 15 Jan 2008 09:13:54 +0000

Photo by: takashy

How is it that when we can readily see public sector and professional athletes salaries on the web and not bat an eye at it. I’m sure they discuss these things over caviar all the time and it isn’t that big of a deal; but why does middle class America think it is so taboo to discuss it? I admit it, I never ask friends and family what they make. If they make it readily available for me, I’ll certainly listen, but I have never asked about it. Is it a status thing?

It seems even more ridiculous when you can find and know the price of everything with the advent of the internet. I can find out prices of cars, prices of houses, prices of groceries, tax information, and daycare prices if I really want to online. We have a pretty good idea of how much someone is worth by these things, but still feel it is some top secret information to readily discuss the last piece of that puzzle.

Do I disclose my salary on this site? No. But could you find it out if you wanted to? Totally. Look at my balance sheet, my net worth, and see how much goes in and out. Feel free, it’s out there to find, but I still find myself reluctant, even through anonymity to release that piece of information.

I think it may fall in the way we were raised and the environment we grew up in. I think a big reason may be that some of us are always trying to “keep up with the Joneses” and don’t want to give in that those said Joneses really are kicking our butts in the income category.

Photo by: takashy

I think another big piece of it MAY be the fact that the athletes, public officials, and some celebrities salaries are posted (including the fact that Paris Hilton gets paid MILLIONS to attend parties). We realize that we’re up against some pretty big $$$ and that our measly salaries are nothing compared to those apples…

But why the mindset in the first place? I never knew what my parents made growing up. Eating hotdogs and macaroni and cheese 4 times a week though gave me a pretty good indication; but they never actually let on anything. I’d suspect that my dad (mom stayed home to take care of us) brought in no more than 20k through the 80′s and left in the 90s and I’d bet when my mom went back to work she was barely pulling in 10-12k in her first few years, nearly to 25k now, but I never knew.

Does the lower class discuss salaries openly? In tight knit families I bet they do. If you’re all working to pay for the roof over your head, I’m sure it is readily available information at the dinner table. Heck, it would have to be.

Photo by: takashy

I’m not rich, nor am I poor, but I can’t tell you the salary of any of my family members, nor do I feel I should ask. Yes, I am certainly interested; but not enough to pry and ask. I would actually probably feel pretty uncomfortable about it. I remember growing up when you’re in your teens, people older than you always asked me though, assuming that I made minimum wage, I’d be happy to pipe up that I was making WELL above the minimum wage of $4.75 and that I was paid very well at $5.15.

So how about worldwide though – Is it just an American thing? Like I said earlier, I’m even confining it to American middle-class right now – prove me wrong if you can, I’m happy to listen. Half Sigma started a post last year about it and what he makes and it has generated a pretty good list so far. These people seem willing to share, anonymously, but still willing.

Is there ever a GOOD time to ask what someone makes? Maybe a rephrase, is there ever an appropriate time to ask what someone makes? I ran across a post my MyOpenWallet and they said:

“The question isn’t one that people are used to asking, I think. It seems rude, and your motivation for asking could be questionable. In many cases, maybe people would rather not know. But more often, I’m sure people are dying to know, although they would never dream of just coming out and saying it: “How much money do you make?”

And I agree – it DOES seem rude, but is that a thing that is a mindset? Would you care as much if you knew EVERYONES salary? if you knew the salary your boss, his boss, your co-workers, your family, your friends – would it numb the subject any? I’d think it would certainly change things up, but in different facets. The newly found rich people would be hit up by charities more, the poorer people wouldn’t have to try to live up the Joneses mentality, and likely would be richer by NOT having to live up to something they weren’t.

Ultimately it sounds like the issue isn’t going anywhere anytime soon. I’m sure I’m not going to be passing on any new developments on that front because to me, it is rude, at least at this point in my life… Convince me differently?

How Do I Plan To Reach My Investing Goals For Retirement?

hank — Sun, 23 Dec 2007 13:00:50 +0000

Photo by: emdot

Only 0 days 5 hours 2 minutes left until Hanks Holiday Handout drawing!

To make my goal of having my net worth be $1,000,000USD by 2020 I need to have a plan laid out. Yes it will change through the years, My wife and I will get raises; we won’t get the return we’re shooting for with investments in some of the years, but as a base goal if we take our current principal of $75,000 and continue to invest $21,500 per year for the next 13 and that will put us just over the 1MIL mark. That first MIL is the hardest, Pinyo lays it out here.

Where do I find $21,500 per year to invest? We’re currently contributing 10% of each our salaries for about $16,000 per year to our 401k plans, then add in $4,000 each for our ROTH IRA accounts and we’re well over the limit there. We’re planning on bumps in the road, so that’s why I’m giving the $21,500 number. There are a lot of calculations that need to taken into account, but that is the same with any investment plan. At 10% return with those calculations we’re looking at just under 840k, and at 12% that puts us over the 1MIL mark.

We could have a year where we can’t pay contributions to either our 401k or ROTH, but on the same note, there could be years where we’d contribute MORE to those accounts, For instance, we’re planning on trying to bump the 401k contributions up to 15% in 2008 and that would be $24,000 in itself; add in the ROTH IRA contributions and we’re looking at $32,000 invested per year and in 13 years, that will be worth 1.33MIL.

Numbers are numbers – sticking to the path of just getting money in is the key. In 13 years I’ll still be nowhere near retirement, but the first million is always the hardest to make, after that, it is quite ridiculous how fast it grows. In 35 years on this same $21,500 per year at 10% return we’re looking at 8.5MIL. Which is dreaming, and a lot can happen in 35 years, but there is no time like the present to start planning on it!

Time, as usual, is the key piece of this financial pie; variables are always tossed in to make it interesting. As long as we’re putting in the $21,500 we’ll be on a good pace. I’m sure there will be other investment opportunities, more job promotions, more raises, maybe more kids, but staying on this basic path is the key to our specific financial goal. What’s your path?

What Is A Target Date Mutual Fund And Should I Use It?

hank — Mon, 17 Dec 2007 15:00:22 +0000

Only 5 days 5 hours 02 minutes left until Hanks Holiday Handout drawing!

Hank – I have a few “target date” mutual funds in my 401k plan from Fidelity. They are:
Fidelity Freedom 2010 FFFCX
Fidelity Freedom 2015 FFVFX
Fidelity Freedom 2020 FFFDX
Fidelity Freedom 2025 FFTWX
Fidelity Freedom 2030 FFFEX
Fidelity Freedom 2035 FFTHX
Fidelity Freedom 2040 FFFFX
What exactly are they, and should I use them? Thanks! – Penelope from Maine

Hey Penelope, thanks for the question, I can help answer that one. Target date funds, or lifecycle funds as their sometimes called are there for the very novice investor. They are a fit for some, but for someone willing to put time in, might not be the best choice -

The point of these funds is to automatically adjust the asset allocation as you approach retirement. For example, the Fidelity Freedom 2030 fund features 80% stocks, 15% bonds, and 5% cash, while the Fidelity Freedom 2010 fund features around 50% stocks, 35% bonds, and 15% cash (which is what will happen to Fidelity Freedom 2030 around 2028).

But the problems with it? Well if Investor “A” is a single, high risk tolerance, millionaire and set to retire in 2020 and Investor “B” is a single father raising 4 kids set to retire in 2020 that needs to be conservative, do you think they have the same tolerance or goals by then? Not likely that they’ll have similar portfolio needs.

Another problem with these funds is that they’re pretty much all LargeCap U.S. based funds. Most invest very little overseas or in the Small and MidCap funds, reducing your exposure.

Or how about if you want to retire in 2043? Not 2040 or 2045, what fund do you choose? Kind of a coin flip and you don’t want your assets being finicky when it is time to hit retirement. Another thing to watch out for is that the funds are generally based on that particular companies OTHER funds. There are 10,000-ish funds out there, but most target date funds stick to their own mutual funds, instead of using index funds.

So Penelope, basically if you’re looking for a “set it and forget it” type of fund that you don’t have to worry about, they’re not bad. You’re at least in the market and they’ll likely turn a profit. However, if you’re willing to spend some time on your retirement, I’d try to find better funds in your 401k.

More Bad Decisions I’ve Made Investing

hank — Mon, 10 Dec 2007 16:48:19 +0000

I wrote last month about my bad decisions I’ve made investing, and the more I think about it, the more I have. So let’s pick up where I left off:

7. “Investing in Life Insurance” is officially a bad decision. I’ve basically had a savings account with my Universal Life Policy for the past 5 years that I’m CERTAIN could have turned better than 0% over 5 years. I’m working on canceling the policy and taking the $ out and putting it towards a different investment, more on this to come later…

8. My Edward Jones ROTH IRA has been taking a few extra $ from me by sticking me in “B” shares – I’ve turned off the juice to that account since then. I was just trying to get BACK in the ROTH IRA game after bad investing decision #4 (undercutting my ROTH by taking a loan).

9. I don’t know if ‘d call this a bad decision necessarily, but in the realm of my blog, spending $12,000+ on a month long trip to Australia for my wife and I probably wasn’t the best financial decision, but it was a lot of fun. I wouldn’t recommend it if you’re looking to save money; but we had a few extra $ when we sold our condo in 2005; which leads to bad investment decision #10.

10. Sold my condo after living in it for only 13 months. Capital gains ate up about $10,000 worth of $ I could have put in my pocket. It was small, and we had the second kid on the way so we needed more space, but really we could have stayed there for another year to maximize our profits.

11. Spent $1000-ish dollars on an invention I had in about 2002; I’ll tell you the name of the 2 companies I went through if you contact me. I don’t care to slander them publicly but if you’re truly interested, I’m more than willing to let you know. They’re easy to find, search google for “invention help” and you’re sure to see them both in the top 5. It’s funny, I had a paper route when I was 12 and I can still remember ads during the 4am paper route saying (verbatim, no kidding I still remember this): “…even if you only have an idea for improving an existing product, and don’t know where to go with it, you’ll want this FREE inventors kit. It shows you how your idea can be packaged and submitted to industry through a databank…” blah blah blah… bad idea.
Here is my one blurb on inventions (well, for now anyway). If you’ve got a good invention idea, BUILD it, make a prototype, write the schematics, do the work, put in the time, don’t tell anyone you can’t trust 100% (THIS INCLUDES THE ONLINE INVENTION “HELP” SITES). Blogging has been able to help out on that front this millenium. There are a few decent Inventor blogs out there nowadays, check out InventorSpot, NewScientist, or InventBlog.

I’m sure there’ll be follies on my way and I’ll be sure to post them here for everyone to take a gander at, but hopefully you don’t fall for the same… Fool me once, shame on me. Fool everyone else that I warned about the traps I’ve fallen in, well, shame on you…

How Many ROTH IRA Accounts Can I Have Open? Can I Have Multiple?

hank — Sun, 09 Dec 2007 16:23:19 +0000

Short answer, yes.

I was considering just leaving this at that, but I figured I’d add a few extra lines to better seal the deal. So in writing My Edward Jones ROTH IRA account is invested in B shares – Is that good? I researched that same question because I was fed up with getting tossed in the “B” share pool, and wanted to get out, but thought (for whatever reason) that I could only have 1 ROTH IRA account open, but no, you can have 10,000,000 ROTH IRA accounts open if you’d like, as long as you don’t go over the $4,000 limit ($5,000 for those over 50) in any given tax year. However, I recommend NOT doing this because with each account, you’ll be buying into a fund for whatever amount your brokerage charges to make a trade, usually between $10 and $50, and that’s really going to eat at the principal, especially if you’re in 10,000,000 accounts.

But under my “bad investing decision #8 now I guess, it makes more sense for me to open another account up, as I won’t be paying the 1st one anymore for transactions, and will have to suck up and choose 2 or 3 stellar ones for the new ROTH…

What Is A Self-Directed IRA And How Can I Use It?

hank — Thu, 06 Dec 2007 14:51:23 +0000

I recently had the pleasure to interview Will Sugg, a fellow personal finance blogger that works towards his fortune with Self Directed IRAs. I am no professional in the arena, so he was very willing to answer the few questions I had about them – I hope they can demystify the Self Directed IRA questions YOU may have.

1. What is an Self Directed IRA?

A Self Directed IRA is an IRA that allows you to buy or invest in things other than Mutual Funds, Stocks and Bonds. Self Directed also means that the custodian is merely a holding bank account for your retirement funds and you have to “Direct” them to buy or invest in the Asset you want to hold in your retirement account. The “Direction” for the custodian that I use is a several page form that you fill out with all the details of the investment, then I fax or email it to the custodian. It tells them what to do, what to expect, and where to send a check. I think of a Self Directed IRA as “The Do It Yourselfers” retirement account/plan. If you have specific knowledge bout some area that makes money then you can profit from that in your IRA. There is very little that you cannot invest in with IRA funds. See a list below.

2. Who can use a Self Directed IRA?

Anyone can open a Self Directed IRA as long as you have earned income or your spouse does. Basically if you can open an IRA with a bank you can open Self Directed IRA. Business owners can benefit significantly once they realize the potential of this type of IRA or 401K.

3. What is the difference between a SD IRA, a Traditional IRA, and a ROTH IRA?

There is really only 2 choices in IRAs; Roth or Traditional. Either can be Self Directed.

4. Where can I sign up for one?

You open a Self Directed IRA with a custodian that understands what they are. I’ve listed several on my blog here.

5. Why should I use a SD IRA over a ROTH or a Traditional IRA?

You can have either as Self Directed. If you are opening a new account and you’re not yet retired I would say that you should open a Roth account since the growth it creates is tax free on harvest. I have both a Traditional and Roth Self Directed IRA but almost all of my investment activity is done in the ROTH. The reason you want to Self Direct your IRA is so that you can use your specific knowledge to help your retirement account grow instead of relying on others opinions and management skills.

6. How much can I invest in one?

If you already have a Roth or Traditional IRA established at another custodian you can roll it over to a Self Directed custodian. If your opening a new account with a Self Directed Custodian. Right now the IRA says you can contribute 4,000.00 per year. That figure can change as dictated by the IRA and congress. Of course for the Roth type you are also constrained by the Earned Income limits set by the IRS.

7. Can I roll a ROTH or Traditional IRA over to an SDIRA? How about my 401k?

Sure you can roll over either type of IRA into a Self Directed Custodian. It’s very simple and painless.

8. How long have you been investing in SD IRAs?

I’ve been using my Self Directed IRA for investing for the past 4 years.

9. Where did you learn about SD IRAs?

I learned about using an IRA to buy Real Estate from talking with family, friends, and some business contacts that were using theirs to do the same thing. Then I did a lot of research on the internet to determine which custodian I like better and opened an account. I first rolled just a small amount into it so I could do one transaction. Once I got the hang of it and understood how this could significantly help my retirement plan I rolled the rest of the money I could into my account.

10. What CAN’T I invest in with an SD IRA?

There are such things as Prohibited Investments and you need to learn what they are. Here is a short list:
- Artworks
- Rugs
- Antiques
- Metals
- Gems
- Stamps
- Coins
- Alcoholic beverages
- Certain other tangible personal property

But most folks wouldn’t want to invest in these any way. Here is the IRS language about Prohibited Investments in case you want to see everything. You also can’t profit from the IRA meaning you can’t loan yourself money from it or buy a Rental Property and then go live in it, that is considered Self Dealing.

11. I want to invest in real-estate through my SD IRA. How do I go about telling my brokerage account that I’m buying a house with my SD IRA?

This example is just to illustrate of the process there is Due Diligence you need to perform to ensure that the investment is prudent for you. It also assumes that you have the entire purchase price in cash. You first open a Self Directed IRA with a Custodian that understands what that really means.
Not all IRA’s are self Directed so that you can buy Real Estate in them. Check out the short list from above, all of those custodians are real Self Directed Custodians. After you have the account open and funded, you find the investment. In this case some Real Estate property and get it under contract. Have your agent if there is one open Escrow. Then it’s merely ending the Custodian the “Direction of investment” forms and them sending a check for the purchase price. Once Escrow closes the transaction and records the deed your IRA is now owner of the property. Your SDIRA can borrow money to fund the purchase, however the down payment required is usually 30% or more. That however is another topic for another day…

12. When can I withdraw from my SD IRA?

The same times as you can with any other IRA or 401K plan (59 1/2).

13. Is my SD IRA funded by pre-tax or post tax dollars? Do I pay a tax
when taking it out?

Depends if your IRA account is Roth or Traditional.

14. Can I have an SD IRA for my spouse if they are unemployed (contribute
twice as much)?

If you can do it with a Roth or Traditional IRA you can do it in a Self Directed IRA.

15. Is there a phase-out schedule like in the ROTH IRA that pertains to an SD IRA?

Yes, these apply to your Roth IRA whether or not it’s Self Directed.

14. What is your SD IRA invested in?

My Self Directed IRA is 100% invested in Promissory Notes secured by either Real Estate or in some cases by Mobile Homes. Some of the Notes I bought at a discount and others I lent the entire amount of the Note to the Borrower. I’m still in the cash generating mode of investment so I am investing to get cash flow going. Once I build up a nice monthly cash flow I may move to another type of asset. Certainly in the long term goals I have I want to own Real Estate.

Will clearly has a vast knowledge about the subject and I’m happy he was willing to take an interview for it – I suggest you all check out his website regularly at http://willsugg.com/irablog/ to keep up to date on the latest happenings in the SDIRA arena!

Are Low Cost Stock Trades From Discount Brokerages Like Zecco, Sharebuilder, And SOGOInvest Worth It?

hank — Sun, 02 Dec 2007 16:18:54 +0000

First let me assure you that ALL these companies offering this KNOW how to play the game. They’re not going to lose money on a deal. It’s just like when the casinos offer you a “comp” if you play long enough. They know the odds of you winning aren’t high, but if they dangle the proverbial carrot in front of your nose to stay longer, in the back of your mind you’re going to be thinking that. Casinos know that the longer they keep you at the table, the more likely THEY’LL win YOUR money; not the opposite. So if they offer a bonus or “comp” only if you stay for an hour, well, you get the point, and so do they.

It’s the same thing with the “free stock trades”. They’re dangling the carrot in front of you to sign up knowing that the $ isn’t made from the actual trade; they’re banking on you taking the low cost trade and getting your money into their banks; here is a quick 15 question list you should ask yourself before jumping onboard with free trades:

1. Are you sure there aren’t “maintenance fees” to sign up?
2. How about account limitations such as you need to keep it open for “x” amount of years to qualify?
3. Do you need to have a minimum amount to get in on?
4. Can you trade ANY stock or mutual fund with a ticker symbol? (Zecco I know has limitations on this)
5. Are there inactivity fees?
6. What about certain types of accounts? For instance, if you open a ROTH IRA can you use the free trades? All tickers?
7. What if you open a ROTH, a standard account, and an account for your wife, do you get free trades for all of them? I’d bet not.
8. How about your credit score? You think they give these free trades away for free? I’d ask if you’re looking at a hard credit hit for them.
9. How about your dividend paying stocks? Are there fees to re-invest that? Likely; I’d inquire about that also.
10. How about ACAT (Automatic Customer Account Transfer) fees?
11. Are all trades free or just BUY options? Can you also SELL with that same fee? I’d ask.
12. Do you get a deal to go with Wells Fargo or Bank of America if you’ve already got an account open with them?
13. Is there a backend fee when you take your $ out of their brokerage?
14. Is there customer service local? If you have a techinical issue, where do you go?
15. Is there a difference between being able to fund the account, and being able to make trades. Be careful, some have different rules so once you get it, you can only trade certain pieces?

A few other people have had issues with it It also eats at the core of the average Joe Investor should be doing, buying and holding. You shouldn’t be actively trading so much anyway (unless you’re trading penny stocks or daytrading and are GOOD at it). You should be buying and holding, not using the 30 free monthly trades anyway. It’s just going to keep you glued to the computer monitor. It might be a good time to consider the age old phrase “nothing in life is free”, when considering using a discount brokerage. I’m not saying they’re bad, just that I’d investigate before jumping in. I’ve read a handful of blogs (MyMoneyBlog, TheMoneyBlogs, ValueBlog, GrumpStump, and CornerOffice) that have had some bad experiences so far. Another cliche rings a bell “you get what you pay for”.

Anyone else had bad experiences with the discount brokerages? Anyone have any more tips to look for when using these brokerages?

Should I Use My 401k To Pay Off My Mortgage?

hank — Thu, 29 Nov 2007 17:23:55 +0000

I got an email from a reader yesterday that asked:

“Hello Hank, I’ve been with my company for almost 20 years and I have over $1,000,000 in my 401k. I am 45 years old and I have a house mortgage still of $295,000 for another 13 years paying about $2000 per month. Would it make sense to get out of my mortgage and have that extra $2000 per month to put towards better investments? I plan on working for 10-15 more years before retiring. What do you think? Is that a good idea?” - Neville from Mississippi

Welp, where to start. First of all Neville, GOOD JOB on putting away $1,000,000 in your 401k by 45! That’s tough to do and the first million is always the hardest! Which leads to point #1 (again, take it how you like, I’m not a professional, but this is what I’d do in this situation):
1. The first million is the hardest to get! It’s taken you 25 years to get there! Do you have another 25 to wait? Yes, I know you’ll only be taking out $295,000, but that off of $1,000,000 still knocks you down to $705,000, which isn’t bad at all, but to get back to the power of that $1,000,000 it’s going to take 6 years to get back there, and on top of that, the 705k in15 years investing 15k per year (3% inflation) is going to be a tidy $2,286,545 (click the image to enlarge)

Now that’s not too bad at all, and I’m not knocking it – I hope to be somewhere around there soon too, but think if you leave that $1,000,000 in there for the next 15 years and add 15k per year at 3% inflation you’re looking at $3,077,503 (click the image to enlarge)

Doesn’t that look better? By keeping that money there, you’re banking $790,958 MORE than by taking out the $295,000 that you “thought” you were taking out – but that’s only the beginning -

2. The 401k is set up as a RETIREMENT account – you shouldn’t be dipping into that bucket, that’s what you set it up for, RETIREMENT, not “HOUSE PAYING OFF” – You clearly make enough money to be able to put money away, so why cut the compounding interest short by hacking it into quarters? It’s for retirement, I’d leave it that way!

3. Taxes, taxes, taxes – You’re going to get raked over the coals taking out 401k $ now to pay for your house – not only are you going to have to claim the 401k money as income for the year, that’ll toss you into the highest possible IRS tax bracket at 35%!

Schedule Y-1 — Married Filing Jointly or Qualifying Widow(er)

If taxable income is over–	But not over–	The tax is:	$0	$15,650	10% of the amount over $0
$15,650	$63,700	$1,565.00 plus 15% of the amount over 15,650
$63,700	$128,500	$8,772.50 plus 25% of the amount over 63,700
$128,500	$195,850	$24,972.50 plus 28% of the amount over 128,500
$195,850	$349,700	$43,830.50 plus 33% of the amount over 195,850
$349,700	no limit	$94,601.00 plus 35% of the amount over 349,700

That’s a pretty penny to pay out, especially if you’re used to the 25% bracket you’ve been in. An additional tax on an early distribution is 10% of the taxable amount. The taxable amount is also included in your taxable income. This 10% tax is in addition to regular income taxes. So you’re giving 45% away right there to ol’ Uncle Sam.

4. Your mortgage interest is a tax write off. I don’t know how your mortgage is structured, but I DO know that when your mortgage is paid off, you won’t have that write off.

5. Even if you DID have an extra $2000 to put somewhere each month instead of paying your mortgage, your nest egg is now at $705,000 and even if you put $2k more each month or 24k more per year on top of your 15k, for a total of 39k per year, you’re going to be sucking tailpipe to your $1,000,000 you would have had making regular distributions(click the image):
vs.

By putting $39,000 per year into an investment making 10% with 3% inflation, you’re going to bank only $2,920,604, which is $156,899 less than if you would have kept that $1,000,000 in there and made standard 401k donations. If you never wanted to see that 157k extra, I guess it’s no big deal though.

So ultimately I’m saying it’s probably not a great decision. A few things you COULD do though:
1. Ask your plan administrator if you can borrow against your 401k plan; take out a loan to pay off your mortgage, the money would still be working for you, but you’d have to pay it back, but that’d be better than just taking it out -
2. Do you have a ROTH? The tax benefits might be better (I strongly suggest NOT doing this) but you can take out the PRINCIPAL that you have put in to it at no tax consequence, but suggest against it – see response #1 at the top of this page and check out this post on it here.
3. Just contribute $100-$200 more per month to your mortgage – it’s amazing what a few extra dollars per month will do to melt away the balance. Ask Money&Happiness, BuildingEquity, LivingAlmostLarge, or MyMoneyBlog.

If anyone else has any info, feel free to share, but from my perspective, I think you’d be making a bad decision to take 401k money and use it towards your mortgage, but like I said, I’m no professional financial guru.