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Pay off mortgage or keep 401K intact?


ZenaidaMacroura

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I have a friend who is facing this dilemma - he works for wells and wants to know if he should liquidate his WFC shares to contribute to his mortgage:

 

I have an inactive 401k whose only future changes in value will come from reinvested dividends and the price of Wells Fargo stock. If withdrawing the full balance of $20,420 will eliminate approximately $22,000 in interest on a mortgage for a total mortgage balance reduction of $42,420, would you recommend pulling it or holding on to 410 shares of Wells Fargo stock. This WF stock is currently 91% of the 401k balance. The contributions total about $550 in reinvested dividends per year. Thank you and any legitimate advice will be eternally appreciated,

 

Seems like on a 15/yr mortgage wells would just have to return 5% or so a year (dividends plus share appreciation) for him to be better off not touching his 401k?

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Your friend seems to be confusing a personal finance and asset allocation decision with a security selection decision.

 

The wells 401k can be converted into other  investments; even if he can't roll it over to an IRA now. I worked for a big bank for almost 2 years and was able to jam 3 full years contributions into company stock at a discount (stock was cheap too). I left And now that is my IRA and in other stocks. Your friend seems to think it is Wells Fargo stock or nothing else, which seems strange.

 

I think your friend should just focus on whether or not he should pay off his mortgage and whether or not he should deplete his tax advantaged savings vehicle; the return projects of Wells Fargo vs other investments is a debate for another day.

 

What is the rate? What is the rate after tax? What is his income? Does he have/want emergency funds?

 

My gut is to say keep the mortgage (cheap tax deductible debt)  and to keep as much money possible in tax advantaged accounts.

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I have a friend who is facing this dilemma - he works for wells and wants to know if he should liquidate his WFC shares to contribute to his mortgage:

 

I have an inactive 401k whose only future changes in value will come from reinvested dividends and the price of Wells Fargo stock. If withdrawing the full balance of $20,420 will eliminate approximately $22,000 in interest on a mortgage for a total mortgage balance reduction of $42,420, would you recommend pulling it or holding on to 410 shares of Wells Fargo stock. This WF stock is currently 91% of the 401k balance. The contributions total about $550 in reinvested dividends per year. Thank you and any legitimate advice will be eternally appreciated,

 

Seems like on a 15/yr mortgage wells would just have to return 5% or so a year (dividends plus share appreciation) for him to be better off not touching his 401k?

 

You also haven't given a lot of relevant info eg 

1. How old is your friend decisions are different for a 20 year old vs 60year old.

2. Is the 20,420 account value or it what he will get after taxes and penalties?

 

This is not advice its just an example of how I would think of this situation.

Withdrawing 20,420 now will eliminate 22,000 in interest over how many years? say 10 years left on the mortgage(just a guess).

Will the 20,420 in WFC stock with dividends reinvested for those 10 years be more than 42,420?

 

 

 

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Yes mortgage interest is tax deductible but remember in the 401k loan you just pay yourself the interest. At 4.3% that fidelity is offering for the rate you pay yourself back at, to me the 401k loan idea makes sense for many applications.

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I have a friend who is facing this dilemma - he works for wells and wants to know if he should liquidate his WFC shares to contribute to his mortgage:

 

I have an inactive 401k whose only future changes in value will come from reinvested dividends and the price of Wells Fargo stock. If withdrawing the full balance of $20,420 will eliminate approximately $22,000 in interest on a mortgage for a total mortgage balance reduction of $42,420, would you recommend pulling it or holding on to 410 shares of Wells Fargo stock. This WF stock is currently 91% of the 401k balance. The contributions total about $550 in reinvested dividends per year. Thank you and any legitimate advice will be eternally appreciated,

 

Seems like on a 15/yr mortgage wells would just have to return 5% or so a year (dividends plus share appreciation) for him to be better off not touching his 401k?

 

You also haven't given a lot of relevant info eg 

1. How old is your friend decisions are different for a 20 year old vs 60year old.

2. Is the 20,420 account value or it what he will get after taxes and penalties?

 

This is not advice its just an example of how I would think of this situation.

Withdrawing 20,420 now will eliminate 22,000 in interest over how many years? say 10 years left on the mortgage(just a guess).

Will the 20,420 in WFC stock with dividends reinvested for those 10 years be more than 42,420?

You're example is actually quite close - I figure that means wells has to return better than 8% (dividends plus appreciation) to make up the difference in the 10 year left scenario...

 

He's 26, married and although as aforementioned though it is not a "wells or nothing" decision, he does get to acquire the shares at a discount.  I think the impetus of his question though is, as you say, whether to liquidate the tax-advantaged retirement account in order to pay off the mortgage.

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How likely is he to stay in the home for the next 10 years? Does anyone his age stay in the same place that long anymore? I'm 25 and most of my college friends have moved at least once in addition to their initial move from school.

 

In my opinion the savings on interest are far less certain than the drawbacks of raiding the 401k. He will certainly pay the 10% penalty. He will certainly pay tax on the withdrawal. But it is not certain that he will save the full amount of interest.

 

What if he gets promoted tomorrow and needs to move across the country? Or has twins and needs a bigger place? What if he gets laid off? There are many situations where it is plausible he will pay off the mortgage anyways.

 

When was the mortgage originated? At what stage of amortization is it in?  I just don't understand why you'd want to take away the foundation of your tax deferred retirement vehicle at this early stage in the game.  That $20k will likely  become $40k in ten years will become $80k in twenty, will become $160k in 30, all the while never incurring the friction of taxes. He can't say that about his home and he is losing out on that compounding and paying for all that interest savings upfront.

 

Home equity is great and all and is another way of building tax deferred (tax free below a certain threshold) wealth  but corporate equity is better.

 

Does he have savings outside his 401k?

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Also, presumably over the next ten years he may get a bonus or raise that allows him to pay off the mortgage with money that is not from his 401k. Isn't it very conceivable for him to get a bonus of that size?

 

He's been able to save $20k in a 401k by age 25 so I am assuming he must have a decent job, not much college debt and maybe his wife has income too. Just from the limited info we have he seems like the type that can handle a little mortgage debt and should keep growing his liquid wealth.

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If he is under 59 1/2 he will have to pay a 10% penalty in addition to the tax.  :(

He should also be aware that the 401K is a protected asset if he should ever get in trouble financially (illness, bad judgement, lawsuit, etc) and normally is exempt from creditors.

 

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Guest longinvestor

Another way to look at the next 15 years,

- Why build equity with your money when the real estate market is likely to do that for you? RE is coming out of the dumps and likely move up, slowly but surely.

- Interest rates are still so damn low. Lock it in.

- Equities are attractive, and were really damned attractive in 2007-09. Putting / leaving money in equities makes sense.

 

I was rapidly paying down my mortgage with 6 years left in a 10 year mortgage and I stretched it out with a new 15 year mortgage at 2.99%. FWIW, last year, WEB told the 30,000 people at the meeting in Omaha to go out and get a mortgage for as long a period as they will lend it you.

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