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February 02, 2007

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I would insert:

3.5 Establish emergency savings

And I would insert:
3.7 Fully fund your Roth IRA

3.6
-Contribute to your 401k to get the full pre-tax deduction allowed. Even without an employer match, the tax benefits are large enough to place this above paying off the mortgage.
-Contribute the maximum to an IRA (deductible, Roth or non-deductible, in that order, as permissible according your situation). The amount is not that large, and the long-term tax advantages are significant.

In re to Nigel:
I would not put 401k contributions beyond the employer match in front of a Roth IRA. The more tax _deferred_ savings you have, the more likely you will be pushed into higher tax brackets in retirement along with pushing more and more Social Security benefits into being taxed. Even if you believe SS will go away, being in a position of having tax diversification may have its benefits. Also, I think that tax rates will generally go up in the future -- today's 15% bracket may turn into 20%.

And as to whether additional 401k contributions are more beneficial than pre-paying the mortgage, I'd have to analyze that given years-to-retirement and whether I'd still be paying a mortgage in retirement, along with rates of return, etc.

I would recommend paying it off at retirement. Paying interest you can't deduct because your income is too low doesn't make sense and paying it off can lower your income and expenses, lowering your tax burden without lowering your standard of living.

Good thoughts! Thanks for making this better Duane, Nigel and EMF!

One of the things that happens when you pay off a debt is that your monthly expenses go down. That has two immediate effects. The money you have available for other things increases. You can invest it or spend it. The second is that the time that your emergency savings will last becomes proportionately longer.

Except with retirement accounts you can never go back and catch up.

my husband passed away dec 2007 i've just gotten 500k from life insurance the insurance agent wants to invest all of it and give me an allowance a month. I'm 40 two children who have their own 85k each when they hit maturity. I owe 230k on my house I have a job and ss for the kids untill they are 18 ( 9 & 11 now) I want to pay off my mortgage invest 150k for retirement and have the balance for emergency also smaller investments. I feel like he's pushing me he also wants control of the childrens UTMA accounts once I have guardianship. What sounds right. I'm picking up the check today. HELP

Barbara --

I posted your question. Click this link for reader responses/suggestions:

http://www.freemoneyfinance.com/2008/05/help-a-reader-5.html

Invest = BAD right now in my opinion.

The most overlooked point most people don't consider is the front end loading of a mortgage or any long term loan. It is not the interest rate that is the key but the term of the loan. The longer the term the higher the front end loading. I agree that you should take the match on any retirement plan first. Figure the interest paid divided by the principle paid and you find you are paying a high rate of %.What is overlooked here is the savings a person has by paying off the principal of the mortgage to save 2 to 1 on the interest. That goes to the home owners balance sheet not the banks.

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