0

This question already has an answer here:

I am 28, single (with no lady in sight), and I earn a high salary in a tech job. After moving to a new job, I have a 401k account from my previous employer (through Principal, employed for 2yrs) sitting on ~$30k that I have not rolled over into my new 401k account (through Fidelity).

Which strategy makes more sense:

A: Rollover the cash from the previous account into the new one

I have no 'retirement' plans because I enjoy working and have plans to start a company, and essentially will be happy working until I die :)

I am maxing out my contributions to my current plan, and I already have a decent amount in there as well. I don't see this option favorably because I believe I can make better use of this money now, seeing as I am in a very good spot in my career.

B: Pull the money out and apply it towards my mortgage

I understand that pulling money from a 401k will reduce the quantity I receive, but as far as I see it this is not such a bad deal because it is like paying taxes on income. (Principal says I will lose up to 30%)

My mortgage:

  • 1 year old
  • 3.875% fixed rate
  • Started at $405k, owe ~$380k
  • Initial downpayment was 5% when I signed, but at the time I only had about $15-20k saved up and was faced with the decision between moving/paying high rent or trying to get my own place. As a result of being under 20%, I am paying mortgage insurance of about $300/mo.

I've read many articles/questions about paying more towards your principal, and how it will shorten the length of the loan. I am unsure if paying a big chunk at once has the same effect as paying more over time.

BONUS! C: Pull the money out and use it as capital for investment purposes

I am wise with my money for the most part and I have no credit card debt. I will research other investments if this makes financial sense.

A personal Note

I come from a poor family and I am okay living a 'simple' life. If the world were to collapse I would be able to find happiness flipping burgers. My ultimate goal and dream, however, would be to help my parents pay off their house (FHB ~4 years ago) so they could finally have a retirement. I currently send $1000/mo to my mom for this very purpose.

I know it's naïve but I sometimes imagine walking in with a suitcase full of money and a stupid smile and being able to say 'hey guys, you can stop working now' :D

anyway. That's where I'm at. Wisdom?

marked as duplicate by Grade 'Eh' Bacon, Dheer, Michael, Nathan L united-states Oct 17 '17 at 14:34

This question has been asked before and already has an answer. If those answers do not fully address your question, please ask a new question.

  • 1
    "Pull the money out and use it as capital for investment purposes" You likely have a lot of flexibility within your 401k plan, to invest as you see fit. There are arguments that might support prepaying your mortgage early in some cases, but withdrawing from the 401k and effectively paying taxes 30 years earlier than you have too, just to make capital investments, is likely a bad plan. – Grade 'Eh' Bacon Oct 16 '17 at 21:04
  • 1
    The duplicate listed there is one of many which talks about the decision to invest vs prepaying your mortgage. In your case, the 401k investment has a huge leg up, given that it defers your taxes owing for many decades. – Grade 'Eh' Bacon Oct 16 '17 at 21:05
  • 3
    Re: "no retirement plans". What if you are unable to work when you are of advanced age? Not everybody retires voluntarily. Food for thought. – Chris W. Rea Oct 16 '17 at 22:19
  • @ChrisW.Rea that is true. As a programmer, I hope to not lose my ability to work, that would mean I either lost my hands or my mind :) – Felipe Oct 17 '17 at 16:32
1

Which strategy makes more sense:

Check your new Fidelity 401k plan. Make sure it has a good group of funds available at very low fees. If it does, roll over your Principal 401k to your new 401k. Call Principal and have them transfer the funds directly to Fidelity. Do not have them send you a check.

If the new plan doesn't have a good fund lineup, or has high fees, create a rollover IRA and roll your old 401k plan into it. Again, have Principal transfer the funds directly. Consider using Vanguard or other very-low-cost funds in your IRA.

Taking the money out of your old 401k to pay toward your mortgage has several disadvantages. You will pay taxes and a penalty. Your mortgage rate is very good, and since you are probably in a high tax bracket and perhaps itemize deductions, the effective rate is even less. And you lose liquidity that might come in handy down the road.

You can always change your mind later, but for now don't pay down your mortgage using your 401k money.

As a result of being under 20%, I am paying mortgage insurance of about $300/mo.

This is wasted money.

Save aggressively and get your mortgage down to 80% so that you can get rid of that PMI. If you are earning a high salary, you should be able to get there in reasonably short order. If you are maxing out your 401k ($18,000 per year), you might be better off putting it on pause and instead using that money to get rid of the PMI.

I have no 'retirement' plans because I enjoy working and have plans to start a company, and essentially will be happy working until I die

You are young. Your life will change over time.

Everyone young seems to choose one of two extremes:

  • I want to retire as soon as humanly possible, tomorrow would be nice
  • I never want to retire. I want to work until I die

In the end, very few choose either of these paths. For now, just plan on retiring somewhere close to normal retirement age. You can always change your plans later.

  • It’s important to note in this I don’t want to retire strategy if you choose it now you can’t change your mind later. You’ll never get back those investment years where the money grows. Always plan as if you are going to retire – Eric Oct 17 '17 at 4:59
  • 1
    I think diverting money from 401k to paying of mortgage is smart. Good advice! – Felipe Oct 17 '17 at 16:38
4

A: Rollover the cash from the previous account into the new one a low-cost IRA like Vanguard.

This, and only this. Because your mortgage is, less than 4%, while your retirement plan will earn 7% over the long term.

I have no 'retirement' plans because

Because you're 28.

and essentially will be happy working until I die

Unless circumstances change.

but as far as I see it this is not such a bad deal because it is like paying taxes on income. (Principal says I will lose up to 30%)

You're ignoring the 10% early withdrawal penalty.

I am wise with my money for the most part

Then don't piss away $3,000 just for a temporary feel good.

I earn a high salary in a tech job.

As a result of being under 20%, I am paying mortgage insurance of about $300/mo.

So -- after building up an Emergency Fund -- throw as much as possible of your high salary against your mortgage to get rid of the PMI.

  • Also note that the investment growth in the rollover IRA will be tax free until money is withdrawn, which most likely will be at a lower tax rate than the OP's current high salary. So it's there, and it CAN be withdrawn if the OP ever needs it. – jamesqf Oct 17 '17 at 3:59

Not the answer you're looking for? Browse other questions tagged or ask your own question.