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Al in San Jose | Should I invest in a college savings plan or pay back my mortgage early ? |
My wife and I have 2 young children (2 and 4), we live in California and our income is around 200k/year. We owe $700k on our mortgage (rate: 6.25%, 30 year fixed) and we try to contribute the maximum to our 401ks.
what if we can save an extra $10k or $20k next year ?
should we invest them in a college savings plan (529) or should we try to reimburse our mortgage early?
I'm mostly interested in the tax benefits of these 2 approaches.
Thanks,
Al |
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mister ed
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pay off the mortagage!!! |
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MVD34
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A $700k mortgage...Yikes!
Tax benefits are negligible at 20k a year and 529 plans are not the most cost effective option for college savings in your income bracket.
Pay down the mortgage or max the 401(k). The biggest tax-bang for the buck is going to be a maxed 401(k) all things equal.
Deal with the kids education later. It should not be a priority at this stage in your life (given your income).
($20,000 * 6.25 = $1250. $1250 * 40% = $500/year est tax increase versus $750 net interest expense savings...assuming you aren't already AMT'd, which you likely are)
*** EDIT for Matthew W ***
This situations "feels" like someone who has not yet fully nailed retirement planning. I agree Matthew -- they should be maxing their 401(k)s and contributing to additional savings inside and outside of retirement plans. A comfortable retirement at 62 for a couple earning $200k before retirement requires A LOT more savings than I think this couple is doing.
If you have serious investments for retirement in protected (401(k), IRA, etc) and cash accounts when your kids are 12 or 13, you can start socking big bucks away for a couple of years to pay for college...
On the other hand, if you loose your job and your wife is now pulling down $55,000/year when your kids are 18, does it really make any sense what so ever to have $100k set aside for the kids education? The answer is no. College is not important next to retirement. |
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rustyoldma
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Really, I strongly advise you to speak to several tax consultants about this. I am not near your financial bracket, but it was well worth me paying down my house payment. I knocked off 20 years from my 30 year mortgage, tripled my investment and in the long run saved more on interest as I paid for the house it self. Sit down and talk to several experts, even if you have to pay them. I say it is better to get out of debt than to save for long term. Yes, save for emergencies, so you don't use credit cards. If poop hits the fan, I rather be debt free than have lots of worthless money in the bank.
Check out DAVE RAMSEY on AM radio or look him up on line for great financial advise.
OK, I see good advise from the first answer. I gave a thumb's up to it. But, that's not to replace seeing a few professionals in person. Best Wishes. |
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Layngea2
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Hey I can get you mortgage refinance rate quotes from the best lenders to lower your payments by thousands of dollars. Send me an email: davidshaffer@ocopa.com
I'm sure I can help you!! |
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desnlori
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Since you have no ARMs, I would say to definitely invest in a 529 plan for each child.
Mortgages are different than credit cards. Since you can use the interest paid as a deduction, it is considered good debt.
Good luck |
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$so fresh so clean$
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I would definitely pay down that mortgage. It would be the same with any debt. If funds are available, always pay the debt down first. A home appreciates in value and is an important asset. A college education can be funded in many ways, such as grants, loans, and scholarships. And its too far down the road to think about with having a high mortgage and all. You can leave that to deal with later as a previous answer said. You can write the mortgage off on your taxes to a certain amount. There aren't really any tax advantages to a 529 plan right now, only at withdrawal to pay for college expenses which is years away. If you are lucky enough to save an extra $10,000 or $20,000 a year, then look at IRAs such as traditional (your income is too much for Roth IRA contributions.) They are tax deferred and your savings will compound faster wthout annual taxes, although you will pay current income taxes on withdrawals and they must begin by at least the April after making 70.5. If anything left over, then I would look into a college savings plan. But I would also pay down more debt with the leftovers as well. Good luck. |
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Uncle Leo
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Since you're mostly interested in tax benefits, let's start with those. There are no tax benefits to paying your mortgage off early. In fact, you lose the deduction for mortgage interest sooner. However, paying off your mortgage early is a good idea because you get a major debt out of your life.
The tax benefits of a 529 plan would be that the assets in the plan grow without taxation. So, if you have 529 accounts, the interest, dividends and other income earned by those accounts won't be taxed to you in the year they are earned. Further, if the money in the account is used to pay "qualified expenses," (which basically means tuition and fees, books, and living expenses of the student), it is never taxed. If the money in the income is withdrawn for any other purpose, you have to pay federal and state income taxes and a 10% penalty.
Logically, it's best to take care of your retirement first by maxing out your 401(k)s and paying off the mortgage asap. But the relationship between parent and child isn't based on logic. If you're uneasy about not having money specifically designated for your kids' college expenses, open 529 accounts. Find inexpensive ones (Utah seems to offer about the lowest cost plan; and you don't have to be a Utah resident to have a Utah 529 account). An inexpensive 529 plan will be as good or better than taxable investments for the purpose of college savings. If you want to open 529 accounts, start now. That way, you'll get 14 or 16 years of tax-free growth from the account assets. If you wait 8 or 10 years to open 529 accounts, you lose a number of years of tax free growth. I'm not trying to give you the hard sell on 529 accounts. Lay the foundation for your retirement first. But 529 accounts give you the biggest tax savings if you start when the kids are young.
By the way, you don't have to choose between 529 accounts and paying off the mortgage. If you can save an extra 10K or 20K a year, you can do both. Just split the extra savings between the two purposes. |
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Obama Sucks Already
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I agree a little of what each has to say above. I do hope that you have more investments other than the 401k. Always max out on that. As far as college, you should certainly start to save. Unfortunately, the 529 plans aren't the best way to maximize your profits. I'd look into other options. Personally, I'm investing my children's education myself so that fees are kept to a minimum. That 700k mortgage is outrageous. I'm from California but couldn't see living that kind of life trying hard to make ends meet. You're working for your mortgage not your family. Good luck in your decisions. |
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love to teach
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I have a paid 4yr tuition only prepaid plan for my son. Should I pull that money to help pay some current debt? Please help I can't make my current monthly bills. |
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