Socking money away into IRAs and 401(k)s and paying extra principal on your mortgage is counter-productive
In the quest for financial independence, there are two places most Americans accumulate the most money: our home and our retirement plan.
Following accepted wisdom, we set aside money in qualified retirement accounts such as IRAs and 401(k)s, enjoying tax deductible funding and/or tax deferred accumulation. At the same time, we assume it’s best to achieve the goal of outright home ownership and save money no mortgage interest expense by sending extra principal payments against our mortgages.
Unaware, like naïve, inexperienced drivers, we proceed down the highway of life, pursuing financial security with one foot on the brake pedal and the other foot on the gas pedal! We may eventually make it to our destination, but only after a pretty jerky ride. We wonder why a few others arrive at the station of financial independence sooner, achieving more, with a much smoother ride.
We suddenly realize that during all of those years of earning money, we socked a portion away in investment vehicles that give us a tax deduction on the front end, just to be hammered with taxes on the back end! At the same time, we were killing our partner, Uncle Sam, by eliminating one of the best tax deductions we have as Americans – our home mortgage interest.
During our “golden years” of retirement, we painfully come to the realization that we increased our tax liability by postponing it to a time when we no longer had significant deductions. In frustration, we complain, “But I did everything right! Everyone concerned about their retirement puts money into IRAs and 401(k)s, and I’ve always been taught that you should pay off your mortgage by sending extra principal payments to the mortgage company!” There is a valuable lesson I have learned in life-all the dogs barking up the wrong tree doesn’t make it the right one!
If you had your druthers, would you prefer a tax free seed and a taxable harvest, or a taxable seed and a tax free harvest?