Clarification

Sorry for the confusion in my explanation about paying off my house. Here's the deal. During the past four years I have saved some money in my 401K plan at my former job. A 401K plan allow you to save money before it is taxed. This is designed to allow people to accumulate money for retirement by postponing the taxes owed until the money withdrawn, instead of when the money was earned. The idea is that people will will have more money to sock away, if they don't get taxed until they withdraw their investment from the 401K plan. A 401k plan is called a 403B in the schools and nonprofits and the Thrift Savings Plan for government workers. They all work the same. When you leave a job you have three options for the money in your 401K account. (1) you can just leave the money with the old company until you need to withdraw it, (2) you can roll it over (transfer) to an IRA with a financial institution or another 401K at your next job, (3) you can just withdraw it and pay the taxes due. Normally, in option 3, if you withdraw money before you are 59 1/2 years-old there is an additional 10% penalty imposed by the government. However, if you leave a job after 55-years old, you can withdraw the money without the 10% penalty. This is an exception to the 59 1/2 year-old rule. Regardless of age, pretax investment in a 401K plan is taxable when you withdraw it. In my case I plan to withdraw my investment, pay the taxes due and pay off my house. In my situation, the taxes are 25% to the federal and about 5% to the state, meaning that I will collect about 70% of my money after the taxes are paid. This isn't as bad as it seems for a couple of reasons I will explain, should anyone really care to know. Tony asks about the mortgage interest deduction I will lose. A mortgage interest deduction allows you to exclude the amount of mortgage interest paid from your taxable income. For example, if your taxable income was $100,000 and your mortgage interest was $12,000, you could reduce your taxable income by $12,000. That's $12,000 you don't pay taxes on. If you are in the 25% tax, that will save $12,000 x 25%, or $3000 in federal taxes. However, you had to send the bank $12,000 to avoid sending the government $3,000. That is a bad reason to keep a mortgage. If you have a mortgage and you itemize on your federal taxes, you should definitely take advantage of the mortgage interest deduction, but getting a mortgage for the interest deduction is a stupid idea. Of course, in order to deduct the interest costs of a mortgage you have to itemize on your federal taxes and most people don't itemize anyway. Next year I will not have enough deductions to itemize, so the mortgage deduction doesn't apply to me anyway. Finally, Tony mentions using the money for a start-up business instead of paying off the house. That is a possibility of course, but not one I would do. I am risk-averse and paying off the house eliminates risk in my life. Should a business opportunity occur to me, I would have to start small, with minimal investment and work my way up. A business write off comes from spending money. Income minus expenses equals profit. the more you spend to get a write off the less the profits. It is not much different than a mortgage write off. You have to expend money to keep it from being taxed. Most write offs are not worth much because you are spending dollars to save quarters. As I said in my previous post, paying off the house makes good financial sense, but spending the money is a hard emotion decision for me. I hope this makes it more clear. Things in this blog represented to be fact, may or may not actually be true. The writer is frequently wrong, sometimes just full of it, but always judgmental and cranky Tag: Daily Life Personal Finance Humor