Plow My Extra Cash Into my IRA or Mortgage?

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Published October 25, 2012

| Bankrate.com

Dear Dr. Don,
I am 27 years old with $20,000 in cash savings and $30,000 in retirement funds (401(k) and Roth individual retirement account), and I have $121,000 remaining on a new 30-year fixed-rate mortgage at 3.625%. I bought the home this year, after putting down 20%.

If I have an extra $1,000 or $2,000 at the end of this year, would it be better to pay down the mortgage principal or invest the money in my Roth IRA to max it out? I invest in an 85/15 mutual fund.

Thanks,
-- Jason Juncture

Dear Jason,
Fully fund the Roth IRA. If you can reasonably expect to earn more after-tax on your investments than you pay in after-tax interest on your home loan, it's better to invest the money than to pay down the mortgage.

You have a great rate on your 30-year fixed-rate mortgage. Why rush to pay it off when you can put the extra cash in the Roth IRA, keep that money invested and be able to spend out of the account tax-free in retirement?

As you know, an 85/15 mutual fund has 85% of its portfolio invested in stocks and the balance invested in bonds and/or money market funds. That's a pretty aggressive asset allocation. At your age and with your retirement investment horizon, you have the ability to be aggressive in your retirement investments. Know what you're being charged in annual expenses for the account and the mutual fund. You can always move the Roth IRA if you discover you're paying a lot in fees.

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