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Ask Dr. Don
By
Don
Taylor,
Ph.D.,
CFA
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Bankrate.com |
Putting money to work for
retirement
Dear Dr. Don,
If you had an extra $1,000 per month to invest,
which would be the better investment: to deposit the money in a retirement
account or use the money for a mortgage to purchase a home in an excellent
growth area? We have very limited tax deductions. We are both in our
50s and employed.
Marilyn Mortgage
Dear Marilyn,
Investing in a 401(k) plan or traditional IRA account allows you
to invest on a tax-deferred basis, but the withdrawals are taxed
as ordinary income. Since contributions to these accounts are made
on a pretax basis, a $1,000 contribution will reduce your after-tax
income by slightly less than $1,000 -- the actual amount depends
on your tax bracket.
If your employers match all or part of your contributions
to a 401(k) plan it makes it an easy decision to contribute to the
401(k) -- at least up to the limits of the corporate match.
It's not clear to me whether you're considering buying
a second home as an investment or looking to change your primary
residence to an area where you expect housing prices to appreciate
over time. Most homeowners won't owe capital gains taxes on the
sale of their primary residences, but that's not true with the sale
of a second home.
Look at the big picture before buying an investment property. If
you already own a home, how much of your net worth (wealth) is already
invested in real estate? How is the rest of your money invested?
Don't put all your money in real estate assuming that it's a sure
thing. Diversify your investments between real estate, stocks, bonds
and cash.
A second home with a big mortgage is a highly leveraged
real estate investment. You're taking on more risk than you think.
While the mortgage interest may generate a tax deduction for you,
you're still paying an estimated 3 percent to 5 percent on an after-tax
basis for the mortgage.
-- Posted: March 16, 2004
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