Using 401k contributions to pay down debt on an investment property


#1

I have a small apartment complex that I am aggressively trying to pay down my loan on, but I am also contributing to my 401k at work. I’d prefer to put it all into paying down the debt because I could live entirely from the apartment income once the debt is gone, but the 401k contributions are with pretaxed dollars so it seems to make financial sense to do both.

What are some practical solutions for this?


#2

Do the math…

If you contribute $1 to your 401k and your employer matches it by 20 cents, you earn 20%, even if you keep your account in a money market. If they match 1%, then it’s a different story.

If you pay down debt on an apartment building that’s financed at 5%, your return is basically 5%.

You need a couple of spreadsheets to compare side by side. And remember, paying down principal on a loan is NOT tax deductible.


#3

William, thanks, but I should add some detail as its not a straight math problem.

Regarding company contributions, I currently contribute about 15k annually to a 401k that goes unmatched, so it is this amount that is in question (I have 3k that is matched that I’d leave in place while working).

But more importantly, its not purely about the math because I’m almost three decades away from being able to access my 401k, but if I pay off my income property I can effectively retire. By redirecting these these funds to debt reduction I will have it paid off in under 6 years. I’m also much more comfortable having my nest egg in an apartment building I own, manage, and understand than in a stock portfolio that I don’t.

The whole reason I asked the question is because though its clear that my long term return is much better by maintaining the debt and contributing to the 401k, getting the best return is not my primary goal.

So I am wondering, since my income property is part of my retirement, is there is a way to use my income to reduce this debt more aggressively while still maintaining the tax sheltering that 401k contributions receive.


#4

You can borrow from your 401k and pay off the debt?


#5

I hadn’t considered that. How does work? If I borrow from my 401k, who am I paying interest to? When do I pay the tax on the income used to pay the debt?


#6

So, you can borrow up to 50k or 50% of your vested amount. You pay it back with interest over 5 years, which is only to your benefit, since the interest increases your 401k. Check with your human resources supervisor.