This post is part 3 of 7 in a series entitled “When not to pay down your mortgage,” which outlines many scenarios where paying extra on your mortgage isn’t necessarily the best financial strategy.


As detailed in the previous post of this series, excess savings in your budget should not automatically be used to pay down principal on a mortgage loan.  Aside from paying off higher interest loans first, another better option is often investment in retirement accounts.

The employer match: Always the best option

Many employers offer some sort of matched funds for investment in a retirement account, whether that takes the form of a 401(k), a 403(b), or some other type of account.

If you are lucky enough to be in that situation, you should generally take advantage of that as much as your financial situation allows.  Sometimes employers will even have a 1:1 match up to a certain amount: be sure to take that.  Can you think of a single other investment where you are guaranteed an instant 100% return on your money?

Even if your employer only matches a portion of your retirement investment, you should contribute the maximum that you can to take advantage of that match.  Retirement may seem a long time away, but a 50% return or whatever on your money instantly should not be dismissed.  The value of a real estate investment or a stock portfolio may go up or down — as may your retirement account — but starting out with 50% or 100% more in it is a huge financial gain.  And generally it requires little more than a bit of paperwork.

Other retirement accounts

Once you get beyond the matched funds, further investment in IRAs (Roth or traditional) or in 401(k) or 403(b) accounts is a riskier proposition.  Here you have to balance the guaranteed return on your mortgage versus variable returns on retirement investments.  This is a difficult question and will be considered in more detail in a future post.

For now, I would say that the situation depends on your overall financial condition.  If you have enough money in an emergency fund and no high interest debt (like credit cards), you can start to consider these options.  If you’re younger, all things being equal, you might lean toward retirement investments, since you have time to take some bigger risks rather than depending on the guaranteed return of the mortgage.  If you’re older, it may depend on how much retirement money you already have put away.

The other factor to consider is that annual investment in some of these types of accounts is capped.  For example, the Roth IRA provides tax-free growth, but annual contributions are capped.  This creates difficulties for investment strategy.

Suppose you have a 4% fixed-rate mortgage.  Assuming you have a large mortgage or other deductions, you might have an effective after-tax interest rate of slightly less.  But right now, there are few options (such as CDs) that could give you a guaranteed return on a retirement investment that is 3-4%.  So, it seems that paying the mortgage is clearly the winner, if you’re risk-averse.

But wait a minute.  Let’s say that the interest rate situation changes in a couple years, and now there are CDs or bonds or other guaranteed investments with a higher rate of return.  If you had socked away a few thousand each year in your Roth IRA, you could now take advantage of those tax-free returns with a large balance in your IRA, but if you don’t have that money in the Roth IRA to begin with, you are limited to the annual caps in getting your money into the account in the first place.

There’s no clear answer here.  The best choice will depend on the details of your finances, the economic conditions, various tax advantages, your risk tolerance, and how lucky you might be about predicting the future.  Nevertheless, saving for retirement is not necessarily a lesser goal than paying your mortgage, so keep options open.

In general, taking advantage of tax-free retirement growth (e.g., Roth IRA) and tax-deferred retirement plans (many other retirement accounts) is a better option for long-term financial gain.  Paying down the mortgage should only be a priority in particular situations where that equity or guaranteed return are necessary for your specific portfolio.


If your employer offers a match for retirement contributions, definitely take advantage of that over just about any other possible investment opportunity.

For retirement savings beyond the employer match, there are a lot of variables, but a balanced investment strategy should generally consider retirement as a priority at least on par with mortgage investment.  That means that a tax-advantaged retirement plan with a possible high rate of return will usually be better than worrying about tax-deductible mortgage interest.  However, this is a general statement that may not apply to every situation.

Go to part 4: Emergency funds and insurance

Disclaimer: This is not intended to be professional financial advice, nor does it apply to all people in all situations.  It’s a good idea to consult a professional financial advisor before making any major changes in your finance management, because individual circumstances will often affect the choice of strategy.