401(k) Contribution vs. Mortgage Interest Deduction?

Question

How much can I contribute to my 401(k) before it starts eating into my mortgage interest deduction? After my adjusted gross income is decreased by my 401(k) contributions, 2007 found me able to deduct less from the interest earned on my mortgage.

Answer 1

Any 401k deduction is going to reduce your AGI and, at some point, your mortgage interest deduction just equals the standard deduction anyway.

There's this persistent idea that paying mortgage interest is a good thing because it reduces one's tax bill.  The only reduction really is the amount in excess of the Schedule A threshold.  And, as MVD points out, the net effect is only 30 cents on the dollar reduction.

Mortgage interest is a burden to be born, not an asset.

You are far smarter to invest everything you can in a 401k, and do it wisely.  If your employer matches, deduct enough to take advantage of all of the matching.

If you're paying a mortgage, pay extra principal every time and keep it up.  I've lived in a paid-for house for more than 10 years because we paid extra.  It's a big comfort.

Answer 2

Cannot answer that question without the specific numbers.

Answer 3

401(k) contributions are pre-tax unless it's a Roth 401(k).  They have nothing to do with the mortgage interest deduction.

Answer 4

Don't mix your apples and oranges.

You didn't earn interest on your mortgage, you paid interest on it.

And, don't miss the forest for the trees.

You get to deduct $1 for every $1 you contribute to your 401(k) but  you only get to deduct 30 cents for every $1 you pay in mortgage interest.

Be sure your math is correct.

It doesn't sound correct to me.

Answer 5

Don't know without numbers.

One thing you may want to look at is paying off your mortgage asap.  Yeah you get a tax break on the interest you pay but it isn't dollar for dollar.  If you are in the 35% bracket then you are paying a dollar to the bank so you can pay 35cents less to the IRS.  

Your 401 contributions is before AGI, yeah you deduct dollar for dollar but if you didn't contribute you would owe 35cents per dollar in taxes.

I would suggest lowering the % you contribute (to the highest level your company matches) and pay the mortgage off then use the money you would have paid for it and put it into your 401.