You know you need to think about, and plan for, retirement, but one possible source of retirement income that many people overlook is the cash equity you’ve built in your home. When the market drops, many of us worry about our 401(k) balances, while many experts tell us that it’s a great time to buy because prices are low. How do you balance short term losses with the long term investment landscape? Can the cash equity in your home become an effective investment vehicle in your 401(k)? The answer just might be a solid yes!
What is a “cash out refi”?
When you have built equity in your home, you may be able to refinance your mortgage and receive some cash back, based on the amount of equity you have in your home. With mortgage loan and refinance loan interest rates at historic lows, many home owners are finding that they are able to refinance existing mortgages (especially those at higher interest rates than today’s competitive rates) at lower rates, which lowers their monthly mortgage payment - and they are able to take out cash at the same time. When you utilize the cash-out option during a mortgage refinance, you can spend the cash you receive however you wish, which includes investing it – even into your 401(k)!
Many 401(k) accounts grow at interest rates that well exceed the amount of interest charged on a mortgage loan, so it often makes sense to throw more money into your retirement accounts than to pay down your mortgage faster than scheduled. If your mortgage loan is at 4% interest, but you can reasonably expect to make 10% or more interest in your 401(k), it may make better financial sense to put as much cash as you can into your 401(k).
Are there limits on how much you can contribute to a 401(k) each year?
Yes. If you are under age 50, generally you may not contribute more than $18,000 a year to your 401(k) (employee contributions only.) Additionally, generally you can’t just make a lump-sum payment into your 401(k) because the contributions to this account are done through pre-taxed income. However, you can increase your contributions to your 401(k) and use the cash-out you received to cancel out the lowered paycheck you’ll receive, so that in the end, the figures wash. When you’ve contributed the amount of your cash-out, you simply go back in and change your contribution level to the amount you were previously contributing – leaving you with more money in your retirement accounts, and in the same financial position you were before.