Just an update on a previous post about contributing to retirement or paying down the mortgage. I am contributing to retirement this month even though mortgage rates are generally going up. Why? I am self-employed and my income fluctuates from month to month. For whatever reason, this month’s deductible expenses are unusually low meaning that my taxable income is higher than usual. Out of an abundance of caution, I keep a reserve fund to pay taxes. Given the higher than expected level of taxable income this month, my tax reserve fund is under-funded and the most immediate measure to cover some of this short-fall is to accelerate my retirement contributions to lower my taxes on a dollar for dollar basis (I was going to be slightly under my maximum contribution room this year at my current pace).

I understand the argument that paying down my mortgage would give me an imputed return equal to my mortgage rate. However, the one lesson I have learned from advising businesses is that many financial difficulties begin with owing the tax-man money- the interest and penalties on late tax payments can be crippling and, of course, we know about the power of government when applied against an individual. If the choice is lowering my tax burden and keeping the tax-man away or paying down the mortgage, I am going with the former. Of course, if my circumstances change, I may be more inclined to pay down the mortgage. As always, context is everything.