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PERSPECTIVES

Matters of principal.

April 11, 2011
Jonathan Clements, Director of Financial Education, Citi Personal Wealth Management

Many homeowners make extra-principal payments with a view to paying off their mortgage more quickly -- and it's easy to understand why. They effectively earn a pre-tax return equal to their mortgage rate, which might be 5% or 6%. They reduce the amount of debt they're carrying. And it's as simple as adding maybe $50 or $100 to the monthly mortgage check.

Paying down debt can be particularly compelling as you approach retirement. If you pay off the mortgage entirely, you eliminate a major expense. Even if the mortgage isn't paid off completely by retirement, you'll have more home equity, which you could tap into by trading down or taking out a reverse mortgage.

Still, before making extra-principal payments, you may want to take advantage of the various retirement accounts available to you. While paying down your home loan will reduce your tax-deductible mortgage interest, funding retirement accounts will often give you tax benefits.

For instance, traditional 401(k) plans and Individual Retirement Accounts can give an initial tax deduction and tax-deferred growth, plus the 401(k) may also offer a matching employer contribution. Meanwhile, there's no initial tax deduction with Roth 401(k) plans and IRAs, but all withdrawals in retirement can be tax-free. On top of these advantages, you will have the investment return you earn, which could potentially be higher than your mortgage's after-tax cost.

If you have college-bound children, there may be an added incentive to putting the funding of retirement accounts ahead of extra-mortgage payments: While some private colleges consider home equity when determining financial-aid eligibility, retirement accounts are typically ignored.

What if you've maxed out on your various retirement accounts? At that juncture, paying down your home loan could be a smart strategy if you're a conservative investor. But you may be able to earn higher returns if you're willing to take more risk and invest your extra savings in the financial markets.

INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE

The information provided here is for informational purposes only. It is not an offer to buy or sell any of the securities, insurance products, investments, or other products named.

Terms and conditions of accounts, programs, products and services are subject to change. Citigroup Inc. and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Any such taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.

A Citigroup Global Markets Inc relationship does not have to be established or maintained to obtain the products or pricing offered as part of the Citigroup Global Markets Inc. Home Loan Program at Citibank. Home equity programs not available in AK. A default (stopping monthly payments) on a mortgage could result in the loss of pledged real estate, securities or both. Citigroup Global Markets Inc. policy does not permit clients to use the proceeds of a home loan to invest in the securities or related markets. Your Financial Advisor may receive compensation in connection with this lending program. Affiliates of Citigroup Global Markets Inc may earn fees in connection with the funding, origination, and sale of a loan.

There is no guarantee that these strategies will succeed. This information is intended to illustrate products and services available through Citigroup Global Markets Inc. The strategies do not necessarily represent the experience of other clients, nor do they indicate future performance. Individual clients should review with their Financial Advisors the terms and conditions and risks involved with specific products or services.

© 2011 Citigroup Inc. Citi Personal Wealth Management is a business of Citigroup Inc., which offers investment products through Citigroup Global Markets Inc. ("CGMI"), member SIPC. Citibank, N.A., CGMI and CLA are affiliated companies under the common control of Citigroup Inc. Citi and Citi with Arc Design are registered service marks of Citigroup Inc. or its affiliates, and are used and registered throughout the world.

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