Author Topic: Priorities when down to one income (mortgage vs retirement)  (Read 3228 times)

FLBiker

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Priorities when down to one income (mortgage vs retirement)
« on: December 15, 2014, 01:28:21 PM »
My wife and I currently earn ~$105K, but we'll be going down to just my income ($65K) when her maternity leave runs out (~Sept 2015).  Currently, we max out both of our 403Bs ($35K) and our Roth IRAs ($11K).  I'm thinking about switching to traditional IRAs, though, after reading about the pipeline.  We also pay an extra $150 per month towards our mortgage.  We won't be able to do all these things when we're just down to my salary.  Am I right in thinking that the first thing to "cut" would be the extra mortgage payment?  Our interest rate is 4.125%.  Also, if it matters, we don't deduct our interest -- it's too low, we just do the standard deduction.

I'm hoping that, for 2015, we can come close to maxing everything out, but in 2016 we'll definitely have to pick and choose.  What would your priority be (between the 403B and the Roth)?  Would you switch to a traditional IRA going forward?  And, if we switch to traditional, am I right in thinking that the 403B and the IRA are basically the same?

If you have any questions, please feel free to ask.

Thanks!

 

Gin1984

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Re: Priorities when down to one income (mortgage vs retirement)
« Reply #1 on: December 15, 2014, 01:53:45 PM »
Yes, my first cut would be the extra money to your mortgage.
The 403b and traditional IRA are similar, however, some tax credits like EITC would only be available if you used the 403b not traditional IRA.
Switching to the traditional IRA would depend on when you plan to retire.  The pipeline is great for early retirees, not as much for those who stay in the work force through their 50s.  It also depends on how much you already have in your Roths. 

FLBiker

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Re: Priorities when down to one income (mortgage vs retirement)
« Reply #2 on: December 15, 2014, 02:13:52 PM »
Thanks!

Currently, my wife has $39K in her Roth, I have $76K in mine.  We've got another $210K in 403b / other retirement.  I'm 38, she's 34.  As far as retirement dates, I'd say the earliest would be when I was 45.  That is based on my wife going back to work immediately after her year of absence, though.  If she loves being a SAHM and stays home longer, then who knows.  It's also possible that we'll move overseas and do a semi-retirement (we both have an ESL teaching background). 

My (new) sense, though, was that traditional IRA's were ALWAYS better, because of the pipeline.  Is this not the case?

Thanks again!

falcondisruptor

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Re: Priorities when down to one income (mortgage vs retirement)
« Reply #3 on: December 15, 2014, 02:15:38 PM »
We're Canadians, but we're a single income family, so I thought you might be interested in hearing what we do. 

We contribute to his pension plan that's matched.  After that we full up our emergency fund.  All our extra goes on the mortgage.  Our RRSPs and TFSAs are taking a bit of a backseat until our mortgage is paid off. 

Cheddar Stacker

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Re: Priorities when down to one income (mortgage vs retirement)
« Reply #4 on: December 15, 2014, 02:32:21 PM »
My (new) sense, though, was that traditional IRA's were ALWAYS better, because of the pipeline.  Is this not the case?

Be careful with always.

In your case, I believe the T.IRA would be better. If you do nothing else but switch to T.IRA's, you might not have to "cut" anything since you will be saving $1,650 in taxes from that switch alone. In addition to those tax savings, you will have a 3rd exemption to claim (worth about $600), plus a $1,000 child tax credit for a grand total of $3,250 in tax savings.

If you still have to cut something after all the tax savings, I would cut the extra mortgage payment first but many others around here would disagree with that. Debt/Invest Poll

I would put all future savings possible into Traditional retirement accounts. You have a lot of Roth funds built up already. Once you get within 5 years of FIRE I would begin to worry about building up taxable investments and paying down the mortgage. If you can do both now in addition to everything else, by all means do so, but I would focus on the retirement accounts now.

FLBiker

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Re: Priorities when down to one income (mortgage vs retirement)
« Reply #5 on: December 15, 2014, 03:04:29 PM »
We contribute to his pension plan that's matched.  After that we full up our emergency fund.  All our extra goes on the mortgage.  Our RRSPs and TFSAs are taking a bit of a backseat until our mortgage is paid off.

Interesting.  If you don't mind telling me, why?  Here's my current thinking -- since our mortgage is only 4.125%, we're better off investing in our retirement.  Plus, I figure we can always payoff our mortgage, but there are annual caps on retirement contributions.

It would be nice to have no mortgage, though!

I would put all future savings possible into Traditional retirement accounts. You have a lot of Roth funds built up already. Once you get within 5 years of FIRE I would begin to worry about building up taxable investments and paying down the mortgage. If you can do both now in addition to everything else, by all means do so, but I would focus on the retirement accounts now.

Just to make sure I understand -- are you saying that, since we've already got Roth that we could use before retirement age (in terms of withdrawing contributions), we'd be better off doing Traditional IRAs from here on out?

Thanks!

Cheddar Stacker

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Re: Priorities when down to one income (mortgage vs retirement)
« Reply #6 on: December 15, 2014, 03:47:34 PM »
I would put all future savings possible into Traditional retirement accounts. You have a lot of Roth funds built up already. Once you get within 5 years of FIRE I would begin to worry about building up taxable investments and paying down the mortgage. If you can do both now in addition to everything else, by all means do so, but I would focus on the retirement accounts now.

Just to make sure I understand -- are you saying that, since we've already got Roth that we could use before retirement age (in terms of withdrawing contributions), we'd be better off doing Traditional IRAs from here on out?

Thanks!

That's part of it. You've built up a nice Roth stache, some of which you will be able to take out before 59.5 without penalty.

I'm referring more to the power of tax deferral and how it can accelerate your path to FIRE. Just in case you haven't read this: http://www.madfientist.com/retire-even-earlier/

The tax savings will allow you to continue plugging away at the other savings/investing/debt reduction strategies in addition to maxing out retirement contributions. You're in the 15% bracket already which is great, but if you're really thinking about only working another 7-8 years you might as well tax advantage of the tax deferral while you can.

Stache every way you can, but I would prioritize tax deferred accounts over debt reduction in almost all scenarios, particularly given your specific set of facts.

FLBiker

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Re: Priorities when down to one income (mortgage vs retirement)
« Reply #7 on: December 18, 2014, 12:15:58 PM »
Excellent, thanks!

And that 7-8 year timeline might change.  For example, one option might be to switch to a 9-month schedule sooner than that, and work a bit longer.  We'll see.

Thanks again.

Gone Fishing

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Re: Priorities when down to one income (mortgage vs retirement)
« Reply #8 on: December 18, 2014, 12:31:33 PM »
How many kids do you have now?  Planning any more?  For 2015, the TIRA will almost certainly be the best bet with your higher income.  (CPAs check me on this next one) In 2016, depending on the # of kids, if you don't get a raise, and continue to max out your 403(b) you will probably be right at the line of even having to pay any taxes, in which case you could either fund your Roth with tax free money, or fund your TIRA and take the child tax credit as a refund.

Your wife may also want to increase her 403(b) contributions next year to the point where she will fully fund her limit prior to her quitting her job.     
« Last Edit: December 19, 2014, 09:38:08 AM by So Close »