Author Topic: Invest Lump-sum or Fund Mega Back Door Roth  (Read 1096 times)

Ms.Fortuna

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Invest Lump-sum or Fund Mega Back Door Roth
« on: November 16, 2017, 07:05:37 PM »
Hello,
I am in the process of re financing my mortgage with a cash-out..the reason is that my home equity made 47% of my total net worth (168k equity and $187k invested in 100% stock, total U..S.market index funds)...and I wanted to have more invested in the market instead while mortgage rates are still low.
No intention to stay in the house and sell it after FI, in 6-10 years..
With the re finance, will have 84k available of which 18k  thinking to set aside for EF..
The question is what to do with the rest 66k?
First wanted to invest it all in VTI, now having second thoughts (and am fearful) with the market reaching new " all time high" every day..

The alternative would be to front load contributions to 401(k) to max it to 55k.. I have been using Mega door Roth and was short about 10-12 k a year to max it..So that would mean spreading out that cash over next 6 years (keeping it in a 1.5% savings acct in meantime) and if there is a big market correction in meanwhile, invest whatever is left at once at that point of time?
Which makes more sense?
The new mortgage rate is 3.75%

kasperle

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Re: Invest Lump-sum or Fund Mega Back Door Roth
« Reply #1 on: November 16, 2017, 09:32:42 PM »
I canít comment on whether refinancing your mortgage is a good idea or not, so keep in mind that others may have opinions there.

When it comes to Backdoor Roth vs VTI, here are my thoughts:

1. The market will, on average, continue to rise 7% each year. So donít worry that the market is going up right now. It will always be going up. I buy a ton of VTSAX (a fund similar to VTI) every 2 weeks. Worrying that the value is too high is the same as trying to time the market.

2. Iíve been trying to figure out the value of the Mega Backdoor Roth, and Iím just not convinced. The gains grow tax-free, but you canít withdraw them until youíre retired. And the gains on a regular taxable account can be withdrawn tax-free if you withdraw less than about 50k if youíre single, and closer to 90k if youíre married. And you can withdraw those gains at any time. I donít plan to spend $50k/yr in ER, so the Backdoor Roth just seems to unnecessarily lock away my money. But maybe Iím missing something.

Assuming refinancing is a good idea (again, Iím not sure on that one), Iíd consider maxing out the Backdoor Roth for the current year, and throwing the rest into VTI.

Ms.Fortuna

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Re: Invest Lump-sum or Fund Mega Back Door Roth
« Reply #2 on: November 17, 2017, 01:45:48 AM »
Thanks, kasperle,
Just curious about your thoughts around why re fi may be not a good idea...if to assume that market on average returns 7%, wouldn't it be good to pool some of the money tied in a low interest mortgage and put it to work?

Proud Foot

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Re: Invest Lump-sum or Fund Mega Back Door Roth
« Reply #3 on: November 17, 2017, 09:08:11 AM »
.....
The question is what to do with the rest 66k?
First wanted to invest it all in VTI, now having second thoughts (and am fearful) with the market reaching new " all time high" every day..

The alternative would be to front load contributions to 401(k) to max it to 55k.. I have been using Mega door Roth and was short about 10-12 k a year to max it..So that would mean spreading out that cash over next 6 years (keeping it in a 1.5% savings acct in meantime) and if there is a big market correction in meanwhile, invest whatever is left at once at that point of time?

I would probably do a blend of both. Max out enough to essentially do a $0 net paycheck the rest of the year and the first 6 months or so of next year while still getting the maximum match from your company.  Figure your cash needs for this time period and then dump the rest into a taxable investment account. 6 years of holding cash is a long time to be losing to inflation.

kasperle

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Re: Invest Lump-sum or Fund Mega Back Door Roth
« Reply #4 on: November 17, 2017, 09:27:10 AM »
Thanks, kasperle,
Just curious about your thoughts around why re fi may be not a good idea...if to assume that market on average returns 7%, wouldn't it be good to pool some of the money tied in a low interest mortgage and put it to work?

I don't have any opinions on whether refinancing is good or bad. I don't know much about refinancing a mortgage, since I've never owned a house, and I haven't read too much on how refinancing works. Because my advice hinged on you refinancing, it could have come across as implicit support for that decision. I only wanted to clarify that I wanted to give advice on what to do with your money independent from making any claims around refinancing. Does that make sense?

Ms.Fortuna

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Re: Invest Lump-sum or Fund Mega Back Door Roth
« Reply #5 on: November 17, 2017, 03:37:58 PM »
Kasperle, it does make sense, thanks!

Proud Foot, I like the idea of a blend.