Already maxing 401ks -- payoff mortgage or contribute to Roth IRA

[rpr]

This is a great site. I am glad I discovered this.

We have been living a somewhat mustachian lifestyle these past few years.

Some details:
Ages: 45 both he and she
Assets: close to 500k -- almost all of it is in retirement accounts. Have two 401ks and 2 Roth IRAs.
Current marginal tax bracket 32% (25 federal + 7 state)
Expenses: approx 3500/month
Mortgage: 280k at 3.5% for 30 years. Still have about 28 remaining years and about 270k balance.
Yearly savings: about 60k (2 401ks with employer match and 2 Roth IRAs)

My questions:
1. what to do with extra cash?
We have approximately 7-800 a month available. Should we throw this all into the mortgage?

2. Roth IRA
Also, I am thinking that I should not be saving in a Roth IRA especially since our tax bracket is high? If so two choices:
a)  Traditional IRA
b) Mortgage prepayment

I am thinking that if I took the extra cash + Roth IRA money and attacked the mortgage, then we should be able to prepay it off in 7-9 years. Then our monthly expenses would come down by a huge amount. Down from 3500/month to 2300/month. Maybe we will have enough to be semi-retired. The only downside is that so much of our assets are tied up in accounts which cannot easily be accessed without limits before 59.5.

Ideally, I'd like to be FI by 50. But that will not happen due to the mortgage.

Thanks all. Your inputs would be most appreciated. This is a great forum.

[Joel]

I would max out my Roth IRA contributions and then put extra money into taxable accounts. No reason to pay off a 3.5% mortgage early. Set that money aside and let it work for you.

[aj_yooper]

Even though I like my no mortgage in retirement, I would not prepay your current 3.5% loan.  I would continue funding the Roths and then save the rest in a taxable account.  Do you have HSAs available at your jobs?  They can also help you out. 

The taxable accounts and Roths can be very beneficial in avoiding taxes while you are retired.  The 401k s can be tapped earlier than 59.5 by converting them to Roths, for example.  There is a lot written on that already; just do a search at MMM. 

[rpr]

Joel and aj_yooper:

Thank you. Right now I am saving the extra n a Vanguard taxable account in a stock index fund. Unfortunately, no access to a HSA for us. I have read about accessing tax advantaged accounts before 59.5 via SEPP 72t. Right now it is a bit early and we are both still working. If all goes well, we will take a look once we reach 50.

[Catbert]

In addition to 72t access as look for "Roth pipeline" around this site to see another way to get to money before 59 1/2.  I'm with the others I would not be in a hurry to pay-off that 3.5% loan. 

[rpr]

Mary -- thanks about the Roth conversion pipeline. That is indeed one route.

My one big concern is that we don't have any significant accumulation in our taxable account in order to be able to pay the taxes to do the Roth conversion. Partly, this is due to the fact that we have a huge space available in our tax advantaged accounts. Given that, it probably makes sense to hold off on the mortgage prepayment and build savings in taxable.

[The Happy Philosopher]

Agree with others, keep the 3.5% mortgage forever. I've said it before, once you dump money into a mortgage it's difficult to get back if times get tough. I'd rather have 270k in a taxable account and a 270k mortgage than no mortgage and zero in taxable. That said I would first contribute the max to traditional ira and 401k because of your tax bracket. I would not do a Roth unless the other benefits of a Roth (estate planning, etc) are valuable to you. I would also not convert to Roth IRA in your tax bracket.

A fixed low rate mortgage is a very effective hedge against inflation.  If you have a variable mortgage invest as much as you can in taxable and be prepared to pay it off if interest rates become too painful.

[rpr]

Few reasons why we do the Roth:

1.  We are in the traditional deductible IRA phaseout region.
2. More than 80% of our tax advantaged is in tax deferred. My thinking is that I would like a little bit of tax diversification. It probably comes at the high price of the marginal tax bracket of 32% :(
3.  Also since we have very little by way of taxable, I would like to be able to withdraw the Roth contributions in case of early retirement and also to covert the 401k as well.

We don't have any estate planning issues. Plan to either spend all or donate to charity anything remaining.

The mortgage is also a fixed rate at the 3.5%.

[Gin1984]

How much is in the Roth right now? 

[rpr]

How much is in the Roth right now?

About 80k right now.

[Gin1984]

How much is in the Roth right now?

About 80k right now.

Then personally, I would try to push that up.  Having something to pull from that is untaxed may give you some extra flexibility.  My mom retired at 58 and I really wish she had put money in a Roth.  It would make certain tax movements easier especially when accounting for ACA.  Speaking of which, do you have a plan for health care in retirement?

[rpr]

Unfortunately, already at max contributions right now for IRAs. Still have 7-8 years before FI. Also, have not made any health insurance plans. DW is planning to keep working as long as she can. While I enjoy my work, the politicking at work is starting to become tiresome. I try to keep out but get sucked in. :(. 

[Gin1984]

Unfortunately, already at max contributions right now for IRAs. Still have 7-8 years before FI. Also, have not made any health insurance plans. DW is planning to keep working as long as she can. While I enjoy my work, the politicking at work is starting to become tiresome. I try to keep out but get sucked in. :(. 

Sorry, I meant I would keep contributing, like you have been, so that the total Roth amount gets pushed up.  So that means you have about $400K in 401ks, right?  I think I agree with most people here, open a taxable account and fund that.   Between the Roths and taxable, you should have over 4 years of expenses in 5 years.  May give you some flexibility about retiring, if your wife still works.

[rpr]

Gin1984--

Thank you. We will keep doing that. In about 7-8 years hopefully, we will have a total accumulation greater than 25x expenses. If I am able to last at the same job for the next ten years, I may be able to withdraw from the 401k without penalties at age 55.