Author Topic: Pay house off early vs. invest more - low income advice  (Read 1101 times)

d.rose

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Pay house off early vs. invest more - low income advice
« on: December 28, 2018, 09:48:21 AM »
So hi there. I'm new (just introduced myself in that other thread in general discussion) and I was hoping to get some opinions/advice about what to do with all this extra money we have.

Okay, semi-kidding. We're a low-income family of 4 and we don't have TONS of extra money, but we do live frugally and simply enough to give us some. Once we get our tax refund (we don't get a refund because we're financial idiots, btw, we get a lot more than we pay due to the credits based on our income) we'll be able to polish off our emergency fund (we need about $3,000 more then we'll be at our $10,000/6-month goal). After we finish our emergency fund we want to put every last cent to...something.

Originally, we just wanted to pay off our mortgage early (we bought in 2017 with 20% down, a 30-year fixed @ 4.25%) which we owe around $107k on.

I figured if we get really gung ho, between our checks, tax refunds and medical reimbursements (we double insured, and since we are low-income the state pays for our employer insurance by sending us a check each month for what comes out of *our* paycheck. This is the only "subsidy" we get. We're not eligible for EBT or anything - not that that's bad to use, we just don't get any) we could possibly, hopefully, pay off our mortgage in 10 years (when DH is 46) and then use the 10 years after that to save more on retirement and POSSIBLY (in our dreams!) retire at 56.

Now I'm thinking this is totally backwards, and it makes more sense to spend the next 10 years going crazy gung-ho on retirement, and the following 10 years on the house. You know, being that our money will make more money the longer it sits there. Also, what if DH loses his job (I don't believe he will, but you never can be sure about these things)? I'd rather have money to live on vs. all of it tied up in the house.

We presently put 10% of our income into his employer sponsored 401k at Fidelity. We have 100% of it in FID 500 Index. The employer matches, I believe, about 3.5% of that.

Just a rough guesstimate, once our e-fund is finished, I think we'll have around $477 every month to put towards...whatever...plus once a year, our tax refund of at least $5,000 (at least while our 2 kids, 14 & 9, are minors)....so, about $10,000 a year. Best case scenario. We all know life happens.

So - thoughts?

What should we do? All retirement, all house or maybe both? And if you say retirement, how should we go about that? Use only our employer plan or open a separate account?  FYI 10% of our income is less than $70/wk, so that percentage could be upped a LOT.

FYI, we presently have $53K in retirement (it was about $10k more a couple months ago!) and $42k of that is in a separate account (also at fidelity) from a previous employer. We didn't roll it over because it was a ROTH 401k (VPMAX) and our new account is a regular 401k. We plan to leave it just sitting there, probably forever.

I really appreciate your time and help and I'll gladly answer any questions!

P.S.
Please be kind? It's intimidating putting this info out there, even anonymously.

nereo

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Re: Pay house off early vs. invest more - low income advice
« Reply #1 on: December 28, 2018, 10:27:36 AM »
are you funding your IRAs?  That is where I would start.  Even if you don't get a great tax benefit now, you could save a considerable sum in the future as your net worth increases.

I would not try for accelerated payments on a fixed 4.25% mortgage until you have passed #4 in the investment order.

robartsd

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Re: Pay house off early vs. invest more - low income advice
« Reply #2 on: December 28, 2018, 11:20:02 AM »
In the long run, you're very likely to be much better off investing in tax advantaged accounts than paying off a 4.25% fixed rate loan. You're even likely to be slightly better off investing in taxable accounts than paying off a 4.25% fixed rate loan (though the difference was reduced with last year's tax reform). Strictly following MDM's investment order advice under current interest rates you wouldn't choose to pay off a loan before taxable investments in our current rate environment unless the interest rate was closer to 4.75%.

d.rose

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Re: Pay house off early vs. invest more - low income advice
« Reply #3 on: December 28, 2018, 11:44:02 AM »
Can you help me understand the benefits of opening up an IRA over just increasing our 401K? In super simple English so my slow money brain can grasp it? And would we open one for both of us (I don't work...I say that very lightly, as I bust my butt sans pay at home!) I'm guessing at our income we'd be looking at a Roth? (Unless I'm reading the note entirely wrong...).

Thank you both for your advice!

frugaliknowit

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Re: Pay house off early vs. invest more - low income advice
« Reply #4 on: December 28, 2018, 11:59:20 AM »
Can you help me understand the benefits of opening up an IRA over just increasing our 401K? In super simple English so my slow money brain can grasp it? And would we open one for both of us (I don't work...I say that very lightly, as I bust my butt sans pay at home!) I'm guessing at our income we'd be looking at a Roth? (Unless I'm reading the note entirely wrong...).

Thank you both for your advice!

The benefits of opening an IRA as opposed to increasing your 401K contributions (assuming no match or that you already met your match with other funds):

1.  You have COMPLETE CONTROL.  This is BIG.  No worrying about your company's 401K provider scamming you with sub-optimal funds, potentially riddled with fees, with investment goals which are not aligned with yours.

2.  If your company 401K does not offer a Roth option and you wish to contribute after tax (tax free forever as opposed to tax-deferred until withdrawl), your own self-directed IRA affords you the opportunity to choose whichever option you wish.

I believe you can open a spousal IRA for you as well as one for your (working "outside of the home") spouse, but google it (preferably to the IRS.gov site to make sure...) or talk to a tax professional to be sure.

bacchi

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Re: Pay house off early vs. invest more - low income advice
« Reply #5 on: December 28, 2018, 12:04:36 PM »
If you can't max both, the biggest difference is that IRAs often have more choices and lower fees. With your Fido 401k, there may not be much of a difference.

Yes, I'd open one for both of you, if you plan to do so.

Are you close to getting the saver's credit? It's a tax credit if your AGI is lower than $38k (MFJ). Both 401k and tIRA contributions lower the AGI.

robartsd

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Re: Pay house off early vs. invest more - low income advice
« Reply #6 on: December 28, 2018, 12:16:40 PM »
Can you help me understand the benefits of opening up an IRA over just increasing our 401K? In super simple English so my slow money brain can grasp it? And would we open one for both of us (I don't work...I say that very lightly, as I bust my butt sans pay at home!) I'm guessing at our income we'd be looking at a Roth? (Unless I'm reading the note entirely wrong...).

Thank you both for your advice!
It depends on the 401k plan's options. Many employer sponsored plans are worth investing in for the tax advantages, but the options provided have higher expense ratios than available elsewhere. If you're just as happy with the investment options in the 401k as you would be with options in the IRA you would choose to open then just increase your 401k contribution and wait to open an IRA until you run out of tax deductible space in your 401k ($19,000 in 2019).

Each of you can contribute $6000 to your own IRA in 2019. Generally tax deferred traditional is better unless you're currently earning less than you expect to spend in retirement (after adjusting for inflation). If you ever think you might earn enough to not be able to deduct traditional IRA contributions, then you might want to study backdoor Roth IRA's and how your current IRA contributions will impact your future options.

d.rose

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Re: Pay house off early vs. invest more - low income advice
« Reply #7 on: December 28, 2018, 12:56:44 PM »
If you can't max both, the biggest difference is that IRAs often have more choices and lower fees. With your Fido 401k, there may not be much of a difference.

Yes, I'd open one for both of you, if you plan to do so.

Are you close to getting the saver's credit? It's a tax credit if your AGI is lower than $38k (MFJ). Both 401k and tIRA contributions lower the AGI.

I just checked last years tax return (our income and savings are similar to this year) and we did get the saver's credit, though it was under $300 (still, it's nice to get a credit!)

If there isn't much of a difference between the fees of our current 401k should we still get an IRA? (I mean, we should probably get one in my name, but for my husband?

ETA: our gross expense ration for our current 401k (officially FXAIX) is only .015%.
« Last Edit: December 28, 2018, 01:11:33 PM by d.rose »

d.rose

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Re: Pay house off early vs. invest more - low income advice
« Reply #8 on: December 28, 2018, 12:58:42 PM »
And that you all for explaining this stuff to me, I really appreciate it. I better start doing some IRA research! 

d.rose

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Re: Pay house off early vs. invest more - low income advice
« Reply #9 on: December 28, 2018, 01:15:46 PM »
I wanted to add, in case it makes a difference, that our current 401k is the Fidelity 500 Index fund (FXAIX) (we have 100% of our money going into that) and the fees are very low at .015%. I don't know much about investing, but I was told this is a good fund and a good rate.

Can I do better than this in an IRA? Is it worth it?

TexasRunner

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Re: Pay house off early vs. invest more - low income advice
« Reply #10 on: December 28, 2018, 01:31:27 PM »
Making some assumptions here, but if you were lump summing 10,000 into your mortgage in 6 months and paid an extra $200 a month onto the house, you would come out $872,437.00 BEHIND vs just investing the extra.  4.75% is a crazy low rate (historically speaking).


I would say for you to do the following:

Use any large sums (like that tax refund) to build up your emergency fund to 6 months.  Get a high-yield checking account or rolling CD's for your amount so you get some money from it.
then
change your 401k to hit your employers match
then
Max out IRAs for you and the spouse (11k a year).  I would use vanguard but Fidelity is fine too since you mentioned them.
then
Increase your 401k to whatever maximum you can handle.  You can go up to 19k a year.  I would put everything in the 401k into the lowest rate ETF you can find.  From what I can recall, it was Fidelity's equivalent of the S&P500.  Consider yourself lucky to have an employer that has nice 401k options, many of us are paying 1.0% or more for basic etfs...  :/

Between those factors you should be the best off mathematically.

« Last Edit: January 03, 2019, 09:14:18 AM by TexasRunner »

TomTX

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Re: Pay house off early vs. invest more - low income advice
« Reply #11 on: December 28, 2018, 02:30:33 PM »
I just checked last years tax return (our income and savings are similar to this year) and we did get the saver's credit, though it was under $300 (still, it's nice to get a credit!)

If you are getting the Saver's Credit, you need to split the retirement contributions so that each of you contribute at least $2k. The credit is on the first $2k contributed for each of you. If one of you contributes $4k and the other $0, you get half as much credit.

Looking the other way, splitting it would have probably gotten you $600 instead of $300 in credit.

It's not too late to open an IRA for you for 2018 - you can contribute up until Tax Day, just designate it as a 2018 contribution.

d.rose

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Re: Pay house off early vs. invest more - low income advice
« Reply #12 on: December 28, 2018, 03:18:06 PM »
I just checked last years tax return (our income and savings are similar to this year) and we did get the saver's credit, though it was under $300 (still, it's nice to get a credit!)

If you are getting the Saver's Credit, you need to split the retirement contributions so that each of you contribute at least $2k. The credit is on the first $2k contributed for each of you. If one of you contributes $4k and the other $0, you get half as much credit.

Looking the other way, splitting it would have probably gotten you $600 instead of $300 in credit.

It's not too late to open an IRA for you for 2018 - you can contribute up until Tax Day, just designate it as a 2018 contribution.

Whoops...my response was in the quote!

Thank you for the tip on the saver's credit! That is definitely an incentive for me to open a IRA in my name :-)

« Last Edit: December 28, 2018, 04:13:50 PM by d.rose »

robartsd

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Re: Pay house off early vs. invest more - low income advice
« Reply #13 on: December 31, 2018, 08:45:58 AM »
I wanted to add, in case it makes a difference, that our current 401k is the Fidelity 500 Index fund (FXAIX) (we have 100% of our money going into that) and the fees are very low at .015%. I don't know much about investing, but I was told this is a good fund and a good rate.

Can I do better than this in an IRA? Is it worth it?
That's a really good expense ratio. I'd probably stick with the 401k if you're happy with the allocation (US large cap blend). The only lower expense ratios that I'm aware of are Fidelity's zero fee funds that you could use in a Fidelity IRA. (I haven't moved my IRAs from Vanguard to Fidelity chasing lowest fees.)