Author Topic: ROTH or mortgage  (Read 4173 times)

rtrnow

  • Bristles
  • ***
  • Posts: 323
ROTH or mortgage
« on: August 02, 2013, 08:01:24 AM »
I've always fully funded my ROTH IRA since starting it in 2004. However, now I'm debating whether to pay off mortgage principle first. I'm reducing my work schedule to 75% starting next month which will not have to slow down my savings through work retirement plans but will reduce my extra available cash.  I also plan to leave my job at the end of 2014 to pursue more meaningful work or at least take some time off (like a year). I think/hope that I will achieve basic FI by that time or be close. Here is my current breakdown.

401  129K with 14-15% going in per month with match
457a 45K (I max this one, $1,458 per month)
ROTH 403b 33K ($135 per month, will go down 25% with reduction in sept)
ROTH IRA 60K (maxed for 2013)
HSA $7,200 ($2.5K cash, 4.7K invested, $240 per month)

mortgage 50K at 5.875% (adjustable IO set to adjust 2/2014)

cash 25K

Because of a recent failed business that dinged my credit and my desire to leave my job, I don't feel comfortable with less than 20K cash. Knowing my savings rate will go down a bit starting next month, would you put all surplus cash towards the mortgage or keep 5.5K around to fuly fund the roth in 2014? Should I stop funding the ROTH 403b and put that towards the mortgage? I can't adjust contributions to the 401 and I want to max the 457 because there is no early withdrawal penalty and plan on that being key to ER. If it makes a deference, the mortgage is on a cash flowing rental.

 




icefr

  • Bristles
  • ***
  • Posts: 325
Re: ROTH or mortgage
« Reply #1 on: August 02, 2013, 09:41:05 AM »
Is there any way to refinance that mortgage? 5.875% is pretty high. I guess it'll reset in 6 months, but you could refinance it if you could find somewhere to take on a $50k mortgage to a much lower rate.

Examples:
PenFed's 5/5 ARM is at 3% right now: https://www.penfed.org/55-Adjustable-Rate-Mortgage
Or you could do a 5 year fixed HELOC for 2.74%: https://www.penfed.org/home-equity-loan/
Well those might not apply to a rental property... But surely there is somewhere that would refinance that? I guess at least it will reset in  6 months.

Is your 401 a 401(a) or a 401(k)?

Unless you can fully pay off the mortgage in a short timeframe, I'd probably keep 5.5k around to fully fund the Roth in 2014 and invest the other money in a taxable account.

rtrnow

  • Bristles
  • ***
  • Posts: 323
Re: ROTH or mortgage
« Reply #2 on: August 02, 2013, 10:48:18 AM »
Is there any way to refinance that mortgage? 5.875% is pretty high. I guess it'll reset in 6 months, but you could refinance it if you could find somewhere to take on a $50k mortgage to a much lower rate.

Examples:
PenFed's 5/5 ARM is at 3% right now: https://www.penfed.org/55-Adjustable-Rate-Mortgage
Or you could do a 5 year fixed HELOC for 2.74%: https://www.penfed.org/home-equity-loan/
Well those might not apply to a rental property... But surely there is somewhere that would refinance that? I guess at least it will reset in  6 months.

Is your 401 a 401(a) or a 401(k)?

Unless you can fully pay off the mortgage in a short timeframe, I'd probably keep 5.5k around to fully fund the Roth in 2014 and invest the other money in a taxable account.

Because of the "ding" on my credit, refi is not possible. My credit score is still >700 but I was just denied a CC.

It's a 401a govt employee.

CorpRaider

  • Bristles
  • ***
  • Posts: 415
    • The Corpraider Blog
Re: ROTH or mortgage
« Reply #3 on: August 02, 2013, 12:11:04 PM »
Hiya, curious why you hit the 457 plan maxed out before the other options.  Just curious about it because my wife (a public employee) has that option, but I figured it would be the last choice since it is offered through an insurance company (and they are usually rapacious with the fees and insulting with the investment options).  Sounds like liquidity is a greater concern for you than the overall investment return/ impact on your net worth.

DanBrewMan

  • 5 O'Clock Shadow
  • *
  • Posts: 45
Re: ROTH or mortgage
« Reply #4 on: August 02, 2013, 02:05:26 PM »
Mathematically, throwing money at your mortgage is a guaranteed gain of 5.875% which isn't bad, but not the best either.  If you think your money can earn more than 5.875% in your investment accounts than that's the easy choice.  But again, that's only considering mathematics. 

Paying off your mortgage has a lot more to do with psychology (at least from what I've heard/read).  I don't have a mortgage myself (still young and rent), but I could really understand the desire to truly OWN a home.  So maybe that factored in with a good gain on your early payments (5.875%) could make you want to pay off the mortgage instead.

I think that's what I'd do; especially considering the high interest rate.

Enough

  • Stubble
  • **
  • Posts: 145
Re: ROTH or mortgage
« Reply #5 on: August 02, 2013, 02:36:34 PM »
I would look at the roth IRA as your emergency fund and invest away with that 25k ;)

rtrnow

  • Bristles
  • ***
  • Posts: 323
Re: ROTH or mortgage
« Reply #6 on: August 03, 2013, 05:46:43 AM »
Hiya, curious why you hit the 457 plan maxed out before the other options.  Just curious about it because my wife (a public employee) has that option, but I figured it would be the last choice since it is offered through an insurance company (and they are usually rapacious with the fees and insulting with the investment options).  Sounds like liquidity is a greater concern for you than the overall investment return/ impact on your net worth.

I have decent offerings for my 457a. I'm currently investing with tiaa-cref which isn't vanguard but not too bad. The 457 has no early withdrawal penalty which is why I max it first. I hope it is a big part of my bridge until age 59.5.

MoneyLifeandMore

  • 5 O'Clock Shadow
  • *
  • Posts: 70
  • Location: Florida
    • Money Life and More
Re: ROTH or mortgage
« Reply #7 on: August 03, 2013, 09:13:37 AM »
If you're not sure which to do, why not split the difference and do half of each? Everyone seems to think people must make all or nothing decisions and that only one way is right, but if you want to do both I say invest half in the Roth and use half to pay down the mortgage.