Author Topic: overpay mortgage this way?  (Read 10934 times)

stashja

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overpay mortgage this way?
« on: October 21, 2014, 09:55:44 PM »
My details:

I'm single, no kids, cyclist, no car, urban area (walkability score = 92), scientist (love my career!), modest salary, health insurance, low cost of living, rarely buy new clothes, no tv, access to amazingly good research university library, all kinds of free/cheap cultural events, and work-subsidized exciting travel.
I bought a modest house last year
I have a 15 year fixed mortgage at 3.375% (thank you, credit union!). Paying it biweekly.
I have $30,000 in savings and investments
debt = $0 excepting the mortgage
If I overpay the mortgage by $500/month, I am mortgage-free in 6 years - which is when I expect to be promoted, too
This would leave me $1800/month for the next 6 years
Can I live on this? I think so. I did in grad school. I haven't got more consumerist since.
It's tempting to have lots of FI in 6 years but be really frugal for now.

Everyone I know says to pay the mortgage off slowly so as to have a more than grad-school level of liquidity, but they're the antimustachians who also told me to take out student loans during school "because I could." (I didn't.)

SwordGuy

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Re: overpay mortgage this way?
« Reply #1 on: October 21, 2014, 10:08:19 PM »
If you have no reason to move and every reasonable reason to believe your job is secure (and you could get another one without moving if you got a psycho boss), having a paid off mortgage gives you a lot of freedom and peace of mind.

Of course, having all that money invested and making a profit is good too.

Dollar wise, you will probably come out ahead if you invest the money in an index fund or rental property.   But it's a win-win either way so don't sweat it.

Now, if you're planning on moving, your job is insecure or there's no other likely sources of employment in your area/field if you get a psycho boss, the less money you have tied up in that house the better.

marty998

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Re: overpay mortgage this way?
« Reply #2 on: October 22, 2014, 01:55:48 AM »

Dollar wise, you will probably come out ahead if you invest the money in an index fund or rental property.   But it's a win-win either way so don't sweat it.

Bolded the operative word. On the other hand paying the mortgage is a certainty of return.

All depends on your SANF (sleep at night factor).

Me? I paid the mortgage down - but my interest rates are higher.

Bbqmustache

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Re: overpay mortgage this way?
« Reply #3 on: October 22, 2014, 02:17:48 AM »
And if you live in the United States, STOP PAYING YOUR MORTGAGE BI-WEEKLY!  A mortgage cannot accept less that what is due for a mortgage payment, so your first bi-weekly payment sits in the company's escrow account for two weeks waiting for the other half to catch up.  Bi-weekly does help you a bit by once a year, making an extra payment because there are 26 two week periods.   Oh, and if you are being charged any fees on top of this, super yuck!

Instead, take your monthly payment and divide by 12.  Add at least this amount to your regular payment as a principal payment.  This is the way to pay off that last debt the fastest.  Every month, money goes straight to work, reducing your loan balance, not sitting in some one else's account for a couple weeks.

frugalnacho

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Re: overpay mortgage this way?
« Reply #4 on: October 22, 2014, 08:37:09 AM »
And if you live in the United States, STOP PAYING YOUR MORTGAGE BI-WEEKLY!  A mortgage cannot accept less that what is due for a mortgage payment, so your first bi-weekly payment sits in the company's escrow account for two weeks waiting for the other half to catch up.  Bi-weekly does help you a bit by once a year, making an extra payment because there are 26 two week periods.   Oh, and if you are being charged any fees on top of this, super yuck!

Instead, take your monthly payment and divide by 12.  Add at least this amount to your regular payment as a principal payment.  This is the way to pay off that last debt the fastest.  Every month, money goes straight to work, reducing your loan balance, not sitting in some one else's account for a couple weeks.

That's not true.  Some mortgage companies will schedule biweekly payments if that's your preference, and the payments get applied on a biweekly schedule.  I assume that's what the op has.  If he has a monthly then he should just pay the exact payment on the due date each month, and make extra principal payments whenever he has the money (those will be applied to principal balance as soon as they are received).

Bbqmustache

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Re: overpay mortgage this way?
« Reply #5 on: October 22, 2014, 10:06:43 AM »



That's not true.  Some mortgage companies will schedule biweekly payments if that's your preference, and the payments get applied on a biweekly schedule.  I assume that's what the op has.  If he has a monthly then he should just pay the exact payment on the due date each month, and make extra principal payments whenever he has the money (those will be applied to principal balance as soon as they are received).

Both Bank of America and Wells Fargo, two very large mortgage companies, escrow the partial payment until the other half arrives.  Please provide names of companies who apply partial payments directly to the mortgage principal and interest.

Cheddar Stacker

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Re: overpay mortgage this way?
« Reply #6 on: October 22, 2014, 10:37:05 AM »
If you have no reason to move and every reasonable reason to believe your job is secure (and you could get another one without moving if you got a psycho boss), having a paid off mortgage gives you a lot of freedom and peace of mind.

Of course, having all that money invested and making a profit is good too.

Dollar wise, you will probably come out ahead if you invest the money in an index fund or rental property.   But it's a win-win either way so don't sweat it.

Now, if you're planning on moving, your job is insecure or there's no other likely sources of employment in your area/field if you get a psycho boss, the less money you have tied up in that house the better.

+1 to all of this. I'll add that I prefer to invest, but it's a personal choice that I believe is the optimal one and it's not for everyone. Just consider that last sentence above though. If there is any uncertainty here, it's better to hold a lot of liquid funds to get you through any emergencies that come up. $30k is a great start, but adding to that stache also gets you plenty of FI in 6 years.

Unless your mortgage is structured in some crazy way (and BOA is crazy, so I believe what BBQ is saying) any payment you make in excess of the interest charges will reduce your principal balance and reduce your future interest charges.

frugalnacho

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Re: overpay mortgage this way?
« Reply #7 on: October 22, 2014, 10:51:33 AM »



That's not true.  Some mortgage companies will schedule biweekly payments if that's your preference, and the payments get applied on a biweekly schedule.  I assume that's what the op has.  If he has a monthly then he should just pay the exact payment on the due date each month, and make extra principal payments whenever he has the money (those will be applied to principal balance as soon as they are received).

Both Bank of America and Wells Fargo, two very large mortgage companies, escrow the partial payment until the other half arrives.  Please provide names of companies who apply partial payments directly to the mortgage principal and interest.

I don't know any off hand but I have seen it offered.  Holding the payment in escrow offers no benefit though, so I don't understand why that would have been a payment option if that was the case.  I mean why would they offer a biweekly plan, which requires payment every 2 weeks, when they don't apply it to the loan?  How can they require payment but not apply it to the balance?

SwordGuy

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Re: overpay mortgage this way?
« Reply #8 on: October 22, 2014, 04:16:22 PM »

Dollar wise, you will probably come out ahead if you invest the money in an index fund or rental property.   But it's a win-win either way so don't sweat it.

Bolded the operative word. On the other hand paying the mortgage is a certainty of return.


Unless you lose your job or get sick and can't work, then have the house foreclosed on.   Then you can lose the entire investment.

Mother Fussbudget

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Re: overpay mortgage this way?
« Reply #9 on: October 22, 2014, 05:11:59 PM »


Both Bank of America and Wells Fargo, two very large mortgage companies, escrow the partial payment until the other half arrives.  Please provide names of companies who apply partial payments directly to the mortgage principal and interest.

I don't know any off hand but I have seen it offered.  Holding the payment in escrow offers no benefit though, so I don't understand why that would have been a payment option if that was the case.  I mean why would they offer a biweekly plan, which requires payment every 2 weeks, when they don't apply it to the loan?  How can they require payment but not apply it to the balance?

Capital One / ING Direct mortgages work this way.  The last time I got one, (when it was still ING Direct) they only offered 5 year flexible rate mortgages, and you could  pay them off every 2 weeks, and the amount went to principal and interest.  And the interest rates were the lowest available.

horsepoor

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Re: overpay mortgage this way?
« Reply #10 on: October 22, 2014, 05:25:22 PM »
Where do your retirement account(s) fit in here?  If you can contribute to a 401(K) that would reduce your tax burden, and IMO be a better place for your money, especially if there is any employer matching.  Don't forget to calculate in the mortgage interest tax deduction if you itemize.  Personally, I'd keep the mortgage at that interest rate.

ETA:  Here is another idea - you could put $5500/year into a Roth and let the money grow.  Then later, you could pull your contributions out to pay off the mortgage if you wanted to, but leave the earnings in the Roth account to continue growing.  This would be a more flexible plan, but still has the potential to kill the mortgage within your timeframe.
« Last Edit: October 22, 2014, 05:28:33 PM by horsepoor »

Dan_at_Home

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Re: overpay mortgage this way?
« Reply #11 on: October 22, 2014, 07:21:44 PM »
I don't get your point out about being in FI in 6 years because your mortgage will be paid off in 6 years.  I can tell you from personal experience having a paid off house and being in FI are not necessarily the same thing.  You still need enough savings to produce passive income to pay for your health insurance, utilities, food, property taxes, and insurance even after your house is paid off to reach the ultimate goal of FI.

stashja

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Re: overpay mortgage this way?
« Reply #12 on: October 22, 2014, 08:10:56 PM »
Sorry. OK, it's not FI that I would have in 6 years, but it's living rent-free on the salary from a job that I like.
And my credit union (the mortgage lender) doesn't keep biweekly payments in escrow.

Bbqmustache

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Re: overpay mortgage this way?
« Reply #13 on: October 25, 2014, 05:02:55 AM »




I don't know any off hand but I have seen it offered.  Holding the payment in escrow offers no benefit though, so I don't understand why that would have been a payment option if that was the case.  I mean why would they offer a biweekly plan, which requires payment every 2 weeks, when they don't apply it to the loan?  How can they require payment but not apply it to the balance?

It is not a benefit to the consumer, but the escrow company has the use of your money for two weeks every month.  a HUGE cash flow benefit to them!    I am still waiting for a name of a credit union or bank that applies the first payment directly to the loan balance.  Three local credit unions to me do not, although one only offers bi-weekly to city or state employees.  If the Capital One 5 year plan is still available, i'd like to dismiss it because after all, it is a five year note.  That's a car note term, not a mortgage!

Fuzz

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Re: overpay mortgage this way?
« Reply #14 on: October 26, 2014, 07:45:14 PM »
At a 3.375 rate, with tax deductible interest, I'd prioritize investments over paying down the mortgage. Ultimately, you're going to need both the paid off house and the investments to live on, so you might as well invest some money now and give it a longer time to compound. Do both if you want, but definitely invest something.

frugalnacho

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Re: overpay mortgage this way?
« Reply #15 on: October 27, 2014, 01:06:27 PM »




I don't know any off hand but I have seen it offered.  Holding the payment in escrow offers no benefit though, so I don't understand why that would have been a payment option if that was the case.  I mean why would they offer a biweekly plan, which requires payment every 2 weeks, when they don't apply it to the loan?  How can they require payment but not apply it to the balance?

It is not a benefit to the consumer, but the escrow company has the use of your money for two weeks every month.  a HUGE cash flow benefit to them!    I am still waiting for a name of a credit union or bank that applies the first payment directly to the loan balance.  Three local credit unions to me do not, although one only offers bi-weekly to city or state employees.  If the Capital One 5 year plan is still available, i'd like to dismiss it because after all, it is a five year note.  That's a car note term, not a mortgage!

I still don't have the name of any that offer it and i'm not going to look it up, although I am positive I remember seeing one that actually structured the repayment as biweekly payments.  I don't remember which one.  Perhaps it was the ING, and I was unable to get it for some reason - I can't remember at this point.  I do have to question whether it is even legally allowable to structure the mortgage as monthly payments, but then require the borrow to pay on a biweekly schedule (but hold the first payment in escrow until payment date).  I understand you could voluntarily participate in such an arraignment (even though it doesn't benefit you), but how would it even be legal for the lender to require payment but then not apply it to the loan for a couple weeks?

That's not a mortgage term to you because you have been brainwashed by the mortgage industry into thinking you MUST have a 30 year loan or it's not a mortgage.  Perhaps mustachianism will permeate through society and a 5 year mortgage term will eventually become the norm.   

sol

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Re: overpay mortgage this way?
« Reply #16 on: October 27, 2014, 01:20:47 PM »
With a rate that low and a nonzero chance of not making tenure, I'd prioritize your other investments first.  Max your 401k or voluntary contributions to your 401a or 403b or whatever you have.  Max your Roth.  If you're already doing that, I'd put that extra $500/mo into taxable investments (with low taxable distributions like an index fund or ETF) and sit on it for six years.

If you make tenure, you'll have a big chunk of money that probably earned you more than 3.375% and you can pay off the house with a lump sum.  Nothing lost.

If you don't make tenure, or get a better offer somewhere else, or start a family and have to move to a new house, then you're much better off having that cash on hand.  It gives you options, like buying a new house without selling the current one, so you could rent it out.

Some other considerations:
1.  prepaying your mortgage eats into your mortgage interest tax deduction, effectively reducing your rate of return on the prepayment.
2.  if you're the type of person who can't look at $100k in a taxable investment account without spending it, then you might be better off prepaying and locking that money away from yourself.
3.  "living like you did in grad school" is a great idea.  Don't give in to the pressure to conform.
4.  if you're confident in your long term earnings, it won't matter either way.  As long as you succeed in your career and have stable earnings, there is no horribly wrong choice to be made here.

Sid Hoffman

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Re: overpay mortgage this way?
« Reply #17 on: October 27, 2014, 01:48:04 PM »
If I overpay the mortgage by $500/month, I am mortgage-free in 6 years - which is when I expect to be promoted, too
This would leave me $1800/month for the next 6 years
Can I live on this?

Stashja, can you clarify this part?  IMHO, the method of paying your mortgage is not interesting, as the interest rate is so low that it hardly makes a difference if you're doing regular payments or biweekly or whatever.  You plan to have the home paid off in 6 years and only owe 3.x% interest, so you're hardly going to pay a meaningful amount of interest anyway.

I want to see some discussion about what I think the real meat & potatoes is here; the question about living on $1800/month.  Correct me if I'm wrong, but you're saying that you want to live on $1800/month NOT including housing, right?  I think this should be child's play.  I have a teenage son part-time (he's with his mom the rest of the time) and I also own a car, so right there are two items that I spend on which you do not have to.  My budget is under $1200/month if you subtract housing.  I don't feel like I am living impoverished or anything, and $1200/month is clearly a lot less than the $1800/month you're talking about.  If you can live on $1200/month (which a young, healthy person without a car should be able to do) then that's another $600/month you can put towards investments of one kind or another.

I'm a firm believer in diversification of investment.  While it's true that 401k, IRA, 403b, and so on are great for being tax exempt or tax deferred, you can't access them without penalty before age 59.5, and may even want to delay using them until 70 to get the maximum benefit.  If you are only 25 years old, then waiting until 59.5 is a LONG way away.  I would hate to see someone putting away $18,000 in a 401k, another $5500 in an IRA, then have no money left to put towards regular, after-tax investments.  You could end up looking at yourself at age 45 with a million bucks in investments but no way to use them because you can't really touch those accounts for almost 15 years still!

If you have the discipline for it, then I would suggest picking some ratio you are comfortable with, such as putting 60% in a tax-advantaged account and 40% in regular taxable investments.  Then perhaps you reach age 45 and "only" have $600,000 in your retirement accounts, but you have $300,000 in taxable investments.  As long as you're savvy and have that affordable, paid-off home, you really should be able to make $300,000 bridge that 15-year gap until age 60, at which point your mere $600,000 will have likely grown to $1.2 million anyway.

Planning for early retirement is different from saving for traditional retirement because of the fact that you can't touch tax-advantaged accounts without penalty until age 59.5, but early retirement will likely start quite a large number of years sooner than that.

sol

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Re: overpay mortgage this way?
« Reply #18 on: October 27, 2014, 01:54:35 PM »
Planning for early retirement is different from saving for traditional retirement because of the fact that you can't touch tax-advantaged accounts without penalty until age 59.5

Except that you can!  The most useful knowledge on this site is how to do exactly that.  Your 401k and Roth money is NOT locked up until age 59.5

All Roth contributions (not earnings) can be withdrawn at any time, without penalty or taxes, just like a savings account.  And you can convert your 401k contributions to your Roth IRA (and pay income taxes on the amount in the year of the conversion) and get the same benefit of early penalty-free access.  If you do that conversion after you retire and keep the amounts below your standard deduction + exemptions amount, you effectively get zero taxes on that retirement savings at any point ever, plus no age restrictions on when you can use it.   

Sid Hoffman

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Re: overpay mortgage this way?
« Reply #19 on: October 27, 2014, 03:38:59 PM »
It's the "pay income taxes on the amount converted" part that might look ugly.  That $700,000 401k you built up over 20 years of contributing $15k/year has $300k in untaxed income.  Correct me if I'm wrong, but that means you then have $300k in reportable income when you do the conversion that you must pay tax on, and of the $700k, only $300k can be withdrawn before age 59.5.  To me, that looks like a nightmare.  The IRS's page on Roth conversions only makes it look even less attractive.  Help me out if you think I am looking at it the wrong way.

sol

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Re: overpay mortgage this way?
« Reply #20 on: October 27, 2014, 03:59:59 PM »
It's the "pay income taxes on the amount converted" part that might look ugly.  That $700,000 401k you built up over 20 years of contributing $15k/year has $300k in untaxed income.  Correct me if I'm wrong, but that means you then have $300k in reportable income when you do the conversion that you must pay tax on, and of the $700k, only $300k can be withdrawn before age 59.5.  To me, that looks like a nightmare.  The IRS's page on Roth conversions only makes it look even less attractive.  Help me out if you think I am looking at it the wrong way.

If you contributed $400,000 to a 401k account that now has $700,000 in it and you want to convert that entire 700k to a Roth IRA, you will pay taxes on the entire 700k, not just the 300k in earnings.

The key is to do the conversion in smaller annual chunks.  A married filing jointly couple with two kids can pretty easily get to $60,000 of income without paying a single dollar in income taxes, thanks to deductions and exemptions and such.  So in the first year after you retire you have zero income, and you convert $60,000 from your 401k to your Roth IRA.  That $60k counts as taxable income, but since you've got $60k in exemptions and deductions you don't pay any taxes.  You've never paid taxes on that $60k because you contributed it pre-tax to your 401k account and it grew tax free, and now it has come out tax-free and gone into a Roth IRA account where it will be tax free forever.  Five years later, you can withdraw that entire $60,000 (but not any subsequent earnings from the past five years) from your Roth IRA tax free and penalty free.

So in year zero you have $700k in a 401k, and next year you have 60k in a Roth and 640k in your 401k.  (I'm going to neglect subsequent returns here for the sake of clarity.)

In year two you convert another 60k, and now your Roth has 120k and your 401k is down to 580k.  You've still never paid any taxes on any of it.

After five years of this process, your Roth IRA has 300k in it and your 401k is down to 400k.  But in this year you can now withdraw the 60k from year 1 and spend it on anything you want.  It becomes your income. 

In subsequent years your transfer another $60k over from your 401k and you withdraw the 60k from five years ago tax free, so your Roth IRA stops getting bigger and just becomes a 5 year holding tank between your 401k and your checking account.  You've effectively tapped your 401k well before retirement age, without paying an early withdrawal penalty, and without paying any taxes on it, ever. 

This is the Roth IRA rollover pipeline.  The amount you roll over every year might be 60k or 25k or 100k, depending on what you think your expenses will be five years later and how much tax you want to pay.  The only hard part of this system is that for the first five years after you retire you do not get to use any of  that $700,000 in your 401k, so you have to have some other source of income.  That could be taxable investments, or it could be the principal you've already contributed to your Roth IRA while working (which you can also get out at any time without penalty or taxes).  Or it could be from downsizing your house or something.  Just any other source of non-sheltered money that will support you for five years until your Roth IRA rollover pipeline kicks in.

This information has been discussed to death on this forum but there are always new people showing up so maybe it's good to repeat it periodically.  This Roth IRA rollover pipeline is the primary reason why a traditional 401k is almost always better for an early retiree than a Roth IRA.

More details from MMM:  http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/
« Last Edit: October 27, 2014, 04:02:10 PM by sol »

Cheddar Stacker

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Re: overpay mortgage this way?
« Reply #21 on: October 27, 2014, 07:27:24 PM »
sol, very well summarized. Good work.

Sid Hoffman

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Re: overpay mortgage this way?
« Reply #22 on: October 27, 2014, 08:40:30 PM »
That does help a lot, thank you, although I am not married with two kids and by the time I leave my job I will have zero kids I can claim as dependents.  I think that brings me down to more like only $10,000 between the standard deduction and personal exemption at present tax rates.  So it would seem I could roll over at least $10k/year tax free, and pay 10% income tax on the next $9000 or so.  So I could roll over $19,000 and pay $900 in income tax.  This still seems like it would be a fairly good idea especially if I'm doing this from age 50 through 70 when the required minimum distributions kick in.

It doesn't look like rolling over a traditional IRA or 401k to a Roth makes sense in my present condition however, still being high income due to working full time, but it sounds like it does make sense in early retirement years while I live off some kind of after-tax investments and don't need to rely on retirement accounts.  This is helpful information to plan for the future.

I know I read through all the MMM blogs in chronological order but I guess that particular blog didn't really sink in since it didn't seem like anything I need right away.  What does seem clear however is that once you're beyond the 10% bracket however it becomes increasingly less practical to convert to Roth if you don't expect your RMDs to ever go over the 15% bracket at age 70 anyway.  Anyway still looks great and I know it will apply to many on the forum already.

act01

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Re: overpay mortgage this way?
« Reply #23 on: October 27, 2014, 08:45:39 PM »
Are your extra payments being applied as extra payments or towards principal?

horsepoor

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Re: overpay mortgage this way?
« Reply #24 on: October 28, 2014, 09:05:09 PM »
Thank you Sol!  I've tried reading about Roth pipelines before and my eyes glazed over before any understanding took root in my little brain. This finally makes sense, and I've printed your post out for future reference.

It's the "pay income taxes on the amount converted" part that might look ugly.  That $700,000 401k you built up over 20 years of contributing $15k/year has $300k in untaxed income.  Correct me if I'm wrong, but that means you then have $300k in reportable income when you do the conversion that you must pay tax on, and of the $700k, only $300k can be withdrawn before age 59.5.  To me, that looks like a nightmare.  The IRS's page on Roth conversions only makes it look even less attractive.  Help me out if you think I am looking at it the wrong way.

If you contributed $400,000 to a 401k account that now has $700,000 in it and you want to convert that entire 700k to a Roth IRA, you will pay taxes on the entire 700k, not just the 300k in earnings.

The key is to do the conversion in smaller annual chunks.  A married filing jointly couple with two kids can pretty easily get to $60,000 of income without paying a single dollar in income taxes, thanks to deductions and exemptions and such.  So in the first year after you retire you have zero income, and you convert $60,000 from your 401k to your Roth IRA.  That $60k counts as taxable income, but since you've got $60k in exemptions and deductions you don't pay any taxes.  You've never paid taxes on that $60k because you contributed it pre-tax to your 401k account and it grew tax free, and now it has come out tax-free and gone into a Roth IRA account where it will be tax free forever.  Five years later, you can withdraw that entire $60,000 (but not any subsequent earnings from the past five years) from your Roth IRA tax free and penalty free.

So in year zero you have $700k in a 401k, and next year you have 60k in a Roth and 640k in your 401k.  (I'm going to neglect subsequent returns here for the sake of clarity.)

In year two you convert another 60k, and now your Roth has 120k and your 401k is down to 580k.  You've still never paid any taxes on any of it.

After five years of this process, your Roth IRA has 300k in it and your 401k is down to 400k.  But in this year you can now withdraw the 60k from year 1 and spend it on anything you want.  It becomes your income. 

In subsequent years your transfer another $60k over from your 401k and you withdraw the 60k from five years ago tax free, so your Roth IRA stops getting bigger and just becomes a 5 year holding tank between your 401k and your checking account.  You've effectively tapped your 401k well before retirement age, without paying an early withdrawal penalty, and without paying any taxes on it, ever. 

This is the Roth IRA rollover pipeline.  The amount you roll over every year might be 60k or 25k or 100k, depending on what you think your expenses will be five years later and how much tax you want to pay.  The only hard part of this system is that for the first five years after you retire you do not get to use any of  that $700,000 in your 401k, so you have to have some other source of income.  That could be taxable investments, or it could be the principal you've already contributed to your Roth IRA while working (which you can also get out at any time without penalty or taxes).  Or it could be from downsizing your house or something.  Just any other source of non-sheltered money that will support you for five years until your Roth IRA rollover pipeline kicks in.

This information has been discussed to death on this forum but there are always new people showing up so maybe it's good to repeat it periodically.  This Roth IRA rollover pipeline is the primary reason why a traditional 401k is almost always better for an early retiree than a Roth IRA.

More details from MMM:  http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

sol

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Re: overpay mortgage this way?
« Reply #25 on: October 28, 2014, 11:49:09 PM »
This finally makes sense

Glad to be of service.

SwordGuy

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Re: overpay mortgage this way?
« Reply #26 on: December 06, 2014, 09:59:49 AM »



That's not true.  Some mortgage companies will schedule biweekly payments if that's your preference, and the payments get applied on a biweekly schedule.  I assume that's what the op has.  If he has a monthly then he should just pay the exact payment on the due date each month, and make extra principal payments whenever he has the money (those will be applied to principal balance as soon as they are received).

Both Bank of America and Wells Fargo, two very large mortgage companies, escrow the partial payment until the other half arrives.  Please provide names of companies who apply partial payments directly to the mortgage principal and interest.

I don't know any off hand but I have seen it offered.  Holding the payment in escrow offers no benefit though, so I don't understand why that would have been a payment option if that was the case.  I mean why would they offer a biweekly plan, which requires payment every 2 weeks, when they don't apply it to the loan?  How can they require payment but not apply it to the balance?
f

How can they do it?  Easy.  People sign up to do it.

Why would they do it?  Because they get to use your money for 1/2 a month for 0% interest.  It's a sweet deal.

For them.

Bbqmustache

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Re: overpay mortgage this way?
« Reply #27 on: December 08, 2014, 03:05:00 AM »




I don't know any off hand but I have seen it offered.  Holding the payment in escrow offers no benefit though, so I don't understand why that would have been a payment option if that was the case.  I mean why would they offer a biweekly plan, which requires payment every 2 weeks, when they don't apply it to the loan?  How can they require payment but not apply it to the balance?

It is not a benefit to the consumer, but the escrow company has the use of your money for two weeks every month.  a HUGE cash flow benefit to them!    I am still waiting for a name of a credit union or bank that applies the first payment directly to the loan balance.  Three local credit unions to me do not, although one only offers bi-weekly to city or state employees.  If the Capital One 5 year plan is still available, i'd like to dismiss it because after all, it is a five year note.  That's a car note term, not a mortgage!

I still don't have the name of any that offer it and i'm not going to look it up, although I am positive I remember seeing one that actually structured the repayment as biweekly payments.  I don't remember which one.  Perhaps it was the ING, and I was unable to get it for some reason - I can't remember at this point.  I do have to question whether it is even legally allowable to structure the mortgage as monthly payments, but then require the borrow to pay on a biweekly schedule (but hold the first payment in escrow until payment date).  I understand you could voluntarily participate in such an arraignment (even though it doesn't benefit you), but how would it even be legal for the lender to require payment but then not apply it to the loan for a couple weeks?

That's not a mortgage term to you because you have been brainwashed by the mortgage industry into thinking you MUST have a 30 year loan or it's not a mortgage.  Perhaps mustachianism will permeate through society and a 5 year mortgage term will eventually become the norm.

When we get to the financial part of our lives where a five year term would pay off a mortgage, I would hope we will be mustachian enough to sock that money away and pay cash in five years.

Mortgage Free Mike

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Re: overpay mortgage this way?
« Reply #28 on: December 08, 2014, 02:45:38 PM »
Congrats to you. You are so close. I paid off my modest mortgage in 2 years but also funded my retirement accounts. It was a great decision and one I don't regret.
I think it's key to continue funding other retirement accounts as well, though.