Single man with good job inherited money and bought house in almost LCOL

[csdreaming]

Hello everyone

37, single, moved to Raleigh-Durham area from California, been unemployed for a while due to my disability but got a great remote job and building myself up for the past 2+ years. Software engineer. My mother died from cancer and was the only real family that helped me out. I was planning on holding out for another few months to use up my lease, but I found an absolutely beautiful house with owners very willing to sell in a low cost area outside RDU. No HOA, big lot, 2 stories, 315k. Included a one year home warranty (under $1k cost) and 8k in discounts. I ended up on paper paying almost nothing in closing costs.

I inherited money from my Mom's pretax retirement accounts. My share of my Mom's retirement accounts was around $63k. I pulled out $3k at the start of the year. And pulled out an additional $12k last month. Planning on pulling more out since I contributed pretax to my 401k. I have to exhaust these assets within 9 years under the new rules. I am expecting to get a promotion next year which will make it more difficult to pull money out without reaching the Roth income limit. At the start of the year I gave up on the idea of buying a house when I saw them in the 500k range in this area. I began to aggressively contribute to my pretax and aftertax 401k account. My employer only allows 10% per paycheck-I can not make it up later in the year.

I kept most of the money, aside from playing with VOO and covered calls, in the Vanguard cash account because of:

1) I really wanted to be able to buy a house if a good deal came up. Not that much was needed since I was expecting to have to fork out 450k at the start of this year when the market was so much hotter.

2) Played with VOO and covered calls, but just did not feel like risking the money on a possible collapse of the market where if the housing or stock market fell... which did not happen for stocks, but deflated a little for housing in RDU.

3) Promotion, if I exhaust these assets sooner by maxing out my 401k pretax + Roth IRA this year I could just withdraw the money now. Under both Federal and NC unless I took all of out this year I would not be set up a tax bracket but I would lose the ability to max out the Roth IRA.

I put 36% down on the house which is already a lot by most standards. I was very sure I would aggressively pay down the mortgage principal. Then I read from others here that wish they didn't pay it down since they could refinance it instead of locking the money away when it could have been used for other things. I do not wish to deal with being a landlord, but travel would be nice and so is stock investing. Working on being promoted which could add another 15k per year + additional to bonus.

Owners did not take that good of care of the house. No serious issues, except I had to pay $7k for a new roof to be able to switch my insurance to a cheaper provider. Property taxes go up in 2025.

With the mortgage interest deduction it does not make sense to me to contribute pretax to my 401k anymore. Honestly it did not make much sense to contribute pretax anyway. But I was unemployed for a while and was worried about it happening again. If I was laid off I could spread out my pretax tax liability during my unemployment so it made sense at the time. I now have two years of seniority under my belt. My company did have a layoff but engineering was not affected and they hiring in engineering again after quite a few engineers left on their own. The Roth IRA limit also went up by 8k, even if I get a promotion I could switch it back to 401k pretax to stay under. Promotions would only be considered later in the year so it would not really affect me this year.

I feel confident in my ability to invest. Right now my self directed investment returns are measured as 10%, which is pretty good since I kept most of my inherited IRA in a money account. I expected to pull out more money to make sure I could make a good down payment on a much more expensive house to get a good rate. That did not happen, thankfully. Next year I would like to be more aggressive about it by keeping the money in the iIRA for a few years and let it grow.

My previous plan was:

1) Simple option:
Keep 4 months of expenses. Max out pretax, after tax options. Aggressively pull money out of the iIRA while being under the income limit to make a full contribution to Roth IRA before my promotion earns me out of it. Contribute all other monies to pay off mortgage principal.

Now I am thinking:

2) More complex:
* Build up my brokerage account with a mix of VOO and REITs + invest same mix in iIRA for 7 or so years and pull it out in a lump sum
* Change 401k to only Roth + aftertax (low fee Fidelity US total market index fund)
* forget about contributing max to the Roth IRA in 2025 or sooner
* Make only required payments to mortgage until the standard deduction grows past the SALT + mortgage interest deduction. NC income taxes are low and scheduled to drop every year so this is a moving target. Property taxes will go up in 2025 and stay that way for 4 years. Calculate $13k in mortgage interest for the full first year.

Tradeoffs:
* much more complex: but it feels foolish to give up my iIRA and the deferred returns I make it in for 8 years
* much more risk: if VOO and the stocks I pick are down for a long time when I need to access the money it will hurt me, esp if I need to pull the money out of iIRA
* my company offers a 15% discount in the employee investment program. There is a $8 per quarter fee and there is no shortage of complaints about the vendor chosen to administer the program. My company is part of a larger conglomerate and we are the best spot of the conglomerate for years. I feel hesitant to invest in the greater part of it despite loving the part of it I work for. I believe I would be taxed on the 15% discount.

Student loans: make minimum payments on them and see if I can discharge.

Assets
House: ~320k according to redfin
Inherited IRA: 48k (pretax, before withdrawing another 10k)
Possible Inheritance: 80-120k might be $0 after estate is settled in cash.
IRA: $6.2k
Roth IRA: $12k
401k: (pretax + aftertax, no Roth): $59k
$18k in cash (with upcoming mortgage payment at the end of the month of 2.2k)
No car, but using a bike + Uber since I WFH. I have a license, but my disability makes it difficult to drive.
Only 3 years of full social security credits. My previous job was with a government.

Liabilities
Mortgage: 205k at 6.875% for 15 years
Student loan debt: 13k, several loans, most ~3-4% interest. One is around 5%. Currently on Repayee/SAVE plan when I was unemployed, COVID postponed it so 0% interest until Jan 2025. Loans are old enough I think I might be eligible to discharge them if I make a few payments after January. If so I would incur a state, but not federal, tax on it.
Repairs: 10k: owners took poor care of the house; house may need an additional 10k in work for locks, pipes, water heater, heating ducts, new HVAC, fence. Warranty may or may not cover this, but the sellers offered it with the house so meh.

Income:
Salary: 132k per year, including bonus. ~10k per month before bonus.
Pension: ~$6720 per year: $560 per month, somewhat adjusted for inflation, part of my Mom's pension she left me. Will last until I die. Pension is from a wealthy local California government. Very unlikely to go bankrupted, but possible to be changed by state law.

Expenses per month:
Mortgage: $2200 includes property taxes and home insurance in escrow, no pmi. My insurance right now is heightened because of the roof, but when property taxes go up next year it will balance out in the escrow.
Electric: $300 estimated
Gas: none, no pipes in the district, electric heat pump.
Water/sewer/garbage: $120? Have not gotten my first bill yet.
Cell Phone: $50 unlimited tethering which is good if fiber goes out since WFH
Internet: $80 fiber
Food: $200-300
Uber: $100 keeps me from needing a car
Eating out/Delivery: $50
Costco: $5 per month (I use Instacart which adds markup but is otherwise included and it is convienant that saves time and keeps me from needing a car)
Medication: $20
Fun money: $300
Maintance/Misc: $200

Thinking of getting Walmart+. Includes Paramount+. Currently on a 30 day free trial but deliveries keep smelling like tobacco smoke so want to get into shape to bike to Walmart.

Property Taxes: 2.2k per year, but will likely go up to 3.6k in 2025 when reassessed and increase my monthly mortgage payment for escrow.

I am not sure of when I will be able to retire since I am not sure if I want to FatFIRE or not. I have a ways to get my social security credits and I want to get married and have 2 kids.

Emotionally, I hate the idea of paying over 10k interest per year, but if you assume VOO returns 7% per year on average it is ahead (once you factor in part of it is tax deferred + long term cap gains) it beats the 6.875% with the mortgage interest deduction. NC income taxes for me are around $5.5k + $2.2k property taxes + $13k mortgage interest deduction. NC income taxes are 4.75% right now and are scheduled to go down so it will be difficult to reach that SALT cap with raise + investment returns. NC has it's own SALT cap of 20k per year, but still difficult to reach. I do like the idea of building up my brokerage in tax deferred growth so it snowballs. If rates fall I refinance to a lower rate. I do take on quite a bit of extra risk with this strategy. Losing my job is unlikely, but watching my Mom struggle with cancer and having to pay her mortgage and medical bills was painful when she ran out of money. I feel more comfortable being able to liquidate, even at a lost my investments if something bad happened to me rather than have to move out of the house to sell it (if something bad happened to me and I was unable to work I would not be able to get a second mortgage).

Basically a tradeoff between risker assets and paying of a middle interest rate mortgage that is already at 36% funded and 15 years.

How does this sound? Am I missing anything? What would you do in my shoes and why?

[uniwelder]

Sorry you haven't had any responses yet.  You're certainly put a lot of effort into typing out your entire situation, so although I don't have much to contribute, maybe it'll spur others to comment.  There's a tremendous amount of detail and takes a good bit of mental energy and time to go through, so that might be why no one is writing back.  I haven't fully read through everything you wrote either.

I was very sure I would aggressively pay down the mortgage principal. Then I read from others here that wish they didn't pay it down since they could refinance it instead of locking the money away when it could have been used for other things.

Mortgage: 205k at 6.875% for 15 years

I think it's best to invest the money you would have used to pay down the mortgage.  Even at almost 7%, unless you're feeling very confident you won't get foreclosed on.  Once you have the full amount saved up, then do it in a single payment to close out the mortgage.

[swashbucklinstache]

A few things to consider for you here.

• If you plan on getting married and staying married I would revisit your 401k Roth vs traditional decision. What matters is the marginal bracket now compared to then and for most single people who later marry with high current marginal rates and low retirement expenses this is a slam dunk traditional case. This is a great "problem" to be thinking about and there are much worse things than maxing it as Roth.
• Maybe you know this but the IRA Roth limit is something you can work around via backdoor contributions. Not sure how the iIRA factors in and you'd want to roll your current IRA to 401k
• Can you immediately sell your ESPP? That's always a big piece of these if you're not confident in the conglomerate. The faster you can sell the lower the risk, and that 15% discount might be even larger when viewed annually if, for example, you have to wait 6 months and there's a floor provision. These can be anywhere from fantastic to just ok with what you've shared so far.
• I'd just be in vti + vxus myself, but if you're in REITs I think traditional wisdom says to hold them in a tax advantaged account if you have enough space there. Absent a strong reason otherwise I'd put any new REIT purchases in advantaged if you can meet your desired allocation while doing so.

[csdreaming]

I think it's best to invest the money you would have used to pay down the mortgage.  Even at almost 7%, unless you're feeling very confident you won't get foreclosed on.  Once you have the full amount saved up, then do it in a single payment to close out the mortgage.

Thanks for responding. It is a lot, but the situation is complicated right now. I was planning on investing until the standard deduction overtakes itemization or the SALT cap hits me.

What would you invest in?

[uniwelder]

I think it's best to invest the money you would have used to pay down the mortgage.  Even at almost 7%, unless you're feeling very confident you won't get foreclosed on.  Once you have the full amount saved up, then do it in a single payment to close out the mortgage.

Thanks for responding. It is a lot, but the situation is complicated right now. I was planning on investing until the standard deduction overtakes itemization or the SALT cap hits me.

What would you invest in?

I don't think I can give you any better investment advice than you are already aware of.  Just in a high yield savings account, you'll get 5% right now, so for me, if I were in your situation, its more about storing the money somewhere else until you get up to the 205k you need to pay off the house in one shot.  How many years do you think it'll take before that happens?  I'm not sure after 401k, IRA, etc, how much money you are saving.

[csdreaming]

• If you plan on getting married and staying married I would revisit your 401k Roth vs traditional decision. What matters is the marginal bracket now compared to then and for most single people who later marry with high current marginal rates and low retirement expenses this is a slam dunk traditional case. This is a great "problem" to be thinking about and there are much worse things than maxing it as Roth.

Thank you for sharing. Good point. I do want to get married, but I do want a woman that wants to work. Still not sure it makes sense since I believe my marginal rate right now will be around 18% including state before pretax deductions. Roth has many benefits including not affecting social security. I do have a pretax pension that may affect SS.

If my work situation would change I could move to a FAANG position where the average salary is much higher and then pretax 401k would work out very nicely, even if married.

Also in a few years the standard deduction may surpass the dropping mortgage interest deduction from it. At that point it would make sense to switch back to pretax.

• Maybe you know this but the IRA Roth limit is something you can work around via backdoor contributions. Not sure how the iIRA factors in and you'd want to roll your current IRA to 401k

I am, it seemed complicated since I already have a pretax IRA. I could roll that into the 401k and then do contributions, but I can also do inservice withdrawals from my 401k every 5 years. I think Vanguard funds are better than the ones in my 401k and being able to invest in certain individual stocks is even better. Feel free to share more if you have a way to manage it. I do have to draw the line somewhere as I could be spending my time developing more skills in my specialty and improving my career options, which with the FAANG part above, has it's own return.

• Can you immediately sell your ESPP? That's always a big piece of these if you're not confident in the conglomerate. The faster you can sell the lower the risk, and that 15% discount might be even larger when viewed annually if, for example, you have to wait 6 months and there's a floor provision. These can be anywhere from fantastic to just ok with what you've shared so far.

That is a good question. Never heard of a floor provision. Will ask them. Would you please share more?

• I'd just be in vti + vxus myself, but if you're in REITs I think traditional wisdom says to hold them in a tax advantaged account if you have enough space there. Absent a strong reason otherwise I'd put any new REIT purchases in advantaged if you can meet your desired allocation while doing so.

Yep. I have already invested in it my tax advantaged accounts and would like to start building up my brokerage. The 20% tax discount does change the math a bit with REITs.