Author Topic: Roth IRA MAGI Phase-out: Taxable or Non-Deductable tIRA? Pay down Mortgage/PMI?  (Read 2764 times)

Apocalyptica602

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Hi all,

Last year we hit the partial Roth-IRA phase out, because our MAGI fell in the ~$180K range, even after accounting for 2 maxed out 401k's and a family HSA, mortgage interest deduction etc. We're well beyond the income range for deducting tIRAs.

I had to do some reclassifications of my Roth-IRA contributions to non-deductible tIRA contributions once I did my taxes this year. Although this year we're expecting to be fully phased out of the Roth-IRA eligibility.

I've reviewed the 'Investment Order' that gets thrown around here a lot, and I think it is a wonderful tool, but I think it falters for high income individuals.

So I see these as my options:

  • Throw extra savings in a taxable account
  • Throw extra savings in a non-deductable tIRA (unless I'm missing something, I see absolutely NO reason to do this versus taxable?)
  • Pay down the mortgage to remove PMI

Details about the mortgage:

$449K remaining at 3.5% but with PMI of $158/month since we only put 10% down on our $513k house (facepunch).

So that being said we're at 87.7% LTV right now so it would take approx $50k to eliminate PMI automatically at 78% LTV.

No other debt, no children yet but planning on 1-2, ages 29 and 28 and a net worth of approximately $400k. So I realize we're in a very privileged position, but still looking for any and all advise to help further optimize this portion of our lives.

Thanks!
« Last Edit: September 21, 2017, 01:13:22 PM by Apocalyptica602 »

dandarc

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Since your income is that high, consider a backdoor Roth IRA.  You make non-deductible contributions to a traditional IRA, then as immediately as you're comfortable with convert to Roth.  One big "Gotcha" - you must have no other traditional money out there for this to work.  Any old SEP-IRAs or SIMPLE-IRAs count for this purpose as well.  Easy fix - roll the tIRA balance into your 401K and then do the backdoor Roth.

Since you both have 401Ks it is also possible that you could do a MegaBackdoor Roth IRA for one or each of you - review the terms of the 401K plans to see if you have the ability to make after-tax (Not Roth) contributions and in-service rollovers.  If so, you've potentially got a lot more room - tens of thousands of dollars more room - for Roth IRA money.

talltexan

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so...eliminating PMI would take $50,000, and it would net you about $1,800/year of risk-free return? Sounds like VTSAX is a better way to go for you!

MDM

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I've reviewed the 'Investment Order' that gets thrown around here a lot, and I think it is a wonderful tool, but I think it falters for high income individuals.
That's certainly possible.

It was developed originally as a composite of suggestions from many different sources, and has been modified a few times since its original manifestation.  Do you have specific questions/suggestions about it?

Apocalyptica602

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so...eliminating PMI would take $50,000, and it would net you about $1,800/year of risk-free return? Sounds like VTSAX is a better way to go for you!

Well... when you put it that way it makes sense as it only appears to be a ~3.8% annualized return.

Although I'm not sure if I'm calculating it correctly, since PMI remains constant doesn't this perceived return constantly increase until it's eliminated? For example, if I pay $25000 down, the next $25000 will realize me a return of ~7.5%?

MDM

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so...eliminating PMI would take $50,000, and it would net you about $1,800/year of risk-free return? Sounds like VTSAX is a better way to go for you!

Well... when you put it that way it makes sense as it only appears to be a ~3.8% annualized return.

Although I'm not sure if I'm calculating it correctly, since PMI remains constant doesn't this perceived return constantly increase until it's eliminated? For example, if I pay $25000 down, the next $25000 will realize me a return of ~7.5%?
That seems about right.  Of course, the first $25000 doesn't affect your PMI at all, so on average....

See https://forum.mrmoneymustache.com/investor-alley/pmi-or-investing/msg205197/#msg205197 for a more detailed discussion.

Scandium

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so...eliminating PMI would take $50,000, and it would net you about $1,800/year of risk-free return? Sounds like VTSAX is a better way to go for you!

Well... when you put it that way it makes sense as it only appears to be a ~3.8% annualized return.

Considering current treasury yields I don't think 4% risk-free is that bad..

As others have said you're never really out of Roth eligibility. Just use back-door. The reason you'd want to contribute to non-deductible IRA over taxable is you don't pay capital tax every year. But you do pay tax on withdrawals later so I think it only makes sense in a roth. You'd save 0.15*dividend rate * gains^years..

AdrianC

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so...eliminating PMI would take $50,000, and it would net you about $1,800/year of risk-free return? Sounds like VTSAX is a better way to go for you!

Well... when you put it that way it makes sense as it only appears to be a ~3.8% annualized return.

Although I'm not sure if I'm calculating it correctly, since PMI remains constant doesn't this perceived return constantly increase until it's eliminated? For example, if I pay $25000 down, the next $25000 will realize me a return of ~7.5%?

You'll save the PMI AND the mortgage interest on the 50k, right?

MDM

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You'll save the PMI AND the mortgage interest on the 50k, right?
Correct.

See the link in reply #5.

AdrianC

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You'll save the PMI AND the mortgage interest on the 50k, right?
Correct.

See the link in reply #5.

I'm just pointing out the savings are more than mentioned above. It's looks to me like eliminating the PMI gets a 7% odd risk free return on the 50k. VTSAX is not going to beat that.

MDM

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I'm just pointing out the savings are more than mentioned above. It's looks to me like eliminating the PMI gets a 7% odd risk free return on the 50k. VTSAX is not going to beat that.
Agreed - there is the return on the mortgage itself, plus the eventual PMI elimination.

As Heart of Tin noted,
Quote
The reason that I used the IRR instead of the ROI is that the IRR takes the amount of time that you will need to wait to profit into account. For that reason, the IRR can be compared to historic annualized stock market rates to decide where you should put your money. For example, if you could pay me one dollar today and get two dollars back in two years your ROI would be 100% and your IRR would be about 41%. Since 41% beats most historic annualized stock market returns over two years, you should probably give me the dollar instead of investing it in the stock market. On the other hand, if you could pay me one dollar today and get two dollars back in thirty years, your ROI would still be 100% but your IRR would fall to only 2.337%. Over a 30 year time frame, the stock market will probably beat an annualized 2.337% growth rate, so you should probably invest the dollar instead. My point is that timing matters, and ROI doesn’t tell the full story of which investment is better.

AdrianC

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I'm just pointing out the savings are more than mentioned above. It's looks to me like eliminating the PMI gets a 7% odd risk free return on the 50k. VTSAX is not going to beat that.
Agreed - there is the return on the mortgage itself, plus the eventual PMI elimination.

Sure, but OP will come up with $50K quickly. If I were him/her I'd do the "Pay down the mortgage to remove PMI" option asap, then keep the remaining mortgage and do taxable investments in the usual index funds (and/or the back door Roths and all that - not something that looked attractive in my case, so I've not studied it).


MDM

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Sure, but OP will come up with $50K quickly. If I were him/her I'd do the "Pay down the mortgage to remove PMI" option asap, then keep the remaining mortgage and do taxable investments in the usual index funds (and/or the back door Roths and all that - not something that looked attractive in my case, so I've not studied it).
Oh, yeah, I agree with that philosophically - avoiding PMI altogether has been our practice - just looking to ensure the math effects are understood by any who might wish to retain PMI for long times.

Apocalyptica602

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Thank you all for your advice in this thread.

It looks like I'll be throwing extra money at the mortgage to remove PMI (after I re-confirm with my lender that I do not need to refinance and it automatically drops off - I believe this to be the case but I cannot recall.)

Re: MDM - I don't have many suggestions for your investing order thread, re-reviewing it I see it has provisions for backdoor and mega-backdoor roth. I suppose if anything consider adding a clarifier on what those are and why would you want to use them. Either way, it's a very useful post and one that I've shared with countless friends when they ask me what to do with savings.


MDM

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...it has provisions for backdoor and mega-backdoor roth. I suppose if anything consider adding a clarifier on what those are and why would you want to use them.
Good idea!

For now at least, links to the bogleheads wiki for those two subjects have been added.

talltexan

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Thanks for the correction! I am humbled that OP might have down the wrong thing based on my post.

When you add in regular interest, I do see that paying down PMI is the way to go. In my own life, I have been lucky enough to never have PMI, so the math was always easy.