The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: dhc on March 07, 2014, 07:56:33 PM
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Hi all - longtime reader/lurker but first-time poster here.
My wife and I recently paid off the last of our student loans, so we're trying to figure out where to throw extra savings next. Specifically, we're trying to figure out whether all of the advantages of upping our tax-deferred savings are worth the potential lack of liquidity vs putting the extra into a taxable account.
Some relevant details:
- We're in our late 20s
- We expect to make about $100,000 combined this year, including about $10,000 of self-employment income (hers)
- Annual expenses are currently about $35,000, but we're also planning to buy a house this year which may raise these slightly (our price range of ~$250,000 puts 30-yr mortgage/insurance/tax payments in the same neighborhood as our current rent, but we're planning for a moderate increase in overall expenses to be safe
- Current taxable savings of $80,000 (~$50,000 earmarked for down payment); retirement savings of $40,000 (about 80% is in Roth accounts)
- Currently contributing ~$9000 to my traditional 401(k) and $5500 to her Roth IRA.
- Upping my 401(k) contributions to the full $17500, contributing all $10,000 from her self-employment into a solo 401(k), switching her IRA to traditional and adding a traditional IRA for me could bump our tax-deferred savings up to $38,500, cutting out significant tax liability. We'd still have plenty to cover expenses, even with increases.
- General plan is to semi-retire early in 10-ish years and continue working enough to cover expenses
We're not particularly interested in using much of our extra income to accelerate mortgage payments (though we may begin rethinking that if rates rise significantly before we buy a house), but the alternative in our minds to maxing out retirement savings would be to contribute some portion of the excess to a taxable account until we had enough in taxable that we could pay the mortgage off entirely if we so chose. It's a bit silly, but it's some combination of wanting to mix the mathematical advantage of investing over mortgage payments with the peace-of-mind of debt payments.
What would you do? Max out pre-tax accounts? Save for the mortgage payoff, while not actually planning to pay off said mortgage? Split the difference?
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Upping my 401(k) contributions to the full $17500, contributing all $10,000 from her self-employment into a solo 401(k), switching her IRA to traditional and adding a traditional IRA for me could bump our tax-deferred savings up to $38,500, cutting out significant tax liability. We'd still have plenty to cover expenses, even with increases.[/li][/list]
General plan is to semi-retire early in 10-ish years and continue working enough to cover expenses[/li][/list]
Change "could" to "will" and you have a great plan.
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Some rough calculations suggest that even when maxing out your tax-deferred, you'll still have a yearly surplus of ~$10k or more. So I say max 'em out, and before you know it, your taxable savings will be big enough to pay off the mortgage anyway.
When I bought my house, I planned to take 15 years to pay of my mortgage (paying principal on a 30-year mortgage). I had similar income and expenses as you (though only half the tax-deferred space), and after 9 years of those payments I noticed I had more than enough cash sitting around, so I said "what the heck" and paid it off in a lump. Seems like you could end up in the same situation but with even larger tax-deferred accounts.
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Thank you both for the encouragement.
Some rough calculations suggest that even when maxing out your tax-deferred, you'll still have a yearly surplus of ~$10k or more. So I say max 'em out, and before you know it, your taxable savings will be big enough to pay off the mortgage anyway.
When I bought my house, I planned to take 15 years to pay of my mortgage (paying principal on a 30-year mortgage). I had similar income and expenses as you (though only half the tax-deferred space), and after 9 years of those payments I noticed I had more than enough cash sitting around, so I said "what the heck" and paid it off in a lump. Seems like you could end up in the same situation but with even larger tax-deferred accounts.
skyrefuge, my rough calculations match yours, which is encouraging. And your "what the heck" is exactly the reason we'd like to have some of this sitting in taxable - so we could pay off a mortgage in a lump if we wanted to. I think you're right, though - better to max out the tax-deferred and know that what's left is still there ready to use on the mortgage whenever.