Liquidate Roth/HSA principal (to remove PMI) and family loan

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Topic Author
BogleBear
Posts: 31
Joined: Sat Feb 11, 2012 1:01 am

Liquidate Roth/HSA principal (to remove PMI) and family loan

Post by BogleBear »

Hey Guys/Gals,

I've been debating my wife and I's (In our 20's) next steps towards Financial Independence. We just finished paying off $80k of student loans over the past 2 years. Woohoo!!! Our other obligations left are as follows:

DEBTS

~15k @ 2%APY - Family Loan for down payment on house. We're on year 1 now, and the 1st 6 months were interest free. So $300 in interest/year going forward. We have until 11/2017 to pay this off. The person wants one payment with all the principal+interest, so we could earn interest while saving up the lump sum. I'd love to take the full 5 year term, but the wife feels very strongly on paying this ASAP as it is from her family.

~$168,214 @ 3.375%APR ($1393.50/month / [$755.98 P+I, $561.82 Insurance+Tax, $85.50 PMI]) - House sold for $180,000 and we started loan at $171,000 balance with a $9k downpayment. This a conventional loan, so no mandatory PMI period. When buying the house, it appraised for $190,00 so I believe we have gained some equity already! Assuming we asked for a new appraisal from the mortgage company and it was $190k again, we need to send ~$16,214 to get to 80% LTV, or as much as ~$24,214 if it were appraised at $180k.

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Thankfully we were also able to save into 401K's, Roths, and HSA's during this student loan payment time. We maxed Roths and HSAs and did up to matching in the 401K's. We felt strongly about still saving for retirement while paying our loans. In terms of penalty free accessible cash from these accounts we have:

INVESTMENTS (Only Penalty-Free Accessible)

$21k in Roth IRA principle (6.18% Return) - Index Funds

~$4.7k in HSA eligible reimbursements (20.02% Return) - We use the HSA as a super IRA by maxing it and then pay out of pocket and keep our receipts. We planned to reimburse ourselves in retirement. Most of the HSA is in index funds.

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Emergency Fund

~$5k to $8k - 2 to 3 months of expenses (still debating this, as we are using December to build this). We had a YNAB 1 month buffer during the student loan payment phase of 2 years.

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INCOME (Assuming we have Insurance, 401K Up to Match, HSA Contribution [to max within 12 months] taken out of paycheck)

Here's the low and high monthly estimates for money leftover to paydown loan/invest after all expenses paid. The low is the baseline salaried, and is a guarantee (assuming no job loss of course).

~$3,300/month - Conservative baseline left over money to send to debts after all obligations met

~$5,100/month - A good month, these happen about 5 times a year on average.

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I believe we have a # of options, I want to see what you think is the optimal strategy and also please suggest a better idea if you have one:

1.Take out $25,700 from Roths and HSA eligible refunds. This would almost payoff the $16,214 principal + interest & 15k family loan. We'd owe $5,514. (We'd pay the mortgage to 80% LTV first). We could finish the family loan 2 months later.

Pros:

* Instant 3.375% (closer to 2.9% with tax deductions) return on ~$16,214 of mortgage paydown, Instant 2% return on family loan ~$15k

* Save on pointless $85.50/month PMI, I'm not sure how to calculate the return on that, but I do know at minimum payments we'd reach 80% LTV in roughly 7 to 8 years.

* Lock in good HSA and Roth Returns, 20.02% and 6.18% return respectively

Cons:

* We could never re-contribute the $21k to the Roth (Is there an exception?)

* I feel silly paying the 2% loan early, but the wife feels very strongly on that. We compromised by saying we'd do the higher interest mortgage LTV paydown first.

* The appraisal could come back worse (although doubtful) and it would take more than $16,214 of paydown to reach 80% LTV.

2. Leave existing investments intact, max HSA, 401K matching, and max IRAs, and take 8 to 14 months depending on how things go to pay the 2 loan goals.

Pros:

* Investments compound and grow, and may beat the guaranteed returns of early loan payments. 8 to 14 months is not too long, we're just weary from 2 years of ultra-aggressive student loan payments and live very frugally.

Cons:

* Longer time with debt. Psychology of debt especially for wife owing to her family

* Investments tank and not superior to guaranteed loan early payment route

3. Only do 401K Matching, no HSA, and no Roth IRAs.

Pros:

* Faster payoff of loan goals compared to option 2, but not as quick as option 1, liquidating from investment accounts

Cons:

* Miss out on tax deferred space, although we'd have until April 2015 to top up those Roth IRAs. Maybe we only miss out on the HSA.

* Investments tank and not superior to guaranteed loan early payment route

4. Any ideas?

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I realize we are very fortunate to be able to pay our debts off so quickly. We are very thankful!

We are just tired of debt and want to get to just the mortgage with no PMI as soon as possible. We would then max (2) 401Ks, (2) Roths IRAs, and (1) HSA. Then I'd be more comfortable to splurge on some vacation and other wants etc. that we've delayed.

Bogleheads give some awesome advice and I wanted to tap into the hivemind.

Thanks for your help!
bdpb
Posts: 1622
Joined: Wed Jun 06, 2007 3:14 pm

Re: Liquidate Roth/HSA principal (to remove PMI) and family

Post by bdpb »

What is your tax rate?

I wouldn't worry too much about the PMI. It's great to get rid of it, but it probably only adds about .5% to your effective interest rate costs of the loan.

I would be more concerned about losing 25% income tax deduction for retirement contributions. At these relatively low interest costs and assumingly 25% tax bracket, I would max out 401k deductible contributions before paying down this debt.

Try to renegotiate your family loan to a win-win for everyone. Ask the lender if they'd be interested in receiving once a year payments for five years. That's not too much different than a one time lump sum (it's still easy to track), you save on interest rates and it may satisfy the spouse as far as repayment priorities go.
Topic Author
BogleBear
Posts: 31
Joined: Sat Feb 11, 2012 1:01 am

Re: Liquidate Roth/HSA principal (to remove PMI) and family

Post by BogleBear »

Technically we fall into the 25% federal tax bracket.

But with itemized deduction we typically fall between 10 - 13% effective.
bdpb
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Joined: Wed Jun 06, 2007 3:14 pm

Re: Liquidate Roth/HSA principal (to remove PMI) and family

Post by bdpb »

BogleBear wrote:Technically we fall into the 25% federal tax bracket.

But with itemized deduction we typically fall between 10 - 13% effective.
Your marginal rate is what's important. I would maximize deductible contributions in the 25% bracket.

Is there a state tax, too?
Topic Author
BogleBear
Posts: 31
Joined: Sat Feb 11, 2012 1:01 am

Re: Liquidate Roth/HSA principal (to remove PMI) and family

Post by BogleBear »

No state tax
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PaddyMac
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Re: Liquidate Roth/HSA principal (to remove PMI) and family

Post by PaddyMac »

I believe there is a penalty for withdrawing from the HSA unless you have medical receipts to match to withdrawals. If not, then it's taxable and there's a penalty.
Withdrawing from the Roth is also a terrible idea, imo. You will never get those years back.

If you want to accelerate the personal loan, that's a nice idea,. But I would not touch the Roths or HSA.
Topic Author
BogleBear
Posts: 31
Joined: Sat Feb 11, 2012 1:01 am

Re: Liquidate Roth/HSA principal (to remove PMI) and family

Post by BogleBear »

PaddyMac wrote:I believe there is a penalty for withdrawing from the HSA unless you have medical receipts to match to withdrawals. If not, then it's taxable and there's a penalty.
Withdrawing from the Roth is also a terrible idea, imo. You will never get those years back.

If you want to accelerate the personal loan, that's a nice idea,. But I would not touch the Roths or HSA.
I have $4.7k in receipts I could potentially reimburse.

You don't think mathematically it is better to pay down to 80% LTV first? 3.375% vs 2%?
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grabiner
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Re: Liquidate Roth/HSA principal (to remove PMI) and family

Post by grabiner »

If you aren't maxing out your retirement investments, you should pay your medical expenses from the HSA, to free up cash for other uses. If you have $1000 in medical expenses, this gives you the right to withdraw $1000 penalty-free from the HSA. If you do this, and then since the $1000 was not paid out of pocket, you invest that $1000 in your Roth IRA, you now have $1000 that can be withdrawn penalty-free at any time, and the growth on the $1000 can be withdrawn penalty-free once you turn 59-1/2.

In your situation, paying down the mortgage to remove PMI is probably a better investment.

And by the same logic, you should take money out of the Roth if you need to remove the PMI. Since you aren't maxing out your retirement accounts, you won't waste the tax-deferred savings; the money that you took out of the Roth, plus interest, will be available for future IRA and 401(k) contributions.
Wiki David Grabiner
bdpb
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Joined: Wed Jun 06, 2007 3:14 pm

Re: Liquidate Roth/HSA principal (to remove PMI) and family

Post by bdpb »

grabiner wrote: And by the same logic, you should take money out of the Roth if you need to remove the PMI. Since you aren't maxing out your retirement accounts, you won't waste the tax-deferred savings; the money that you took out of the Roth, plus interest, will be available for future IRA and 401(k) contributions.
I don't see how the OP will not be maxing out retirement accounts. They've already been contributing some to 401k, full IRAs and HSA on top of retiring 80k of debt over the last two years. I would make sure I did not pass up any opportunity to take a 25% tax deductible contribution to retirement accounts.
Topic Author
BogleBear
Posts: 31
Joined: Sat Feb 11, 2012 1:01 am

Re: Liquidate Roth/HSA principal (to remove PMI) and family

Post by BogleBear »

bdpb wrote:
grabiner wrote: And by the same logic, you should take money out of the Roth if you need to remove the PMI. Since you aren't maxing out your retirement accounts, you won't waste the tax-deferred savings; the money that you took out of the Roth, plus interest, will be available for future IRA and 401(k) contributions.
I don't see how the OP will not be maxing out retirement accounts. They've already been contributing some to 401k, full IRAs and HSA on top of retiring 80k of debt over the last two years. I would make sure I did not pass up any opportunity to take a 25% tax deductible contribution to retirement accounts.
Ya, I was somewhat confused by grabiner's advice.

The past two years we have done the following each year:
- Max (2) Roth IRAs
- Max (1) Family HSA
- Contribute up to the matching of our respective 401Ks

Anything leftover was sent to our loans/goals. This leftover amount will be between $3,300 to $5,100 per month.

I wanted help deciding between:

1. Taking out from prior HSA ($4.7k worth of receipts) and Roth IRA contributions ($21k principal) to paydown mortgage for PMI removal and family loan payoff (This would be quickest, and we'd most likely have enough time in the year to do (2) max Roths, (1) family HSA, and up to 401K matching). We would just be giving up the tax advantaged space. FASTEST

2. Or don't touch prior investments and keep sending $3,300 to $5,100 per month at our goals. (We would still do (2) max Roths, (1) family HSA, and 401K matching) SLOWEST

3. Or don't touch prior investments and keep sending $3,300 to $5,100 per month at our goals. (We would only do 401K matching). 2nd Fastest

bdpb made a point to say that option 3 might not be ideal if we're paying a 25% rate.

Let me know if this changes anything in your mind.

Cheers!
bdpb
Posts: 1622
Joined: Wed Jun 06, 2007 3:14 pm

Re: Liquidate Roth/HSA principal (to remove PMI) and family

Post by bdpb »

BogleBear wrote: The past two years we have done the following each year:
- Max (2) Roth IRAs
- Max (1) Family HSA
- Contribute up to the matching of our respective 401Ks

Anything leftover was sent to our loans/goals. This leftover amount will be between $3,300 to $5,100 per month.

2. Or don't touch prior investments and keep sending $3,300 to $5,100 per month at our goals. (We would still do (2) max Roths, (1) family HSA, and 401K matching) SLOWEST
This is what I would do with a little bit of scheduling.

Use 3.3k over the next 5 months to save enough to pay off the family loan. Use the 3.3k over the remaining 8 months in 2014 to fully fund your 401k to max out your retirement accounts. Remember, 3.3k after-tax is equivalent to 4.4k pre-tax. You should have more than enough to do this in 2014.

Beginning 2015, pay down 3.3k per month towards mortgage which should take anywhere from 4 to 6 months to get to your target LTV. The remaining months in 2015 can be used to max out retirement accounts again.
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