tax-deferred savings vs liquidity

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dhc
Posts: 98
Joined: Sun Oct 07, 2012 7:58 pm

tax-deferred savings vs liquidity

Post by dhc »

A slight variation on the perennial "mortgage vs investing" question:

My wife and I recently finished paying off our student loans and are trying to decide what to throw the surplus at. We're also expecting to purchase a house in the next 6 months or so.
  • In our late 20s
  • Combined income is expected to be $100,000 this year, including $10,000 self-employment income (her)
  • Expenses expected to be about $35,000/year after house purchase
  • $80,000 taxable savings (including $50,000 or so for a down payment); $40,000 retirement savings
  • I have access to a 401(k) through work; she doesn't
If we maxed out all pre-tax retirement savings available to us (my 401(k), start a solo 401(k) with all of her self-employment income, and traditional IRAs for both of us), we could save $38,500 tax-deferred, which would significantly decrease tax liability. My rough estimate is that we'd still end up with a $10,000+ surplus in taxable.

We're not particularly interested in accelerating mortgage payments unless rates rise significantly before we purchase. However, psychologically we like the idea of saving enough in taxable to offset the mortgage (essentially, to feel like we could pay it off whenever we chose).

Would it be crazy to contribute less than the maximum to tax-deferred accounts? Would it be crazy to contribute the maximum? Are we missing something else entirely?
mnvalue
Posts: 1107
Joined: Sun May 05, 2013 2:22 pm

Re: tax-deferred savings vs liquidity

Post by mnvalue »

If you can afford to max out the tax-advantaged space and still have $10k/year to save and you already have your downpayment saved up, there's no question you should max out your tax-advantaged accounts.
rr2
Posts: 1071
Joined: Wed Nov 19, 2008 9:04 pm

Re: tax-deferred savings vs liquidity

Post by rr2 »

Congratulations on the loan payoff!

You are in your late twenties -- get a 15 year mortgage. Pay on schedule and your mortgage will be paid off by the time you are in your mid 40s. Plus you will have a nice sum of money in your retirement accounts.
Topic Author
dhc
Posts: 98
Joined: Sun Oct 07, 2012 7:58 pm

Re: tax-deferred savings vs liquidity

Post by dhc »

Thanks for the speedy responses, mnvalue and rr2!

Much as the lower rate of a 15 year mortgage is attractive, we're shying away from it for the same reason we're shying away from accelerating payments on a 30-year mortgage: although the peace of mind of knowing we had enough saved to pay it off if we wanted to sounds great, we can't get over the mathematical hurdle that our investments have a high probability of earning more than either the 15- or 30-year rates, so we're more likely to come out ahead by paying as little as necessary towards the mortgage.
rr2
Posts: 1071
Joined: Wed Nov 19, 2008 9:04 pm

Re: tax-deferred savings vs liquidity

Post by rr2 »

In the long run, it probably doesn't really matter whichever option you choose.

I too have a 30 year fixed rate mortgage, even though we can make payments at the 15 year rate. The 3.5% fixed rate for a 30 year mortgage seemed too good to pass up. We are much older than you (mid 40s) and just bought our first home three years ago. With our extra savings (after maxing out two 401ks and 2 IRAs), we split them towards additional principal payments as well as buying a Vanguard Mutual Fund every month. I wanted to minimize regret as I could not choose -- so I do both. Hopefully in 10-15 years, there should be enough in the taxable to pay it off -- well before retirement.

Though I wish in my mid-40s, we had a paid off house!! Now that would be nice.
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