Bogleheads

[newtoohere]

In a previous post we received very good advice on developing our asset allocation. We now have another question for the group and that is whether it is better to payoff our 2nd mortgage vs continuing to invest that money in our Roth IRAs. The mortgage is a 15-yr fixed @ 7.5% mortgage for $66k currently in our 2nd year of paying it off. After taxes, the rate is roughly 5%. Don't know if it helps, but we both are currently 30 yrs of age, and probably will be in the current house for at least another 8-10 years.

With the $10k that is going to the Roth plus an additional $8k yearly that currently is going in our emergency fund (currently at 6 months), we could pay off the 2nd mortgage in roughly 3 years. We are torn on what to do? We know the mental reward of paying of the mortgage would be great, but also understand the great benefits of the Roth IRA. If you were in our position, what you do and why?

[JDCPAEsq]

My vote would be to keep funding the Roth. Once that opportunity is lost in any given year it can never be retrieved.
John

[dkdoy]

I agree with John, you only get a limited number of those tax free growth dollars.

[Amishman]

Pay off Mortgage.

[JDCPAEsq]

[grabiner]

[YDNAL]

[DSInvestor]

Would six month of cash reserve be around 24-30K? I'm estimating around 2600/month for the two mortgages, maybe another 1000/month for prop taxes, utilities, insurance etc. Then you have other loan payments, food etc. I'm estimating 4000-5000/month in expenses.

Why not keep funding the ROTH into a Money Market Fund and use the taxable emergency cash reserve to pay down the debt? This will essentially transfer the cash reserve into ROTH and keep growing the valuable ROTH space. The MMF in the ROTH will keep the money safe in case an emergency happens. Keep the taxable cash reserve at a minimum of 1 month, but use the rest to pay down debt.

If there's an emergency, you can tap the ROTH MMF without taxes or penalties. If no emergency happens, you will have the extra roth space but also have paid off the debt and increased cash flow. That extra cash flow can be used to rebuild the taxable cash reserve. While rebuilding the taxable cash reserve, you can shift the ROTH from MMF into longer term investments.

You can shift 10K into ROTH for 2009, another 10K for 2010.

What's the rate and monthly payment on the 10K loan from your parents? That's your smallest loan, so I was looking for an option to snowball your debt to see if we can free up some cash flow.

[YDNAL]

[SpecialK22]

---Deleted. I figured I was hijacking the OPs thread so I figured I would instead start my own thread.

[celia]

Contributing towards a Roth or a mortgage pay-down aren't your only choices. Both of these will tie up money that would no longer be available for other things, if an opportunity should arise. (Sorry to make your original question more complicated, but....)

I would "hedge my bets" and split it between the Roth and maybe 2 extra mortgage payments per year. Put the rest into a "rainy day" fund (not for emergencies, but for that great sale on that thing you always wanted or to invest when the market takes another dive).

[Polaris]

I would max out the Roths before throwing adding additional money at the mortgage.

It's an opportunity that you can only take advantage of until you file your tax return each year, you're young and are likely in a low tax bracket (locking in lower tax rates now), you can withdraw your contributions without penalty at any time if the need arises, Roth's have no required minimum distributions, and you could potentially pass quite a nice chunk of tax-free estate money to your heirs.

[RobG]

I disagree with the comments about missing an important opportunity with the Roth because it will only be three years of lost Roth. The savings in interest will make up for the lost money.

The tax deduction is also a bit overrated - you need to reinvest the savings and this is hard to do unless you really keep track of your money (to be fair, the same could be said for the increased cash flow). Plus things change. I wouldn't count on the Roth being tax free when you retire.

Making 5% with the same risk as paying down the mortgage is not possible at this time - and quite a feat in normal times. I can't see you coming out ahead by not paying it down -- it is only three years of lost Roth.

rg

[retiredjg]

Pay the mortgage.

But, I really agree with the other side of the coin as well, so here is another option (similar to DSInvestor above):

I think if your current emergency fund is 6 months, you can put at least that $8k toward the mortgage. To compensate for an emergency fund that is smaller than you want, put the $10k (or part of it anyway, the rest going to the mortgage) into Roth, but invest in money market rather than stocks and bonds. In this way, the Roth serves as a second tier of your emergency fund and your Roth space continues to grow.

You don't get quite the whole cake while eating it too, but closer than choosing one or the other.

When the second mortgage is paid off, grow your "real" emergency fund to the point that you no longer need the Roth space to hold your emergency fund. Exchange the money market for the stocks and bonds that you want to hold in your Roth.
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Links to Investment Planning and Asking Portfolio Questions

[billb]

I like the question Dave Ramsey poses to people with this same question. Would you borrow money against your home to invest in the stock market?

[Taylor Larimore]

Hi newtohere:

The choice is a difficult one which probably means it doesn't make much difference.

If you anticipate needing cash, it will be tied up in your home if you pay down the mortgage. It is easy to withdraw contributions if invested in a Roth.

If you don't anticipate needing cash, paying down the mortgage would be my (close) choice.
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Best wishes
Taylor

The Majesty of Simplicity

[Polaris]

[Doc]

[DSInvestor]

[RobG]

[newtoohere]

Thank you to all that have reply - this forum is truly remarkable bc of the kindness of its members. We wanted to add more information to our original post to help make things a little more clearer.

[Taylor Larimore]

[retiredjg]

[nisiprius]

I'm still waiting for someone to find a rock on which someone has carved "Stay in hock and invest."

A mortgage is a very "conservative" anti-investment in the sense that the bills come regular as clockwork every month. And if you don't pay them regular as clockwork every month you're in fairly big trouble. And your job is not as reliable as your mortgage. And mortgage payments are big; you can always scrape together enough to make the minimum payment on a credit card, but you can't finesse a mortgage. The unemployment check probably isn't big enough to cover your groceries, your electric bill, your COBRA medical insurance continuation, and your mortgage. This is serious stuff.

I think big debts really should be paid down as quickly as possible a matter of principle. This isn't a question of financial wisdom, it's a matter of basic financial hygiene. The only exception would be if the math is really compelling and that math is based on an investment that pays out interest that is just as regular and reliable as the mortgage payments. I've yet to see anyone post a compelling example where the investment was safe and the theoretical gain over paying down the mortgage was more than razor-thin.

Keep in mind that there are a lot of people out there who would like you to sell you investments. Naturally they just hate it if you say "I can't afford to do that until I've paid off the mortgage." Naturally, being salespeople, they have an answer for that. Of course they are going to tell you that you don't need to do that, it's safe not to, nobody does it. They are going to tell you that all the sophisticated people carry as much debt as possible so that they can invest as much as possible. Assume that some of talk you hear about not paying down mortgages is not prudent financial analysis, but sales talk. If it's not direct than once-removed--it's people who bought the sales talk and are now anxious to convince you and themselves that they did the right thing.

Your mortgage is not your money, it's the bank's money. Get it back to them as quickly as possible. Polish it off in three years, and then invest with money that really belongs to you.
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Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

[DSInvestor]

Good points raised by retiredjg and nisiprius.

My posts here have been to suggest that you can can pay down your debts and growth roth space as well by shifting some of the emergency cash reserve into the ROTH so that you will have a constant 6 month reserve for the next 2-3 years. There may be a wrinkle.

Looking back at your post from March, you indicated that you were in the 28% tax bracket which is quite high. It may be high enough to make you ineligible for ROTH conversions particularly if you have stopped 403b contributions. If you were eligible for full 5K contributions in 2008, were you making Trad403b contributions in 2008? Trad403b contributions reduce your AGI and MAGI to help you stay under the ROTH phase out limits.

This IRS page shows the 2009 MAGI limits ROTH-IRA contributions:
http://www.irs.gov/publication....nk10006030

[retiredjg]

[DSInvestor]

[newtoohere]

Hey everyone,

Thanks for the replies so far - definitely appreciate all the different opinions. As for our post back in March, a couple of things have change in that my wife decided to go back to work part-time and we decided to restart our 403(b) investing which in turn meant she would be home more with our little one as well as make us Roth eligable. Also, our thought to add additional money to the emergency fund was mostly because we just were unsure exactly were to place additional income. Our thoughts now are to place $10k in the Roth IRA on Jan 1., leave $20k in taxable EF and then have $20k in Roth contributions to also use for EF, and all disposable income thrown at the 2nd mortgage. This should then keep us invested in the Roths, 4 months of EF in taxable, and hopefully pay off the mortgage asap.

[grabiner]