OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

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coachd50
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OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by coachd50 » Sun May 05, 2019 9:59 am

So, here is my question. With a potential retirement date 12-13 years away, and a current Assest allocation at about 80/20,(for both taxable and Roth IRA) should I look into using about 3/4ths of the taxable account to pay off a 4% mortgage?

Is it correct to look at it as "shifting" asset allocation and locking in the previous gains as well as re balancing to a more conservative AA?

Is it stupid, since the increased cash flow from no longer having to make a monthly mortgage payment will simply be invested into the taxable account I just drew down to pay off the mortgage?

bampf
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by bampf » Sun May 05, 2019 10:20 am

There is no way to answer this question rationally with the information you have provided. Do you have income? Does it cover expenses? Are you maximizing non-tax etc etc. More importantly, why are you trying to pay off the mortgage? If the market gains 13% this year, will you feel silly? If the market tanks 13% will you regret that you didn't? You are trying to predict the future and it is unknowable. You have to do what you think is right for you. If the concept of being debt free, saving that interest payment or having choices is important to you, pay it off. If not, keep it in the market and take your gains (or losses...).

--Bampf

Quaestner
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by Quaestner » Sun May 05, 2019 10:23 am

How much tax will you pay when you sell things in your taxable account to do this? I don't think you've provided enough detail for us to give you best guidance. I will note that while home equity is part of our net worth, many of us don't include home equity as part of our asset allocation. Without knowing more, you might simply accelerate your mortgage payments so that the home is paid off by retirement time.

mmmodem
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by mmmodem » Sun May 05, 2019 12:00 pm

There is no twist. It is the same question that's been asked over and over again.There's no harm on asking it though. :beer Your situation is the same. A good number of people will prefer to keep in taxable. A proportionally large number of people will pay off the mortgage.

I'll save Taylor Larimore the trouble of his usual quote to this question: "When experts disagree, it is often because it doesn't matter."

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welderwannabe
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by welderwannabe » Sun May 05, 2019 12:03 pm

I am a fan of paying off a mortgage, but I am not sure I would evaporate 75% of my taxable portfolio to do it. That is a big bite and I wouldn't want to lose that 'insurance' in my case. Maybe stop adding to it and focus on the mortgage.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

mortfree
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by mortfree » Sun May 05, 2019 12:26 pm

Is the stock market not going up in the next 12 years?

Does your employer have the same timetable as you do?

Figure how much you need to pay monthly for your mortgage to be gone in 12 years (or less).

Let that taxable account ride.

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Watty
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by Watty » Sun May 05, 2019 12:43 pm

There is a wiki on this question but no real consensus.

https://www.bogleheads.org/wiki/Paying_ ... _investing

One thing to realize is that you have a lot of sequence of returns risk so investing and earning a higher return is not as easy as it sounds. Here is a very simplistic example of this that I have posted before.
 If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To break even the next year you would need to gain back the $16K and another $6,000 for the next years mortgage payments which is $22K. That would take a 25.6% return on the remaining $84K just to break even.

You didn't give a lot of details about the rest of your situation and that could make a difference but the question that is often suggested in this situation is, "If you had a paid off house then would you take out a new mortage just to invest the money?". Few people would.

MotoTrojan
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by MotoTrojan » Sun May 05, 2019 12:44 pm

Paying tax on gains and then cashflowing back into equities doesn't quite make sense to me, but perhaps selling some bonds.

btenny
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by btenny » Sun May 05, 2019 12:53 pm

80/20 seems too large a AA for anyone older than 40. IMO you might want to dial that down to 60/40. Especially if you are on target with savings and investing to get to FIRE by 55. But I am an old conservative guy. I think paying off your mortgage while you are still working is not that important. And no I would not crash my taxable account to pay off my mortgage early. Especially if you have a low cost mortgage at 4% or less. I might pay a little extra of my mortgage principal each month to help reduce that debt if I had extra money to invest. Then when you retire you can evaluate paying off your mortgage completely. At that time you can make a more realistic income and expense projection and decide if you still have the right mix of income versus savings and the ability to carry a mortgage.

Good Luck.

Dottie57
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by Dottie57 » Sun May 05, 2019 1:16 pm

mortfree wrote:
Sun May 05, 2019 12:26 pm
Is the stock market not going up in the next 12 years?

Does your employer have the same timetable as you do?

Figure how much you need to pay monthly for your mortgage to be gone in 12 years (or less).

Let that taxable account ride.
+1

I paid off my mortgage by adding money to each payment. It really works.

harvestbook
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by harvestbook » Sun May 05, 2019 2:33 pm

coachd50 wrote:
Sun May 05, 2019 9:59 am
Is it stupid, since the increased cash flow from no longer having to make a monthly mortgage payment will simply be invested into the taxable account I just drew down to pay off the mortgage?
Leaving the account alone and paying down the mortgage with incoming money seems better to me.
I'm not smart enough to know, and I can't afford to guess.

Topic Author
coachd50
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by coachd50 » Sun May 05, 2019 5:26 pm

Thank everyone here for the replies so far-- I was trying to make a short post, but since more info was asked for :

Background info:
Single Mid 40s Teacher (meaning income not expected to significantly increase like in other professions) 13 years of service credit. Potentially looking to retire at around 57 with 25 years of service credit. Hence, the 12 year time line (that I was considering my "twist" when combined with asset allocation)

Financial Info
Liabilities:
House. Bought House for $165,000 in 2008. Put $33,000 down and borrowed $132,000. It appraises at about $200,000 now. Refinanced original mortgage in 2012 to lower rate from 5.35% to 4.00% 30 year with zero closing costs. Owe $68,000.
Home Buyers Credit- $4,000 Must repay $500 a year when paying taxes. 0% interest.

Assets:
Checking Account : Generally carry a balance between $2,500 and say $4,000
Online Savings Account : $15,000
Fidelity taxable Brokerage Account : $88,000
Fidelity Roth IRA : about the same
Social Security Alternative : $1,200


Cash Flow Info
Current Gross Yearly Salary: About $53,000
Monthly breakdown : This breaks down to about $3,100 net after insurance, tax, retirement (pension) etc.
Cash Outflows
Generally spend about $1,100 a month on general living expenses (food, entertainment, utilities, dining, etc) Use a credit card for most things and pay off each month.
House Note: $1,220 each month. Breakdown is about $260 to Home Owners Inurance and Property Tax, about $579 principle and interest, and currently pay $386 extra principle payment. Also have paid an extra $2,000 or so to principal at the end of each year for the last few years.

Retirement Info
Member of the State Teachers Retirement Plan. This means extremely reduced if not zero Social Security benefit payments upon retirement.
Estimated Monthly Income from Teachers Retirement Plan at 25 years service credit (retiring at around 57 in 2032) $3,2000 a month. At 30 years credit (62 years old) estimated benefit is about $3,900 a month.

TAX info -- will be taking the Standard deduction

Again, I guess my original post was in regards to timeline and asset allocation. Since I anticipate the pension as a source of income in retirement, I have kept a higher Stock to bond allocation than many would have at my age/retirement time horizon.
Last edited by coachd50 on Sun May 05, 2019 6:46 pm, edited 1 time in total.

Topic Author
coachd50
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by coachd50 » Sun May 05, 2019 5:28 pm

Dottie57 wrote:
Sun May 05, 2019 1:16 pm
mortfree wrote:
Sun May 05, 2019 12:26 pm
Is the stock market not going up in the next 12 years?

Does your employer have the same timetable as you do?

Figure how much you need to pay monthly for your mortgage to be gone in 12 years (or less).

Let that taxable account ride.
+1

I paid off my mortgage by adding money to each payment. It really works.
Yes, I have been doing so, and under my current schedule will have it paid off before I retire.

Topic Author
coachd50
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by coachd50 » Sun May 05, 2019 5:36 pm

btenny wrote:
Sun May 05, 2019 12:53 pm
80/20 seems too large a AA for anyone older than 40. IMO you might want to dial that down to 60/40. Especially if you are on target with savings and investing to get to FIRE by 55. But I am an old conservative guy. I think paying off your mortgage while you are still working is not that important. And no I would not crash my taxable account to pay off my mortgage early. Especially if you have a low cost mortgage at 4% or less. I might pay a little extra of my mortgage principal each month to help reduce that debt if I had extra money to invest. Then when you retire you can evaluate paying off your mortgage completely. At that time you can make a more realistic income and expense projection and decide if you still have the right mix of income versus savings and the ability to carry a mortgage.

Good Luck.
My thought process was that paying off the 4% Mortgage ($68,000) was in affect dialing down the asset allocation. Effectively buying 4% bonds.

btenny
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by btenny » Sun May 05, 2019 6:17 pm

My other reason to not crash your taxable account is the "you just do not know what is going to happen next factor". Life is full of surprises. I just like a big easy to draw on fund that does not create too much taxes if I need to spend it. What happens if you loose your job? You get hurt and cannot work? Your wife gets hurt? So I suggest a nice big taxable fund that can be spent down slowly while you look for new job is just great. Same issue if you end up on disability for a while. What happens if you need to send one of your kids to private school?

So I suggest you maybe convert some of your stock funds in taxable to tax free bond funds to fix your AA. Then keep the rest of your taxable money in the stock funds. Then up your extra principal payments to $850 per month. That will keep your taxable account for emergencies and pay off your mortgage before you retire.

Good Luck.

Topic Author
coachd50
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by coachd50 » Sun May 05, 2019 7:20 pm

Watty wrote:
Sun May 05, 2019 12:43 pm
There is a wiki on this question but no real consensus.

https://www.bogleheads.org/wiki/Paying_ ... _investing

One thing to realize is that you have a lot of sequence of returns risk so investing and earning a higher return is not as easy as it sounds. Here is a very simplistic example of this that I have posted before.
 If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To break even the next year you would need to gain back the $16K and another $6,000 for the next years mortgage payments which is $22K. That would take a 25.6% return on the remaining $84K just to break even.

You didn't give a lot of details about the rest of your situation and that could make a difference but the question that is often suggested in this situation is, "If you had a paid off house then would you take out a new mortage just to invest the money?". Few people would.
Thank you for the reply. Yes I realize that question is often the one put to people in this situation. I suppose another one (more specific to my situation) would be " If someone was offering a 4% "risk free" after tax CD, would you sell $68,000 of your $88,000, pay the necessary capital gains and then buy the CD?

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fortfun
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by fortfun » Sun May 05, 2019 7:26 pm

coachd50 wrote:
Sun May 05, 2019 9:59 am
So, here is my question. With a potential retirement date 12-13 years away, and a current Assest allocation at about 80/20,(for both taxable and Roth IRA) should I look into using about 3/4ths of the taxable account to pay off a 4% mortgage?

Is it correct to look at it as "shifting" asset allocation and locking in the previous gains as well as re balancing to a more conservative AA?

Is it stupid, since the increased cash flow from no longer having to make a monthly mortgage payment will simply be invested into the taxable account I just drew down to pay off the mortgage?
I'm keeping my money in taxable. I plan to use tax gain harvesting during early retirement. If your numbers work out, you might consider the same. Basically, you don't have to pay taxes on the money you gain/pull from taxable, as long as you keep your earned income down and your other income isn't too high. I will keep my 3% mortgage loan during this time.

Topic Author
coachd50
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by coachd50 » Sun May 05, 2019 7:30 pm

fortfun wrote:
Sun May 05, 2019 7:26 pm
coachd50 wrote:
Sun May 05, 2019 9:59 am
So, here is my question. With a potential retirement date 12-13 years away, and a current Assest allocation at about 80/20,(for both taxable and Roth IRA) should I look into using about 3/4ths of the taxable account to pay off a 4% mortgage?

Is it correct to look at it as "shifting" asset allocation and locking in the previous gains as well as re balancing to a more conservative AA?

Is it stupid, since the increased cash flow from no longer having to make a monthly mortgage payment will simply be invested into the taxable account I just drew down to pay off the mortgage?
I'm keeping my money in taxable. I plan to use tax gain harvesting during early retirement. If your numbers work out, you might consider the same. Basically, you don't have to pay taxes on the money you pull from taxable, as long as you keep your earned income down and your other income isn't too high. I will keep my 3% mortgage loan during this time.
As mentioned, upon retirement I anticipate between approximately $3,100 and $3,500 a month in pension income. Do you know what the income levels are to avoid capital gains taxes? Granted there is a great chance it will be different 12 years from now.

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Watty
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by Watty » Sun May 05, 2019 7:43 pm

coachd50 wrote:
Sun May 05, 2019 7:20 pm
Yes I realize that question is often the one put to people in this situation. I suppose another one (more specific to my situation) would be " If someone was offering a 4% "risk free" after tax CD, would you sell $68,000 of your $88,000, pay the necessary capital gains and then buy the CD?

The difference with that example is that it does not account for the mortage payment that you would be eliminating so it is not a good analogy.

Topic Author
coachd50
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by coachd50 » Sun May 05, 2019 7:48 pm

Watty wrote:
Sun May 05, 2019 7:43 pm
coachd50 wrote:
Sun May 05, 2019 7:20 pm
Yes I realize that question is often the one put to people in this situation. I suppose another one (more specific to my situation) would be " If someone was offering a 4% "risk free" after tax CD, would you sell $68,000 of your $88,000, pay the necessary capital gains and then buy the CD?

The difference with that example is that it does not account for the mortgage payment that you would be eliminating so it is not a good analogy.
Can you explain. I don't quite follow. I had mentioned that in all likely hood, the $900 or so a month in p&I payments would be put back into the taxable fund, which as I think about it doesn't seem to make a ton of sense or seem very tax efficient. (Just thinking out loud here)

samstar
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by samstar » Sun May 05, 2019 8:44 pm

.....
Last edited by samstar on Thu Jul 11, 2019 2:06 am, edited 1 time in total.

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fortfun
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by fortfun » Sun May 05, 2019 8:55 pm

coachd50 wrote:
Sun May 05, 2019 7:30 pm
fortfun wrote:
Sun May 05, 2019 7:26 pm
coachd50 wrote:
Sun May 05, 2019 9:59 am
So, here is my question. With a potential retirement date 12-13 years away, and a current Assest allocation at about 80/20,(for both taxable and Roth IRA) should I look into using about 3/4ths of the taxable account to pay off a 4% mortgage?

Is it correct to look at it as "shifting" asset allocation and locking in the previous gains as well as re balancing to a more conservative AA?

Is it stupid, since the increased cash flow from no longer having to make a monthly mortgage payment will simply be invested into the taxable account I just drew down to pay off the mortgage?
I'm keeping my money in taxable. I plan to use tax gain harvesting during early retirement. If your numbers work out, you might consider the same. Basically, you don't have to pay taxes on the money you pull from taxable, as long as you keep your earned income down and your other income isn't too high. I will keep my 3% mortgage loan during this time.
As mentioned, upon retirement I anticipate between approximately $3,100 and $3,500 a month in pension income. Do you know what the income levels are to avoid capital gains taxes? Granted there is a great chance it will be different 12 years from now.
This article explains how: https://www.gocurrycracker.com/never-pay-taxes-again/

Lars_2013
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by Lars_2013 » Sun May 05, 2019 8:56 pm

coachd50 wrote:
Sun May 05, 2019 7:30 pm
As mentioned, upon retirement I anticipate between approximately $3,100 and $3,500 a month in pension income. Do you know what the income levels are to avoid capital gains taxes? Granted there is a great chance it will be different 12 years from now.
If you're single and your taxable income is under $38,600 (2018 tax year), you're in the zero percent tax bracket for long term capital gains and qualified dividends. https://www.taxpolicycenter.org/briefin ... ains-taxed

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fortfun
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by fortfun » Sun May 05, 2019 9:02 pm

Lars_2013 wrote:
Sun May 05, 2019 8:56 pm
coachd50 wrote:
Sun May 05, 2019 7:30 pm
As mentioned, upon retirement I anticipate between approximately $3,100 and $3,500 a month in pension income. Do you know what the income levels are to avoid capital gains taxes? Granted there is a great chance it will be different 12 years from now.
If you're single and your taxable income is under $38,600 (2018 tax year), you're in the zero percent tax bracket for long term capital gains and qualified dividends. https://www.taxpolicycenter.org/briefin ... ains-taxed
According to the blog post: "Unless that income comes from qualified dividends or long term capital gains. In this case, a married couple can have $24,000 a year in income AND $77,200 in investment income, TAX FREE (if that isn’t a strong signal to not work, I don’t know what is.)"

So, maybe you can tax gain harvest before you start collecting your pension.

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Watty
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by Watty » Sun May 05, 2019 9:11 pm

coachd50 wrote:
Sun May 05, 2019 7:48 pm
Watty wrote:
Sun May 05, 2019 7:43 pm
coachd50 wrote:
Sun May 05, 2019 7:20 pm
Yes I realize that question is often the one put to people in this situation. I suppose another one (more specific to my situation) would be " If someone was offering a 4% "risk free" after tax CD, would you sell $68,000 of your $88,000, pay the necessary capital gains and then buy the CD?

The difference with that example is that it does not account for the mortgage payment that you would be eliminating so it is not a good analogy.
Can you explain. I don't quite follow. I had mentioned that in all likely hood, the $900 or so a month in p&I payments would be put back into the taxable fund, which as I think about it doesn't seem to make a ton of sense or seem very tax efficient. (Just thinking out loud here)
A big advantage of paying off the mortage is that if you pay it off your cash flow improves a lot each month since you no longer have a mortage payment. That would also be a disadvantage with taking out a new mortage in the "If you had a paid off house" question.

With your CD analogy there are no monthly payments involved so that is a different situation. The CD would also be invested in a taxable account so the 4% before taxes would be more like 3.5% after taxes. Paying off your mortage would be like a tax free 4% return.

Topic Author
coachd50
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by coachd50 » Sun May 05, 2019 9:40 pm

Watty wrote:
Sun May 05, 2019 9:11 pm
coachd50 wrote:
Sun May 05, 2019 7:48 pm
Watty wrote:
Sun May 05, 2019 7:43 pm
coachd50 wrote:
Sun May 05, 2019 7:20 pm
Yes I realize that question is often the one put to people in this situation. I suppose another one (more specific to my situation) would be " If someone was offering a 4% "risk free" after tax CD, would you sell $68,000 of your $88,000, pay the necessary capital gains and then buy the CD?

The difference with that example is that it does not account for the mortgage payment that you would be eliminating so it is not a good analogy.
Can you explain. I don't quite follow. I had mentioned that in all likely hood, the $900 or so a month in p&I payments would be put back into the taxable fund, which as I think about it doesn't seem to make a ton of sense or seem very tax efficient. (Just thinking out loud here)
A big advantage of paying off the mortage is that if you pay it off your cash flow improves a lot each month since you no longer have a mortage payment. That would also be a disadvantage with taking out a new mortage in the "If you had a paid off house" question.

With your CD analogy there are no monthly payments involved so that is a different situation. The CD would also be invested in a taxable account so the 4% before taxes would be more like 3.5% after taxes. Paying off your mortage would be like a tax free 4% return.
That is why I stated it would be a 4% "risk free" after tax CD. I would argue it does account for the mortgage payments as the counter balance is the reduction of the taxable account. In essence rather than not having to pay $900 a month for say 75 months, I have given up a lump sum of $68,000. Put another way, I could increase my current cash flow by $900 each month by selling off $900 from my taxable and it would all be the same in the end. Right?

DVMResident
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by DVMResident » Sun May 05, 2019 10:06 pm

coachd50 wrote:
Sun May 05, 2019 5:26 pm
Assets:
Checking Account : Generally carry a balance between $2,500 and say $4,000
Online Savings Account : $15,000
Fidelity taxable Brokerage Account : $88,000
Fidelity Roth IRA : about the same
Social Security Alternative : $1,200
...
Cash Flow Info
Current Gross Yearly Salary: About $53,000
...
Retirement Info
Member of the State Teachers Retirement Plan. This means extremely reduced if not zero Social Security benefit payments upon retirement.
Estimated Monthly Income from Teachers Retirement Plan at 25 years service credit (retiring at around 57 in 2032) $3,2000 a month. At 30 years credit (62 years old) estimated benefit is about $3,900 a month.

TAX info -- will be taking the Standard deduction
The missing item that stands is the lack of tax management and lack of retirement accounts. This is more important than the posted question about paying off the mortgage. Taking your $53k/yr gross at face value (you likely have other deductions), you're just into the 22% bracket by a hair (I think): $39,475 +$12,200 (standard deduction) = $51,675.

Either way, I think a better strategy is to reduce your tax liability. There are two options:

Option #1 if you have capital gains: fund a traditional IRA down with the goal to get into the 12% bracket ($39,475) and realize gains in the 0% bracket (gain topping at $39,475). Based on my assumptions above, of that $6k/yr tIRA contribution, roughly ~$1.5k/yr will be "used" to get to the 12% bracket, and will offset ~$4.5 in gains. This will minimize the capital gains brought into retirement years.

Option #2 minimal capital gain: fund a traditional IRA down with the goal to get into the 12% bracket ($39,475). Sell taxable accounts to fund a Roth IRA. This will leave you with roughly $1.5k/yr in tIRA and $4.5k/yr in Roth IRA.

Pursuing either option will not fully convert your taxable accounts over the next 12 years. It will take years to decompress your assets (not to mention your ongoing savings).

My numbers are very crude and just meant for illustration. The numbers will vary based on deductions not obvious in the post and should also consider state taxes. Please run your own.

Topic Author
coachd50
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by coachd50 » Sun May 05, 2019 10:23 pm

DVMResident wrote:
Sun May 05, 2019 10:06 pm
coachd50 wrote:
Sun May 05, 2019 5:26 pm
Assets:
Checking Account : Generally carry a balance between $2,500 and say $4,000
Online Savings Account : $15,000
Fidelity taxable Brokerage Account : $88,000
Fidelity Roth IRA : about the same
Social Security Alternative : $1,200
...
Cash Flow Info
Current Gross Yearly Salary: About $53,000
...
Retirement Info
Member of the State Teachers Retirement Plan. This means extremely reduced if not zero Social Security benefit payments upon retirement.
Estimated Monthly Income from Teachers Retirement Plan at 25 years service credit (retiring at around 57 in 2032) $3,2000 a month. At 30 years credit (62 years old) estimated benefit is about $3,900 a month.

TAX info -- will be taking the Standard deduction
The missing item that stands is the lack of tax management and lack of retirement accounts. This is more important than the posted question about paying off the mortgage. Taking your $53k/yr gross at face value (you likely have other deductions), you're just into the 22% bracket by a hair (I think): $39,475 +$12,200 (standard deduction) = $51,675.

Either way, I think a better strategy is to reduce your tax liability. There are two options:

Option #1 if you have capital gains: fund a traditional IRA down with the goal to get into the 12% bracket ($39,475) and realize gains in the 0% bracket (gain topping at $39,475). Based on my assumptions above, of that $6k/yr tIRA contribution, roughly ~$1.5k/yr will be "used" to get to the 12% bracket, and will offset ~$4.5 in gains. This will minimize the capital gains brought into retirement years.

Option #2 minimal capital gain: fund a traditional IRA down with the goal to get into the 12% bracket ($39,475). Sell taxable accounts to fund a Roth IRA. This will leave you with roughly $1.5k/yr in tIRA and $4.5k/yr in Roth IRA.

Pursuing either option will not fully convert your taxable accounts over the next 12 years. It will take years to decompress your assets (not to mention your ongoing savings).

My numbers are very crude and just meant for illustration. The numbers will vary based on deductions not obvious in the post and should also consider state taxes. Please run your own.
I am a bit confused. I already have a Roth IRA with almost the same value as my taxable account (about $88,000). I currently fund it fully ($6,000 in 2018, on track for $6000 in 2019) I was under the impression that I could only fund $6000 a year between any combination of IRA accts (traditional or roth)

I don't use the 403b through my employer because the MINIMUM fee would be about 2%.

DVMResident
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by DVMResident » Mon May 06, 2019 6:24 am

coachd50 wrote:
Sun May 05, 2019 10:23 pm
DVMResident wrote:
Sun May 05, 2019 10:06 pm
coachd50 wrote:
Sun May 05, 2019 5:26 pm
Assets:
Checking Account : Generally carry a balance between $2,500 and say $4,000
Online Savings Account : $15,000
Fidelity taxable Brokerage Account : $88,000
Fidelity Roth IRA : about the same
Social Security Alternative : $1,200
...
Cash Flow Info
Current Gross Yearly Salary: About $53,000
...
Retirement Info
Member of the State Teachers Retirement Plan. This means extremely reduced if not zero Social Security benefit payments upon retirement.
Estimated Monthly Income from Teachers Retirement Plan at 25 years service credit (retiring at around 57 in 2032) $3,2000 a month. At 30 years credit (62 years old) estimated benefit is about $3,900 a month.

TAX info -- will be taking the Standard deduction
The missing item that stands is the lack of tax management and lack of retirement accounts. This is more important than the posted question about paying off the mortgage. Taking your $53k/yr gross at face value (you likely have other deductions), you're just into the 22% bracket by a hair (I think): $39,475 +$12,200 (standard deduction) = $51,675.

Either way, I think a better strategy is to reduce your tax liability. There are two options:

Option #1 if you have capital gains: fund a traditional IRA down with the goal to get into the 12% bracket ($39,475) and realize gains in the 0% bracket (gain topping at $39,475). Based on my assumptions above, of that $6k/yr tIRA contribution, roughly ~$1.5k/yr will be "used" to get to the 12% bracket, and will offset ~$4.5 in gains. This will minimize the capital gains brought into retirement years.

Option #2 minimal capital gain: fund a traditional IRA down with the goal to get into the 12% bracket ($39,475). Sell taxable accounts to fund a Roth IRA. This will leave you with roughly $1.5k/yr in tIRA and $4.5k/yr in Roth IRA.

Pursuing either option will not fully convert your taxable accounts over the next 12 years. It will take years to decompress your assets (not to mention your ongoing savings).

My numbers are very crude and just meant for illustration. The numbers will vary based on deductions not obvious in the post and should also consider state taxes. Please run your own.
I am a bit confused. I already have a Roth IRA with almost the same value as my taxable account (about $88,000). I currently fund it fully ($6,000 in 2018, on track for $6000 in 2019) I was under the impression that I could only fund $6000 a year between any combination of IRA accts (traditional or roth)

I don't use the 403b through my employer because the MINIMUM fee would be about 2%.
Sorry, I didn’t see the annual contribution and falsely assumed there wasn’t any for 2019. You are correct about the contribution limits. My point about trying to stay within the 12% bracket stands, which may include using some tIRA rather than all Roth.


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Dargo
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by Dargo » Fri Jul 12, 2019 9:43 am

Ultimately go with whichever gives you more peace of mind. Having more and owing more or having less and owing less or nothing
Life is what happens to you when you are busy making other plans..John Lennon

dred pirate
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by dred pirate » Fri Jul 12, 2019 12:41 pm

I find myself is a somewhat similar situation. I can't pay off my mortgage with my taxable account - but I have a decent chunk of change left over after I max out my 403b, roth, HSA, etc. So, I can either put money into a taxable account (I have 150k in it) or I can pay more towards my mortgage (220k at 4 1/8th%) I work in a field that is seeing major changes and cut backs (pharmacy), but I feel pretty secure in my job - as my sector currently isn't being reduced - but obviously that could all change. I personally feel comfortable hedging my bets. use half the extra towards the mortgage, and the other half into a taxable rainy day fund. Since I have a baby on the way, I feel better having a decent cushion if I need it. For the OP I think it comes down to what they feel comfortable doing. I would love to be debt free, but not at the risk of depleting my savings IF I am not extremely secure in my job.

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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by miket29 » Fri Jul 12, 2019 3:20 pm

coachd50 wrote:
Sun May 05, 2019 5:26 pm
House. Bought House for $165,000 in 2008. Put $33,000 down and borrowed $132,000. It appraises at about $200,000 now. Refinanced original mortgage in 2012 to lower rate from 5.35% to 4.00% 30 year with zero closing costs. Owe $68,000.
Home Buyers Credit- $4,000 Must repay $500 a year when paying taxes. 0% interest.

House Note: $1,220 each month. Breakdown is about $260 to Home Owners Inurance and Property Tax, about $579 principle and interest, and currently pay $386 extra principle payment. Also have paid an extra $2,000 or so to principal at the end of each year for the last few years.
Have you looked into a 15 year refinance loan? A quick web search showed the rates are around 3.25%, and given what you've been prepaying you might even look at a 10 year loan.

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coachd50
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by coachd50 » Fri Jul 12, 2019 3:42 pm

dred pirate wrote:
Fri Jul 12, 2019 12:41 pm
I find myself is a somewhat similar situation. I can't pay off my mortgage with my taxable account - but I have a decent chunk of change left over after I max out my 403b, roth, HSA, etc. So, I can either put money into a taxable account (I have 150k in it) or I can pay more towards my mortgage (220k at 4 1/8th%) I work in a field that is seeing major changes and cut backs (pharmacy), but I feel pretty secure in my job - as my sector currently isn't being reduced - but obviously that could all change. I personally feel comfortable hedging my bets. use half the extra towards the mortgage, and the other half into a taxable rainy day fund. Since I have a baby on the way, I feel better having a decent cushion if I need it. For the OP I think it comes down to what they feel comfortable doing. I would love to be debt free, but not at the risk of depleting my savings IF I am not extremely secure in my job.
Thank you for the reply. I guess the biggest part of my question was "is it 'correct' to view paying off a mortgage as part of a bond allocation.

dred pirate
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by dred pirate » Fri Jul 12, 2019 4:17 pm

like others said - it is a reasonable statement (bond allocation) although I personally will argue that your house should NOT be seen as part of your portfolio. It is a separate place that you live, etc - you always need a place to sleep (although you can argue you can always downsize, move, etc) - BUT as far as your network, AA, etc - I (my opinion only) keep it separate and don't see it as something that will generate income or as piggybank to dip into when needed,

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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by bradpevans » Fri Jul 12, 2019 4:57 pm

I lean toward the invest rather than pay down camp, especially at 4% (or lower)

1) If you could buy a guaranteed fund at 4%, would you put ALL of your money into it?
at certain phases of life, certainly yes. but probably not during accumulation phase
my AA is very aggressive, so that may cloud my view

2) the investment (or more relevantly), the retirement money will probably be "in the market" longer than the mortgage
(i dont think you have to "beat 4%" each and every month, you just want to have made a better choice by the time you use the money

3) If the plan is to pay off the mortgage quickly, but then immediately invest in equities we *expect* to beat 4%,
i would suggest put the extra in the equities now, giving them more time in the market.

4) pre-paying mortgage doesn't help monthly cash flow (paying it OFF does)

macheta
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by macheta » Sat Jul 13, 2019 10:28 am

The decision to pay off the mortgage or not really comes down to your own goals. Do you want to have no mortgage with a smaller bank account or a mortgage with a larger bank account? Deciding to invest the money instead of paying off the house will give you the ability to make considerably more on a ROI. Deciding to payoff the house will give you the ability to not have a monthly house payment.

Going with investing option will give you a better return. For me personally, I have decided to start paying off my mortgage because I feel pretty comfortable with my current situation on accumulating money for retirement. Plus over the next several years, I will be employed with a company which does not have a very good reputation with layoffs. As a result, paying off the house now will allow me to sleep better if I happen to lose my job.

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coachd50
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by coachd50 » Sat Jul 13, 2019 2:38 pm

macheta wrote:
Sat Jul 13, 2019 10:28 am
The decision to pay off the mortgage or not really comes down to your own goals. Do you want to have no mortgage with a smaller bank account or a mortgage with a larger bank account? Deciding to invest the money instead of paying off the house will give you the ability to make considerably more on a ROI.
Couldn't the same be said when someone decreases their equity % and increases their bond % That is kind of what I was looking for perspective on.

macheta
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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by macheta » Sat Jul 13, 2019 2:57 pm

I wouldn't shift the assets based on my mortgage strategy. I would base it on how much risk and expected returns you are willing to accept. In a strong bull market, I would shift it towards equity and do the opposite in a bear market. I am about 13 years away from retirement and do not plan to shift to having less equity until five years out.

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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by grabiner » Sat Jul 13, 2019 3:02 pm

coachd50 wrote:
Sat Jul 13, 2019 2:38 pm
macheta wrote:
Sat Jul 13, 2019 10:28 am
The decision to pay off the mortgage or not really comes down to your own goals. Do you want to have no mortgage with a smaller bank account or a mortgage with a larger bank account? Deciding to invest the money instead of paying off the house will give you the ability to make considerably more on a ROI.
Couldn't the same be said when someone decreases their equity % and increases their bond % That is kind of what I was looking for perspective on.
This is exactly correct. Conversely, you could pay off your mortgage and keep your stock exposure, by selling bonds to pay off the mortgage (or selling taxable stocks and moving an equal amount in your 401(k) from bonds to stocks). That is what I will do if I decide to pay off my mortgage.

So you should decide separately how much stock you want to hold (your risk tolerance) and whether you want to pay off your mortgage (based on the mortgage rate versus bond rates, and whether you need the liquidity).
Wiki David Grabiner

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Re: OH no, ANOTHER "Should I pay off my Mortgage with Taxable acct" question, with a bit of a twist?

Post by vitaflo » Sat Jul 13, 2019 4:21 pm

coachd50 wrote:
Fri Jul 12, 2019 3:42 pm
Thank you for the reply. I guess the biggest part of my question was "is it 'correct' to view paying off a mortgage as part of a bond allocation.
Your mortgage is a negative bond, in that you are paying someone else's interest on their bond, instead of receiving interest from a bond you hold. So the question of course, is why would you pay out 4% to someone else's bond, when you can only get (say) 2% on your own (equivalent) bonds? One reason is it's much easier to liquidate your taxable account for something like emergencies than it is your house. That may be worth the trade off.

But if you have enough money to pay it off, and enough left over to manage your other financial needs, it (IMO) doesn't make sense to pay someone else a higher rate than you would receive. Keep in mind this is complicated by capital gains, etc, but the point still stands. This is what led me to pay off my (4.25%) mortgage a year and a half ago. Risk free rates were low, I lost the mortgage interest deduction, and capital gains in taxable weren't super high (I owned lots of International). After payoff I rebalanced accordingly.

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