Finish paying off home or start a IRA?

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jmac2007
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Finish paying off home or start a IRA?

Post by jmac2007 »

As the title says I'm looking to get advice on how to invest for my future. I'm 30 and would like retire at 50. I have some extra money each month that I'm not sure where to put it to maximize future gain. I know the majority will say invest because it will pay out more but the thought of owning my home outright brings peace of mind. I'm thinking I'll max out the IRA and put what I have left on my house principal. So I guess my real question is should I go traditional or Roth? I have a 401k (12%) so I'm under the impression to go Roth to have both options later on in life (taxable and non) Some info to help me decide

30
make $76k
owe $135,000 on home,paid $190,000
$32k in 401k
$36k in stocks
$10k in rainy day savings
No other debt besides the mortgage

Thanks for any help!
sport
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Re: Finish paying off home or start a IRA?

Post by sport »

I would suggest a Roth IRA. That will preserve your ability to do a "backdoor Roth" in the future, if your income disqualifies you for regular Roth contributions.
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FiveK
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Re: Finish paying off home or start a IRA?

Post by FiveK »

See Investment Order and links therein, particularly Traditional versus Roth - Bogleheads.
JBTX
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Re: Finish paying off home or start a IRA?

Post by JBTX »

You have just recently started saving, and would like to accumulate enough money in 20 years to live another 40 in retirement, give or take. You don't give much specifics but your plan is probably not realistic (unless you want to live very frugally ( near poverty level) and survive on social security once eligible).

To the extent you want to retire early and multiplicatively grow your savings that isn't going to happen paying off a 3-4% mortgage.
mortfree
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Re: Finish paying off home or start a IRA?

Post by mortfree »

You need to focus on your retirement and rainy day savings.

Don’t pay extra on the mortgage just yet. Your balance is low for a mortgage.

401k max is 19k
Roth max is 6k

There’s some perspective on the gap you have with current contributions versus potential contributions.

It’s great that you are realizing it now.
johnnyc321
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Re: Finish paying off home or start a IRA?

Post by johnnyc321 »

I’d save more for retirement. If you want to pay off the mortgage sooner, refi to a 15 year if you currently have a 30 year and plan to stay in the house for awhile. Rates should be decent now with the cut but I haven’t looked.
scubadiver
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Re: Finish paying off home or start a IRA?

Post by scubadiver »

Welcome to the forum.

With regards to the mortgage, you never mention a rate. In any event, I recommend you prioritize savings in the following way: (1) Contribute to 401k up to employer match, (2) Contribute to Roth IRA up to IRS limits, (3) Contribute to 401k above employer match level up to IRS limits.

Scubadiver
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jmac2007
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Re: Finish paying off home or start a IRA?

Post by jmac2007 »

So in my situation a Roth would be more advisable over a traditional ?
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CyclingDuo
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Re: Finish paying off home or start a IRA?

Post by CyclingDuo »

jmac2007 wrote: Thu Aug 01, 2019 3:41 pm As the title says I'm looking to get advice on how to invest for my future. I'm 30 and would like retire at 50. I have some extra money each month that I'm not sure where to put it to maximize future gain. I know the majority will say invest because it will pay out more but the thought of owning my home outright brings peace of mind. I'm thinking I'll max out the IRA and put what I have left on my house principal. So I guess my real question is should I go traditional or Roth? I have a 401k (12%) so I'm under the impression to go Roth to have both options later on in life (taxable and non) Some info to help me decide

30
make $76k
owe $135,000 on home,paid $190,000
$32k in 401k
$36k in stocks
$10k in rainy day savings
No other debt besides the mortgage

Thanks for any help!
You could use that extra money to both invest as well as pay additional principal on your mortgage. Plenty of calculators available online to show how much interest you will save if you pay it down early (like in 15 years instead of 30). Just plug in your numbers to see.
"Save like a pessimist, invest like an optimist." - Morgan Housel
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BL
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Re: Finish paying off home or start a IRA?

Post by BL »

Yes, and pay any left over toward the max of 19k in your 401k. That may be more than you have available. Didn't understand the "12%". Tax rate or contribution percent?


Did you pay 20% down on your house or are you paying extra with PMI?
What is the interest rate on your mortgage? Do you itemize?

Single, married, kids? This might affect eligibility for Saver's Credit, which is not just a simple calculation, but might need a tax program or estimator to figure out.
https://smartasset.com/taxes/understand ... tax-credit
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jmac2007
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Re: Finish paying off home or start a IRA?

Post by jmac2007 »

12 % is what I contribute.

I put 8K down if I recall correctly. I got the Pmi dropped last year. 4% interest rate. Itemize? I believe my tax guy does. I just bought bogleheads guide to investing so hopefully that'll open my eyes to some things. and single.
pwrdwnsys
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Re: Finish paying off home or start a IRA?

Post by pwrdwnsys »

jmac2007 wrote: Thu Aug 01, 2019 3:41 pm $10k in rainy day savings
You don't mention your monthly expenses, but a $10k emergency fund seems a little low compared to the common rule of thumb "6 months expenses". I'd work on that first.

You could kill 2 birds with one stone by using a Roth IRA as an emergency fund. The great thing about this is that you get to "reserve" that Roth space, which you only get a limited amount of every year. Once your EF is funded 100% outside your Roth, you can then manage your Roth at your desired (probably riskier) asset allocation.
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FiveK
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Re: Finish paying off home or start a IRA?

Post by FiveK »

jmac2007 wrote: Fri Aug 02, 2019 8:04 am So in my situation a Roth would be more advisable over a traditional ?
Maybe, maybe not. What line of reasoning are you using?
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BL
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Re: Finish paying off home or start a IRA?

Post by BL »

This might also be the time to learn about taxes by doing your own, whether or not you continue to have it done elsewhere. I watch Bogleheads for sales on H&R Block for under $25. You could get last year's and do the one you have in hand to see if you understand it. It really is the best way to learn (doing it by hand and reading Pub instructions for 1040 and instructions for each form and Pub 17 for more detailed info is even better.)

You would know about whether you itemize or not, for instance. Of course, right now, you can look at a copy of your 1040 and find out if itemized or Standard Deduction of 12k.
Last edited by BL on Fri Aug 02, 2019 11:18 am, edited 2 times in total.
scubadiver
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Re: Finish paying off home or start a IRA?

Post by scubadiver »

jmac2007 wrote: Fri Aug 02, 2019 8:04 am So in my situation a Roth would be more advisable over a traditional ?
Not exactly a well-posed question, but....

If you are talking about 401k contributions, go traditional for the tax deferral benefits. If you are talking about an IRA, it makes absolutely no sense for you to open a traditional IRA when you are eligible for a Roth IRA. Roth IRA contributions can be withdrawn at any time and earnings are not taxed except when taken as an early withdrawal.
jmac2007 wrote: Fri Aug 02, 2019 9:33 am I put 8K down if I recall correctly. I got the Pmi dropped last year. 4% interest rate. Itemize? I believe my tax guy does. I just bought bogleheads guide to investing so hopefully that'll open my eyes to some things. and single.
A good exercise for the reader would be to do your own taxes next year.
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FiveK
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Re: Finish paying off home or start a IRA?

Post by FiveK »

scubadiver wrote: Fri Aug 02, 2019 10:58 am...it makes absolutely no sense for you to open a traditional IRA when you are eligible for a Roth IRA.
It can make perfect sense if one assumes the marginal tax rate on tIRA withdrawals will be less than the rate saved due to the tIRA contribution.
scubadiver
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Re: Finish paying off home or start a IRA?

Post by scubadiver »

FiveK wrote: Fri Aug 02, 2019 11:08 am
scubadiver wrote: Fri Aug 02, 2019 10:58 am...it makes absolutely no sense for you to open a traditional IRA when you are eligible for a Roth IRA.
It can make perfect sense if one assumes the marginal tax rate on tIRA withdrawals will be less than the rate saved due to the tIRA contribution.
Indeed you are right. I had assumed the tIRA contributions would be non-deductible b/c the OP is covered by an employer sponsored plan, but it would appear that he does meet the income limits for at least partially deductible contributions. Thank you for correcting my error.

EDIT: Recognizing this, I would tend to favor increasing 401k contributions before contributing to a tIRA, just for the convenience if nothing else. And once you've hit the IRS max on 401k contributions, contributing to a Roth IRA has the benefit of tax-advantaged diversity. In my mind, the two unresolved questions are, (1) Does the OP see any value in that tax-advantaged diversity and (2) If the answer to the prior question is yes, does the OP contribute to a Roth IRA before maxing the 401k.
cherijoh
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Re: Finish paying off home or start a IRA?

Post by cherijoh »

jmac2007 wrote: Thu Aug 01, 2019 3:41 pm As the title says I'm looking to get advice on how to invest for my future. I'm 30 and would like retire at 50. I have some extra money each month that I'm not sure where to put it to maximize future gain. I know the majority will say invest because it will pay out more but the thought of owning my home outright brings peace of mind. I'm thinking I'll max out the IRA and put what I have left on my house principal. So I guess my real question is should I go traditional or Roth? I have a 401k (12%) so I'm under the impression to go Roth to have both options later on in life (taxable and non) Some info to help me decide

30
make $76k
owe $135,000 on home,paid $190,000
$32k in 401k
$36k in stocks
$10k in rainy day savings
No other debt besides the mortgage

Thanks for any help!
The rule of thumb is to save 15% of your income in order to comfortably retire at 65. You will need many multiples of your current savings to generate enough income upon which to retire. Your current 401k balance would support a maximum ANNUAL withdrawal of $1280 from which you would also have to pay taxes.

I would suggest throwing all extra money first to increasing your emergency fund to a minimum of 6 months of expenses and then towards retirment savings. Having a mortgage is the best inflation hedge available to an ordinary taxpayer since you are paying it off with cheaper dollars. An extreme example is that in the late 1970's early 80's, many people were earning double digits on a basic savings account while holding a mortgage with an interest rate of only 4 - 6%. In addition, it was not uncommon to be receiving a double digit annual raise back then. The last thing I would be doing is rushing to pay down a low interest rate mortgage. Is "peace of mind" worth delaying your retirement by several years?

In addition, how likely is it that you will actually stay in your house until you pay it off? Assuming a modest increase in real estate values, you would have a higher % profit for your home equity if you don't pay the mortgage off. In addition, aggressive mortgage repayment leaves you with a higher percentage of your net worth in an illiquid undiversified asset (i.e., a single piece of real estate) than it would otherwise be. Let's say at some point you decide to sell this house and purchase another one (e.g., work relocation, getting married etc.). It isn't always easy getting access to excess home equity for a down payment on the new house.
Topic Author
jmac2007
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Re: Finish paying off home or start a IRA?

Post by jmac2007 »

I currently have all my 401k money going into Voya target solution 2055, Is this a good choice?
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FiveK
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Re: Finish paying off home or start a IRA?

Post by FiveK »

jmac2007 wrote: Sat Aug 03, 2019 12:45 pm I currently have all my 401k money going into Voya target solution 2055, Is this a good choice?
What is the expense ratio for this fund (this will be the weighted expense ratios for the underlying funds, plus whatever fee Voya adds for overhead), and what funds does it hold in what percentages?
petulant
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Re: Finish paying off home or start a IRA?

Post by petulant »

jmac2007 wrote: Sat Aug 03, 2019 12:45 pm I currently have all my 401k money going into Voya target solution 2055, Is this a good choice?
What are the other options?
Topic Author
jmac2007
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Re: Finish paying off home or start a IRA?

Post by jmac2007 »

The options are

Asset allocation

voya target solution income
voya target solution 2020 -2060 (in 5 year increments)

STABILITY OF PRINCIPAL
Stable value fund

BONDS
blackrock value fund
fidelity total bond

LARGE CAP VALUE
american funds washington mutual
blackrock russell 3000 index

LARGE CAP GROWTH
voya large cap growth port

Small/mid/Specialty
JHancock dspl val mid cap
T.rpwe mid cap growth
federated clover sm cap vl
T.Rowe price new horizions

Global/international
Blackrock global equity Ex us
American funds europac

Still trying to find the expense ratio
petulant
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Re: Finish paying off home or start a IRA?

Post by petulant »

Yeah, it would help if you could just put in the ticker symbol and/or expense ratio.
Topic Author
jmac2007
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Re: Finish paying off home or start a IRA?

Post by jmac2007 »

Updated funds with expense ratios and ticker symbols where available

voya target solution income
voya target solution 2020 -2060 (in 5 year increments) .66

STABILITY OF PRINCIPAL
Stable value fund .78

BONDS
blackrock value fund .32
fidelity total bond FEPIX .50

LARGE CAP VALUE
american funds washington mutual RWMEX .64
blackrock russell 3000 index .28

LARGE CAP GROWTH
voya large cap growth port IEOHX .67

Small/mid/Specialty
JHancock dspl val mid cap JVMIX .86
T.rpwe mid cap growth PAMCX 1.02
federated clover sm cap vl VSFIX 1.02
T.Rowe price new horizions PRNHZ .79

Global/international
Blackrock global equity Ex us .38
American funds europac REREX .64
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FiveK
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Re: Finish paying off home or start a IRA?

Post by FiveK »

jmac2007 wrote: Wed Aug 14, 2019 10:23 am voya target solution 2020 -2060 (in 5 year increments) .66

blackrock russell 3000 index .28
Blackrock global equity Ex us .38
The extra fees being charged for the voya target funds, compared with what it would cost you for US and/or international funds, seem excessive, but that's just opinion.

You can switch funds within a 401k with no tax consequence.

That still leaves your choice of traditional vs. Roth....
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jmac2007
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Re: Finish paying off home or start a IRA?

Post by jmac2007 »

I decided to go roth. My question is now where should I contribute in my 401k?
MotoTrojan
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Re: Finish paying off home or start a IRA?

Post by MotoTrojan »

jmac2007 wrote: Wed Aug 14, 2019 2:38 pm I decided to go roth. My question is now where should I contribute in my 401k?
I'd put it all in the blackrock russell 3000 fund personally and balance it with international stocks and maybe bonds in the Roth (or just a target fund).

What is your overall savings rate? It will need to be much more than 12% if you want to retire in 20 years.
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jmac2007
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Re: Finish paying off home or start a IRA?

Post by jmac2007 »

I'm gonna do 40% voya large cap 40% black rock 3000 index and 20% T rowe price new horizons. I'll do bonds and international with my Roth. Would adding a 4th fund to my 401K be a bad idea?
catfish48084
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Re: Finish paying off home or start a IRA?

Post by catfish48084 »

Just another angle of thought on home mortgage .....

the "return" on principle paydown is equivalent to mortgage rate. Example: am I better using my available cash to avoid that annual interest expense, or investing it in something that has a higher rate of return? With mortgage rates as low as they are, there may be better returns elsewhere.

the other aspect is that the annual appreciation on the home is the same whether you own the home outright, or whether you carry debt. In this respect a mortgage gives you leverage on your equity. Example: if you have $20K equity on a $100K home appreciating 3% per year ($3000 equity gain in this example), you are making 3K on 20K, which is 15%.

My mortgage is paid off, but I'm definitely part of the crowd who regards mortgage debt as good debt.

Just another angle on property ownership ..... if you live in a duplex and rent one side, there are also benefits of a portion of mortgage interest being a deductible expense in a rental business. And although the home is in reality appreciating, you can depreciate as an asset of the business for tax purposes.

A good portion of wealthy people make their money in real estate, and the leverage of debt plays a significant role
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Re: Finish paying off home or start a IRA?

Post by grabiner »

What is the rate on the mortgage? Paying down loans versus investing on the wiki suggests comparing the mortgage rate to bond yields, as paying down the mortgage gives you a risk-free return, and investing in bonds gives a low-risk return.

Even if your mortgage rate is slightly higher after tax than the comparable bond fund in your Roth IRA (probably Total Bond Market at a 2.36% yield with a 6-year duration), I would recommend investing in the Roth IRA. The reason is that the Roth IRA is use-or-lose; if you pay down the mortgage, you will eventually have eliminated the mortgage payment and have more money to invest, but you won't be able to get back the lost tax-deferred space.

And if your mortgage rate is much higher than bond fund rates, you should probably refinance, as mortgage rates now are very low. If you are considering making extra mortgage payments anyway, you can afford to refinance from 30 to 15 years.

But you have a taxable stock investment. If your investments aren't 100% stock, and you don't have an extremely low mortgage rate, you can get a risk-free gain while keeping the same stock allocation: sell stock in your taxable account to pay off the mortgage, and move an equal amount from bonds to stock in your 401(k).
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grabiner
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Re: Finish paying off home or start a IRA?

Post by grabiner »

cherijoh wrote: Fri Aug 02, 2019 12:52 pm In addition, how likely is it that you will actually stay in your house until you pay it off? Assuming a modest increase in real estate values, you would have a higher % profit for your home equity if you don't pay the mortgage off. In addition, aggressive mortgage repayment leaves you with a higher percentage of your net worth in an illiquid undiversified asset (i.e., a single piece of real estate) than it would otherwise be.
You own the same asset whether it has a mortgage or not. If you own a $200K home with a $150K mortgage, and home prices drop 20%, your equity drops from $50K to $10K, a $40K loss. If you sell $150K in investments to pay off that mortgage, and home prices drop 20%, your equity drops from $200K to $160K, a $40K loss which is the same fraction of your net worth.

Likewise, you don't care about the percent profit on your home equity. If home values rise by 50%, you make a profit of $100K on the sale, whether you have the $150K mortgage (which you must then pay off) or not.

But your other argument, liquidity, is important, and is an argument against paying down a mortgage, for reasons such as this:
Let's say at some point you decide to sell this house and purchase another one (e.g., work relocation, getting married etc.). It isn't always easy getting access to excess home equity for a down payment on the new house.
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Re: Finish paying off home or start a IRA?

Post by StealthRabbit »

international stocks and maybe bonds in the Roth (or just a target fund).
generally... you DO NOT do 'conservative investing' in your Roth. (It is "tax free", including earnings!!)

Put the high gainers into Roth,

Sounds like your mortgage is <4%, Keep it. Invest in growth instead.
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