Use Brokerage Account to Pay down mortgage OR purchase Roth IRAs

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fortfun
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Use Brokerage Account to Pay down mortgage OR purchase Roth IRAs

Post by fortfun »

DW and I are implementing a 4 year retirement plan (below). We have decided to pay down a big chunk of our mortgage, instead of buying bonds. This will free up $1,200/month in retirement. We are planning to max out our 8 tax advantaged accounts for the next 4 years. However, this will cause our emergency fund to get too small. Yesterday, I posted about using our brokerage account to fund our Roth IRAs the next few years. However, now, I'm wondering if I should just go ahead and use the brokerage account to pay down the mortgage now and then use the excess emergency fund to purchase our Roth IRAs the next few years.

I guess the advantage of using the brokerage account now, is that the stock market is up. Who knows where it might be when it comes to funding the Roth IRAs.

Let me know if I'm missing anything.
Thanks,
FortFun

If it helps, here's the link to our 4 year plan.
viewtopic.php?f=1&t=322523
retireIn2020
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Re: Use Brokerage Account to Pay down mortgage OR purchase Roth IRAs

Post by retireIn2020 »

Me? I'd do it asap. Get your future income and debt as low as possible. future benefits will be less SS tax, less income tax.
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grabiner
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Re: Use Brokerage Account to Pay down mortgage OR purchase Roth IRAs

Post by grabiner »

Since you already have a Roth IRA, you can keep your emergency fund there, keeping that part of your portfolio in low-risk bond funds. Contributions to a Roth IRA can be withdrawn tax-free and penalty-free at any time. This will allow you to take more out of your taxable account to pay down the mortgage, for a larger risk-free return.
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lakpr
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Re: Use Brokerage Account to Pay down mortgage OR purchase Roth IRAs

Post by lakpr »

For a married couple, Roth IRAs are $14,000 (assuming both are over the age of 50, and since you mentioned you are retiring within 4 years). You mention "paying down a huge chunk of mortgage", by that I assume you definitely mean more than $14k?

The Roth IRA space can never be claimed back once given up, so I'd take that option over paying down the mortgage any time. In addition, once you are retired, you cannot *contribute* to a Roth IRA any more, although you can do Roth conversions. For this reason, I would prioritize the Roth IRA first, then the remainder to paying down the mortgage.
terran
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Re: Use Brokerage Account to Pay down mortgage OR purchase Roth IRAs

Post by terran »

What would realizing those capital gains do to your tax situation? Would there be any benefit to doing it over time, so will you pay the same tax rate either way? Remember to account for Net Investment Income Tax.
aristotelian
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Re: Use Brokerage Account to Pay down mortgage OR purchase Roth IRAs

Post by aristotelian »

Do you have earned income? If you are currently working, what are you doing with new dollars? Contributing to Roth and paying off mortgage are both excellent ideas but I would be concerned about the tax hit. Using new contribution dollars could help minimize the tax hit from selling a bunch of stock in your brokerage account. If you are not currently working, you would not be allowed to contribute to Roth.
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fortfun
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Re: Use Brokerage Account to Pay down mortgage OR purchase Roth IRAs

Post by fortfun »

grabiner wrote: Tue Sep 15, 2020 8:26 pm Since you already have a Roth IRA, you can keep your emergency fund there, keeping that part of your portfolio in low-risk bond funds. Contributions to a Roth IRA can be withdrawn tax-free and penalty-free at any time. This will allow you to take more out of your taxable account to pay down the mortgage, for a larger risk-free return.
Thank Grabiner. I should have been clearer. In this case, I would use the brokerage account to pay down 34k of the mortgage right now, and then I would use our emergency fund to purchase Roth IRAs the next few years. The emergency fund would get pretty low by retirement but by then, my pension will kick in and like you said, we would have access to the Roth IRAs too. Not sure if this changes anything with your suggestion.
Thanks,
Fortfun.
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