Taking mortgage to contribute more to Roth

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Slick8503
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Taking mortgage to contribute more to Roth

Post by Slick8503 » Mon Dec 22, 2014 1:06 pm

This year my wife and I have been in the process of completely remodeling a house, and have done it with all cash(except 50K 401k loan). I estimate the house to be worth in the neighborhood of 150-180k. We moved in this week. I would like the board's opinion on whether it would be prudent to take out a mortgage on the property to replenish some liquidity and then use my 401k with Fidelity to contribute after tax to convert to Roth. My thinking is that with rates as low as they are (quoted 3.625 30 yr) it may make sense. Especially considering I will be investing some of the resulting cash in Roth space. In my mind the pros would be:

Increase liquidity. This is especially important to me, because I would like to be in a position to purchase more farmland close to me if the opportunity presents itself in the future. Rates for farmland loans are quite a bit higher compared to residential conforming mortgages. I really like the idea of locking in a 30 yr rate under 4%.

Able to move more to tax advantaged space.

Will actually raise cash flow in the near term(5 year term of 401k loan), because I would be able to pay myself back the 401k loan and get rid of the ~800/month contribution to this.

Inflation Hedge

Cons:
Possibility of investment returns being terrible and underperforming the mortgage rate.

My salary is ~90k, my wife's ~60k
Mid 6 figures portfolio
Both my wife and I Contribute the max to our 401k, Roth, and HSA
We do have a farm loan on 30 acres with a balance of ~70k @ 3.1% with 12 years left. value of ~130k
No other debt.


Thoughts?

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cfs
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Re: Taking mortgage to contribute more to Roth

Post by cfs » Mon Dec 22, 2014 2:34 pm

Good question.

I will never take a loan to invest the money in the stock market, but that's my [unqualified] point of view, and now let's wait for the [qualified] board members to give their [qualified] point of view. Merry Christmas.
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niceguy7376
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Re: Taking mortgage to contribute more to Roth

Post by niceguy7376 » Mon Dec 22, 2014 4:06 pm

Is it that you bought a house with cash and took a 401k loan to improve it and now plan on taking a mortgage on it for increased cash flow? In this case, I would say yes and pay off the 401k loan and make judicial use of the money.

retiredjg
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Re: Taking mortgage to contribute more to Roth

Post by retiredjg » Mon Dec 22, 2014 4:39 pm

You want to take out a mortgage on a house you already own?

curmudgeon
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Re: Taking mortgage to contribute more to Roth

Post by curmudgeon » Tue Dec 23, 2014 1:11 am

Opinions here will vary. I would take out a mortgage to repay the 401K loan. That lets you get your 401K money back to your general investment pool. I would NOT take out additional money to pay taxes for Roth conversions (if I'm interpreting you correctly); you are presumably in a fairly high tax bracket to be doing that now regardless of the source of the money.

If you want leverage for other investments, yes, you may get better terms on a home mortgage. It's not always an easy call.

Terms for a "cash out" mortgage usually aren't quite as good as those for a purchase mortgage. You also need to pay attention whether the interest is deductible (I think there are limits in this scenario). Going with a shorter term HELOC might be another option.

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Re: Taking mortgage to contribute more to Roth

Post by retiredjg » Tue Dec 23, 2014 6:30 am

A HELOC to repay the 401k loan makes some sense to me. But a 30 year mortgage so you can invest more is just nuts. Besides, you said you already max out your 401k, Roth, and HSA space.

I think your real goal is to buy farmland with mortgage rates and all this other stuff is simply an effort to justify that.

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Slick8503
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Re: Taking mortgage to contribute more to Roth

Post by Slick8503 » Tue Dec 23, 2014 10:21 am

I will not deny that buying farmland is the ultimate goal. Sorry if you thought I was trying to disguise that. That is if an opportunity becomes available.(No sure thing) But is there not value in being able to contribute after tax to my 401k and convert to Roth, as opposed to simply throwing the contributions in taxable? I would still be able to access the contributions, so I don't see a downside, and avoiding future taxes as a big upside, should I not access that money until retirement.
Last edited by Slick8503 on Tue Dec 23, 2014 10:41 am, edited 1 time in total.

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Slick8503
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Re: Taking mortgage to contribute more to Roth

Post by Slick8503 » Tue Dec 23, 2014 10:27 am

Have been quoted %3.375 for 30 years with ~5200 in points and closing from Penfed. We are in 25% tax bracket. Just to add more detail

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Watty
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Re: Taking mortgage to contribute more to Roth

Post by Watty » Tue Dec 23, 2014 12:26 pm

Slick8503 wrote:We are in 25% tax bracket. Just to add more detail
I'm not sure if that includes your state taxes but either way it would take a compelling case to do Roth conversions in that tax bracket.

It seems that the real questions are;

1) Should you get a home equity loan to pay off the 401K loan?

Probably but you would need to crunch the after tax numbers to be sure. Doing a dummy tax return is a good way to do this. Using a 401k loan is like playing with fire since there are so many ways that it could go wrong. If the numbers are even close then paying it off is likely the best course of action.

2) Should you use the home equity loan to buy more farmland in the near future?

The last time I looked there was a $100K limit to deducting mortgage interest on a cash out refinance. If that is not an issue then it really depends on how your numbers work out.

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Slick8503
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Re: Taking mortgage to contribute more to Roth

Post by Slick8503 » Tue Dec 23, 2014 12:51 pm

I'm not sure if I am explaining my Roth plan very well. I am not proposing a normal "backdoor Roth". What I am talking about is making after tax contributions to my 401k and then transferring that money to my Vanguard Roth. Effectively making my annual Roth contribution maximum much higher than the normal 5500. I would still max out my pre-tax 401 and regular Roth. I'm not sure why one wouldn't want to do this if they were able.

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Re: Taking mortgage to contribute more to Roth

Post by retiredjg » Tue Dec 23, 2014 2:23 pm

Slick, your plan would be perfect if you had the extra money to do it. But taking out a mortgage to do it is just crazy in my opinion. Borrowing money to invest is just not wise.

If you are filling a 401k (or two?) and 2 Roth IRAs, and some HSA space and already have your house paid off (well, almost....) then you are probably saving enough money and there is no reason to borrow more to invest more.

It almost seems like you have not thought this through fully. If you borrow money to invest, then you have to have money coming in to pay off the loan. Why not just put that money into your after-tax account and roll it out to Roth? Or why not save that money for your farmland?

Or do you imagine you'll have enough money rolling in from your investments to pay the monthly note? You could not do that if the money is in your 401k's after-tax account.
I will not deny that buying farmland is the ultimate goal. Sorry if you thought I was trying to disguise that.
It is not so much that I thought you were disguising it, but the title of your thread is about taking the mortgage to contribute more to Roth. If this is part of a convoluted plan to eventually get some farm land...there are some stumbling blocks along the way. For example, if the Roth money ends up buying the farm land, what will be paying off the 30 year note?

Have you calculated the thousands of dollars you will pay over 30 years for a mortgage?

Something is just not adding up here, or so it seems to me.

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Slick8503
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Re: Taking mortgage to contribute more to Roth

Post by Slick8503 » Tue Dec 23, 2014 3:07 pm

6 months ago I had a first mortgage, on a home I recently sold, that was not much different then the one I might be taking out. It wasn't seen as odd to many on this board not to pay that mortgage ahead, and instead direct those funds to taxable, etc. But since I've sold that property and used cash from the sale, income, and a 401k loan to fund a new home, I'm now being told it is crazy to take out a mortgage. That seems odd to me. I'm now in the position to take out another 30 year loan with what I consider pretty great terms, historically, and I'm being told I'm nuts.

If a piece of ground comes up for sale two years from now, I highly doubt that I will be able to obtain a loan with the terms that I am able on this house. That, getting rid of the 401k loan, and having an extra liquidity cushion built back up make sense to me.

I do appreciate the feedback I am getting. It's always nice to have someone give you a reasonable dissenting opinion.

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Re: Taking mortgage to contribute more to Roth

Post by mnvalue » Tue Dec 23, 2014 3:16 pm

I'd take a mortgage over a 401k loan, for the safety factor. If the plan is to buy farmland anyway and the rates on the loans are as you say, yes, I'd take a lower-rate conforming residential loan over a higher-rate farmland loan. However, that's assuming 1) you want the farmland either way, 2) have decided to take a loan for it either way, and 3) such an opportunity will come up reasonably soon (otherwise, you're paying "mortgage rate - savings account rate" in interest to carry liquidity for a farmland purchase that hasn't happened yet).

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Slick8503
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Re: Taking mortgage to contribute more to Roth

Post by Slick8503 » Tue Dec 23, 2014 3:21 pm

That is a very good point mnvalue. My wife and I take advantage of rewards checking up to the 30K max, normally that pays 3%. I would probably lean toward splitting the proceeds 50% rewards checking+stable value/50%stocks. Is it a bad bet that combination would outperform 3.375%?

I would be borrowing 100-110k.

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Re: Taking mortgage to contribute more to Roth

Post by retiredjg » Tue Dec 23, 2014 3:44 pm

Now, I never said that you were nuts. I said the idea is nuts. That is not the same thing. :D

You have to remember that you know your situation and we are getting the info piece by piece. So the way things "look" to me may be all out in the weeds.

If several months ago you had decided to take out a mortgage to finance your new home, that would have made perfect sense to me. And maybe that is what you are actually thinking - you've realized it might have been better to have the mortgage than not have it. But you didn't do that - instead you used cash and a 401k loan. We don't know why, but that was your decision at the time. If you are a reasonable person, we have to assume your thinking at the time was reasonable.

Let's say you have changed your mind - you actually did need a mortgage in the first place. That's fine. I don't have a problem with that other than it seems you could get a shorter mortgage and a better interest rate.

But that is not what you asked in your post. You asked about "taking mortgage to contribute more to Roth". You specifically asked about borrowing money so that you could invest it in Roth IRA. That's what I consider nuts - borrowing to invest. Especially in light of the fact that you are already saving a boatload of money each year anyway.

And then in comes this idea of needing liquidity in case some farmland comes available. Hmmm, is that what this is all about? I don't know. Maybe land does have a higher interest rate than a house. But maybe you could take a HELOC for part of it and use the money you could be saving now (that would go to paying off the mortgage if you get one) for the rest of your farmland.

There seem to be many different reasons that you think this mortgage is a good idea. Are they reasonable or are they simply justifications for something else? I don't know the answer but I think you need to give this some long consideration before doing it.

It is not hard for people to fool themselves and I'm wondering if that is what you are doing here. If you sit on this for awhile, if you are fooling yourself, you'll see it in time.

I have to say your comparison of paying off or not paying off your old mortgage early does not hold water in terms of your question here. It is not the same thing at all. That fact that it seems similar to you is concerning. Again, I'm wondering if you are fooling yourself.

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Slick8503
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Re: Taking mortgage to contribute more to Roth

Post by Slick8503 » Tue Dec 23, 2014 3:53 pm

First off, I want to say how much I appreciate how much you help people of this site retiredjg. You do a great thing here.

I also appreciate your opinion on this matter. Can you explain exactly how it is different than paying off my other mortgage? I'm sorry if I'm being thick. To me, if my wife and I hadn't decided to move and the opportunity for this house didn't present itself. We would still have a 30 year mortgage, well 26years left mortgage.

I also want to apologize for the confusing title of the thread. While using the mortgage to help contribute to a "mega Roth" does make sense to me, I shouldn't have included this in the title of the thread.

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Re: Taking mortgage to contribute more to Roth

Post by retiredjg » Tue Dec 23, 2014 4:18 pm

Slick8503 wrote: Can you explain exactly how it is different than paying off my other mortgage? I'm sorry if I'm being thick. To me, if my wife and I hadn't decided to move and the opportunity for this house didn't present itself. We would still have a 30 year mortgage, well 26years left mortgage.
Assuming same interest rates, having a new mortgage is not different from having an old mortgage other than the fact that you'll pay $5k+ to get it and you set yourself back 4 years.

What is different is that you compared it to the question of paying off the old mortgage early as opposed to paying the old mortgage on schedule. That is what is different. I'm sorry to put this off, but I'll have to let my back burner brain work on this one before I have the right words to say why it is different. I most certainly will awaken at 3 am with the right words.

The other thing that is different is that you chose for whatever reason NOT to get a mortgage when you got this house. Why did you do that? What has changed?
I also want to apologize for the confusing title of the thread. While using the mortgage to help contribute to a "mega Roth" does make sense to me, I shouldn't have included this in the title of the thread.
Well, yes...but your potential mortgage is significantly bigger than the $50k you need to pay off the 401k loan. And sometimes what we say when not thinking carefully is a good representation for what we are thinking unconsciously. :happy You know you want that money to invest it! And frankly, I think getting a mortgage for only $50k is not smart - the closing costs are just too high. So I do understand. But, still....

A couple of questions.

1) Since you've got the income to pay a monthly house note, how long will it take to repay a $50k 401k loan?

2) Why not just take a $50k HELOC and pay off the 401k loan?

2) What is your wife's position on taking out this mortgage? Is it possible that she is not in favor and you are looking for support here?

Of course, you don't have to answer any of the questions posed here. Just let them percolate in your head for a bit.


Thanks for the kind words. :happy

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Re: Taking mortgage to contribute more to Roth

Post by placeholder » Tue Dec 23, 2014 9:40 pm

retiredjg wrote:Slick, your plan would be perfect if you had the extra money to do it. But taking out a mortgage to do it is just crazy in my opinion. Borrowing money to invest is just not wise.
I took out a home equity loan a few years ago to invest and there's really no difference between buying a house with a mortgage and then investing rather than pay off early and taking out a loan to invest.

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Re: Taking mortgage to contribute more to Roth

Post by grabiner » Tue Dec 23, 2014 11:21 pm

I would recommend taking the mortgage, but counting it as a negative bond in your asset allocation. If you take out a 30-year mortgage at 3.625% tax-deductible, and invest in Long-Term Treasury at 2.54% tax-free (in your Roth IRA), you essentially break even, and you aren't taking any extra risk because you have a long-term risk-free investment and a long-term risk-free obligation. The benefit is that you get more money in your Roth IRA to keep growing tax-deferred.

(I don't recommend Long-Term Treasury as an investment, but it gives a fair comparison; if you invest in intemediate-term corporate bonds, you take less interest-rate risk and more credit risk for about the same effect.)

(edited to fix italics)
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Re: Taking mortgage to contribute more to Roth

Post by LeeMKE » Tue Dec 23, 2014 11:56 pm

Just another tidbit that might help those thinking the OP was not financing the renovation correctly.

The interest rate on a 401K loan is much lower than a refi for a gut remodel. Many banks still aren't lending in this space because it is considered pretty risky. You are going to destroy the house to rebuild it, and if something goes wrong, or the homeowner runs out of money, the bank has a destroyed asset. Ergo, the better choice was to borrow from the 401K for the project.

Now, it's time to get that paid off, because the OP realizes, and many here have suggested, that a 401K loan is risky, and probably more expensive than a conventional mortgage. Now that the house is back together, they can get a mortgage without problem.
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Re: Taking mortgage to contribute more to Roth

Post by Bob's not my name » Wed Dec 24, 2014 7:58 am

Unclear why the 401k loan is risky. OP hasn't said there's a repay-on-termination requirement -- some plans have this, but not all.

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Slick8503
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Re: Taking mortgage to contribute more to Roth

Post by Slick8503 » Mon Dec 29, 2014 3:16 pm

Thanks for all the opinions given. I owe so much to this site.

Grabiner, that is a great point about 30 year treasuries and after tax mortgage rate being a wash. The problem i run into is that I currently don't have enough deductions to itemize even with the mortgage interest counted. Is this uncommon? I've always thought it odd that most seem to itemize. Perhaps I need an accountant. Ha.
I'm still kicking this around so anymore comments are definitely welcome. Thanks.

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Re: Taking mortgage to contribute more to Roth

Post by mnvalue » Mon Dec 29, 2014 8:46 pm

Slick8503 wrote:The problem i run into is that I currently don't have enough deductions to itemize even with the mortgage interest counted. Is this uncommon? I've always thought it odd that most seem to itemize.
Does your state have an income tax? State tax is deductible. So is real estate tax. Those two push us just barely over the standard deduction, and we make less income than you. If you're in a low-tax state, though, that'd explain it.

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Slick8503
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Re: Taking mortgage to contribute more to Roth

Post by Slick8503 » Mon Dec 29, 2014 10:26 pm

I thought others state income tax could be the culprit. Indiana's rate is 3.4%, which I believe is lower than most states who have an income tax. Thanks.
Also forgot to mention that, yes, the higher rates for rehab loans kept me from originally pursuing a loan on this property. The fact that rates have dropped significantly through the year makes it more enticing to me as well.

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