Cash out taxable account to payoff student loans?

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AndMan
Posts: 21
Joined: Tue Feb 06, 2018 7:14 pm

Cash out taxable account to payoff student loans?

Post by AndMan » Wed Jul 11, 2018 11:19 pm

First some background:

Self: 29
Wife: 30
Children: 1st child on the way in February/march
Location: Tacoma,WA
Pretax income: $260,000
Tax Filing: married filing jointly
Emergency Fund: ~4 months of living expenses. Continue to contribute to each month, need to move this to higher earning savings account
School Loans: $55,000 remaining. Refinanced to 3.4% variable. To be paid off 12/2019, though with extra payments plan to move this up by a couple months.
Mortgage: We are a little over 1 year into a 30 yr mortgage at 4.375% with ~$450,000 remaining. We are paying PMI (I know we shouldn’t be in a situation where we had to pay PMI but it was before I became aware of bogleheads. Paying a bit extra ($300/month) to help fix this but school loans are the bigger priority (more of a psychological focus for us)

Auto: Wife’s car is paid off, have $17,000 left on my vehicle. At 2% this is my lowest priority. Will need bigger car for wife in near future with a kid on the way but her civic coupe should be usable for a bit.

Both now maxing out 403’s @ $18,500 + employer match of 1.5%.
Total investments ~100,000

Taxable funds:
AGTHX: American Funds The Growth Fund of America® Class A
CWGFX: American Funds Capital World Growth and Income Fund® Class F-1
CWGIX: American Funds Capital World Growth and Income Fund® Class A


I really like the idea of getting my wife’s school loans paid off before our kid comes. This would require an extra $25,000 in early payments. I have picked up a per diem job to help make some extra payments but not sure I can pay it off with this alone. I do have nearly $19,000 in taxable American funds(above) that I could cash out. Is this stupid given our loans have a fairly low interest rate? Like I said a lot of the desire to get rid of school loans is psychological so I worry that it could cloud my judgement a bit. These have been our primary focus and we have been putting $3250/month towards them regularly with many extra payments made over the past few years since finishing residency in 2015. I know there would also be value in just building up the cash reserves more so she can take some unpaid time off if she wants to. My american funds have pretty high ER's so if I am not going to cash them out I need to figure out a better alternative, suggestions?

Thank you!

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BL
Posts: 8105
Joined: Sun Mar 01, 2009 2:28 pm

Re: Cash out taxable account to payoff student loans?

Post by BL » Wed Jul 11, 2018 11:33 pm

https://www.etf.com/docs/IfYouCan.pdf
has 3 funds for a 3-fund portfolio. This might be something to work toward where you have a choice.

What would it take to remove PMI? That might be the most worthwhile. Not sure if you can deduct mortgage interest any more or not.

The other rates are not so bad. Good idea to get rid of them and never borrow again.

mhalley
Posts: 5836
Joined: Tue Nov 20, 2007 6:02 am

Re: Cash out taxable account to payoff student loans?

Post by mhalley » Wed Jul 11, 2018 11:59 pm

Paying off loans that have a relatively low interest rate is one of the things that makes personal finance personal. Being debt free except for a mortgage is a great feeling. In addition, gettin rid of those lousy funds is a plus. Assuming you have held them long enough to qualify for lt cap gains on them, it sounds like a great idea to me. Paying the loans as scheduled is fine also. It’s a personal decision with little downside either way.

Leemiller
Posts: 1010
Joined: Sat Jun 01, 2013 12:42 pm

Re: Cash out taxable account to payoff student loans?

Post by Leemiller » Thu Jul 12, 2018 6:53 am

I wouldn’t pay them off until after the baby was born. Also, not sure if your wife is working or not, but that may also impact my decision to wait. Some of this is career based, I like having a big emergency fund given my current career choice. Another piece of advice is for both of you to have term life insurance outside of your jobs and make sure you have enough insurance.

AndMan
Posts: 21
Joined: Tue Feb 06, 2018 7:14 pm

Re: Cash out taxable account to payoff student loans?

Post by AndMan » Thu Jul 12, 2018 1:43 pm

BL wrote:
Wed Jul 11, 2018 11:33 pm
https://www.etf.com/docs/IfYouCan.pdf
has 3 funds for a 3-fund portfolio. This might be something to work toward where you have a choice.

What would it take to remove PMI? That might be the most worthwhile. Not sure if you can deduct mortgage interest any more or not.

The other rates are not so bad. Good idea to get rid of them and never borrow again.

Would take ~60 k based off original mortgage, ~32 k based off current redfin estimate assuming it was accurate and we had it re-apprasied. I know those estimates are very inaccurate. Not sure what most people do when trying to get rid of PMI.

We did deduct mortgage interest last year, with the changes to standard deductions this year it we prob will not itemize.

Regarding PMI, I see the pro's as:
1) We are making up for the mistake we made in the 1st place in not buying a house that we had 20% down for.
2) We minimize "throwing" money away, ie PMI
3) One of our top three financial goals is for our next home to be waterfront so equity will be important as that purchase will likely be right around the 3x our income mark

Major con is it gains us no liquidity/financial freedom. One of the big reasons I want to payoff the student debt is that will take $3250/month of our budget that can help in case the wife wants to take some unpaid maternity leave. The alternative would be to just build up our EF further to account for this.

AndMan
Posts: 21
Joined: Tue Feb 06, 2018 7:14 pm

Re: Cash out taxable account to payoff student loans?

Post by AndMan » Thu Jul 12, 2018 1:44 pm

mhalley wrote:
Wed Jul 11, 2018 11:59 pm
Paying off loans that have a relatively low interest rate is one of the things that makes personal finance personal. Being debt free except for a mortgage is a great feeling. In addition, gettin rid of those lousy funds is a plus. Assuming you have held them long enough to qualify for lt cap gains on them, it sounds like a great idea to me. Paying the loans as scheduled is fine also. It’s a personal decision with little downside either way.
On the other hand, part of me thinks that cashing out these funds to pay them off is in a way cheating and taking the easy way out. I have had them since 2009 around the time the market bottomed out=so lt gains will not be an issue

AndMan
Posts: 21
Joined: Tue Feb 06, 2018 7:14 pm

Re: Cash out taxable account to payoff student loans?

Post by AndMan » Thu Jul 12, 2018 1:48 pm

Leemiller wrote:
Thu Jul 12, 2018 6:53 am
I wouldn’t pay them off until after the baby was born. Also, not sure if your wife is working or not, but that may also impact my decision to wait. Some of this is career based, I like having a big emergency fund given my current career choice. Another piece of advice is for both of you to have term life insurance outside of your jobs and make sure you have enough insurance.
So you are saying we should consider waiting to pay them off so in essence we could use the taxable account to cover expenses if she stays out of work unpaid longer than expected?

Both of our jobs are very stable, but we wouldnt be touching the EF none the lesss.

Plan on getting term life insurance after we have the baby. Read some posts here that we should not try to get it while she is pregnant.

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