Contribute extra $ into Roth or Mortgage

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dotdotloop
Posts: 27
Joined: Sun Aug 05, 2018 3:52 pm

Contribute extra $ into Roth or Mortgage

Post by dotdotloop » Thu Aug 09, 2018 1:44 pm

Here's our background:
Ages- 31
$52k salary- husband works and I stay at home with our children
$90k remaining on mortgage- 7/1 ARM at 2.875%- 3.5 years until adjustment
$27k months of emergency fund in MM at 1.85%
$23k in savings earmarked for car/health/home repairs
$26k in low risk investments earmarked for downpayment on a home in a few years
$110k in retirement ($3k in 401k, $41k in Roths, $65k in teacher retirement system)
$2k in 529 plans for our children

We currently contribute 15% to retirement monthly and have been putting an additional $100/month into our mortgage. I watch our budget and spending closely and every penny matters to me because we're really trying to prioritize saving. Thoughts on this extra $100- mortgage or Roths?

bradpevans
Posts: 355
Joined: Sun Apr 08, 2018 1:09 pm

Re: Contribute extra $ into Roth or Mortgage

Post by bradpevans » Thu Aug 09, 2018 1:48 pm

dotdotloop wrote:
Thu Aug 09, 2018 1:44 pm
Here's our background:
Ages- 31
$52k salary- husband works and I stay at home with our children
$90k remaining on mortgage- 7/1 ARM at 2.875%- 3.5 years until adjustment
$27k months of emergency fund in MM at 1.85%
$23k in savings earmarked for car/health/home repairs
$26k in low risk investments earmarked for downpayment on a home in a few years
$110k in retirement ($3k in 401k, $41k in Roths, $65k in teacher retirement system)
$2k in 529 plans for our children

We currently contribute 15% to retirement monthly and have been putting an additional $100/month into our mortgage. I watch our budget and spending closely and every penny matters to me because we're really trying to prioritize saving. Thoughts on this extra $100- mortgage or Roths?
I would do the Roth. The Roth will compound for decades, the mortgage will end much sooner (and you can get your principal if needed). Yes the mortgage is a guaranteed return: but at 2.875%. My assumption is that my retirement accounts will earn more than that.

dotdotloop
Posts: 27
Joined: Sun Aug 05, 2018 3:52 pm

Re: Contribute extra $ into Roth or Mortgage

Post by dotdotloop » Thu Aug 09, 2018 1:53 pm

bradpevans wrote:
Thu Aug 09, 2018 1:48 pm
dotdotloop wrote:
Thu Aug 09, 2018 1:44 pm
Here's our background:
Ages- 31
$52k salary- husband works and I stay at home with our children
$90k remaining on mortgage- 7/1 ARM at 2.875%- 3.5 years until adjustment
$27k months of emergency fund in MM at 1.85%
$23k in savings earmarked for car/health/home repairs
$26k in low risk investments earmarked for downpayment on a home in a few years
$110k in retirement ($3k in 401k, $41k in Roths, $65k in teacher retirement system)
$2k in 529 plans for our children

We currently contribute 15% to retirement monthly and have been putting an additional $100/month into our mortgage. I watch our budget and spending closely and every penny matters to me because we're really trying to prioritize saving. Thoughts on this extra $100- mortgage or Roths?
I would do the Roth. The Roth will compound for decades, the mortgage will end much sooner (and you can get your principal if needed). Yes the mortgage is a guaranteed return: but at 2.875%. My assumption is that my retirement accounts will earn more than that.
Excellent!! That's what I was thinking too, but I just wanted a little confirmation. I sure hope our Roths get more than 2.875%!! :)

megabad
Posts: 828
Joined: Fri Jun 01, 2018 4:00 pm

Re: Contribute extra $ into Roth or Mortgage

Post by megabad » Thu Aug 09, 2018 6:15 pm

dotdotloop wrote:
Thu Aug 09, 2018 1:44 pm
Here's our background:
Ages- 31
$52k salary- husband works and I stay at home with our children
$90k remaining on mortgage- 7/1 ARM at 2.875%- 3.5 years until adjustment
$27k months of emergency fund in MM at 1.85%
$23k in savings earmarked for car/health/home repairs
$26k in low risk investments earmarked for downpayment on a home in a few years
$110k in retirement ($3k in 401k, $41k in Roths, $65k in teacher retirement system)
$2k in 529 plans for our children

We currently contribute 15% to retirement monthly and have been putting an additional $100/month into our mortgage. I watch our budget and spending closely and every penny matters to me because we're really trying to prioritize saving. Thoughts on this extra $100- mortgage or Roths?
Congratulations on budgeting skillfully and saving 15% toward retirement! I would lean toward contributing more toward the Roth IRA instead of the mortgage given that you intend to move soon. At the same time, I would also be ready for a significantly higher mortgage payment down the road as we have all been a bit spoiled by the low interest rates. If you were to stay in your current home, I would not be surprised to see an increase of $200 per month upon rate adjustment and that can hurt.

dotdotloop
Posts: 27
Joined: Sun Aug 05, 2018 3:52 pm

Re: Contribute extra $ into Roth or Mortgage

Post by dotdotloop » Thu Aug 09, 2018 8:37 pm

megabad wrote:
Thu Aug 09, 2018 6:15 pm
dotdotloop wrote:
Thu Aug 09, 2018 1:44 pm
Here's our background:
Ages- 31
$52k salary- husband works and I stay at home with our children
$90k remaining on mortgage- 7/1 ARM at 2.875%- 3.5 years until adjustment
$27k months of emergency fund in MM at 1.85%
$23k in savings earmarked for car/health/home repairs
$26k in low risk investments earmarked for downpayment on a home in a few years
$110k in retirement ($3k in 401k, $41k in Roths, $65k in teacher retirement system)
$2k in 529 plans for our children

We currently contribute 15% to retirement monthly and have been putting an additional $100/month into our mortgage. I watch our budget and spending closely and every penny matters to me because we're really trying to prioritize saving. Thoughts on this extra $100- mortgage or Roths?
Congratulations on budgeting skillfully and saving 15% toward retirement! I would lean toward contributing more toward the Roth IRA instead of the mortgage given that you intend to move soon. At the same time, I would also be ready for a significantly higher mortgage payment down the road as we have all been a bit spoiled by the low interest rates. If you were to stay in your current home, I would not be surprised to see an increase of $200 per month upon rate adjustment and that can hurt.
Thank you! I try really hard to be wise with the money we have and earn.

Thanks- that's my thinking too. I know it's only $100/month, but I think it'll be worth a lot more in the long run than it would the money was put into the house. Would you consider refinancing into a 15 year now while rates are lower? (I know this is veering more into a personal finance question now)

mortfree
Posts: 1325
Joined: Mon Sep 12, 2016 7:06 pm

Re: Contribute extra $ into Roth or Mortgage

Post by mortfree » Thu Aug 09, 2018 8:54 pm

$100 to Roth.

Do not refinance the mortgage (unless you get a no fee refinance). Also you may struggle to find a mortgage if your balance is only 90k.

I want to point something else out.

27k for EF
23k for “EF like” expenses.

Why don’t you put the 23k in the MM too? Now you have 50k or 1 year of your household gross income.

Then there is the 26k “low risk” investments for future home.

I think something could be done with those buckets.

Finally why are you going to move?

mikeyzito22
Posts: 103
Joined: Sat Dec 02, 2017 5:42 pm

Re: Contribute extra $ into Roth or Mortgage

Post by mikeyzito22 » Thu Aug 09, 2018 9:01 pm

Just out of curiosity, how do you know exactly how much you have in the "Teacher's Retirement System?" Our state doesn't let you know how much is in there but only gives you an estimate. :)

KlangFool
Posts: 10744
Joined: Sat Oct 11, 2008 12:35 pm

Re: Contribute extra $ into Roth or Mortgage

Post by KlangFool » Thu Aug 09, 2018 9:02 pm

OP,

1) How many kids?

2) If you contribute enough money to Trad. 401K and Trad. IRA, besides not paying tax, the IRS may pay you due to tax credits.

Check out EITC and Saver's credit.

https://www.irs.gov/credits-deductions/ ... tax-credit

https://www.bogleheads.org/wiki/Saver%27s_credit

3) So, the correct answer is Trad. 401K and Trad. IRA.

KlangFool

mortfree
Posts: 1325
Joined: Mon Sep 12, 2016 7:06 pm

Re: Contribute extra $ into Roth or Mortgage

Post by mortfree » Thu Aug 09, 2018 9:15 pm

KlangFool wrote:
Thu Aug 09, 2018 9:02 pm
OP,



2) If you contribute enough money to Trad. 401K and Trad. IRA, besides not paying tax, the IRS may pay you due to tax credits.

Check out EITC and Saver's credit.

https://www.irs.gov/credits-deductions/ ... tax-credit

https://www.bogleheads.org/wiki/Saver%27s_credit

3) So, the correct answer is Trad. 401K and Trad. IRA.

KlangFool
Do teachers even get a 401k? In my state they contribute to a 403b I believe. Same tax benefits as a 401k?

KlangFool
Posts: 10744
Joined: Sat Oct 11, 2008 12:35 pm

Re: Contribute extra $ into Roth or Mortgage

Post by KlangFool » Thu Aug 09, 2018 9:41 pm

mortfree wrote:
Thu Aug 09, 2018 9:15 pm
KlangFool wrote:
Thu Aug 09, 2018 9:02 pm
OP,



2) If you contribute enough money to Trad. 401K and Trad. IRA, besides not paying tax, the IRS may pay you due to tax credits.

Check out EITC and Saver's credit.

https://www.irs.gov/credits-deductions/ ... tax-credit

https://www.bogleheads.org/wiki/Saver%27s_credit

3) So, the correct answer is Trad. 401K and Trad. IRA.

KlangFool
Do teachers even get a 401k? In my state they contribute to a 403b I believe. Same tax benefits as a 401k?
mortfree,

I believe so. In some cases, they have 457 plan too.

KlangFool

User avatar
FiveK
Posts: 5864
Joined: Sun Mar 16, 2014 2:43 pm

Re: Contribute extra $ into Roth or Mortgage

Post by FiveK » Fri Aug 10, 2018 1:05 am

KlangFool wrote:
Thu Aug 09, 2018 9:02 pm
3) So, the correct answer is Trad. 401K and Trad. IRA.
dotdotloop, this is well worth considering. Depending on the number of children and the amount contributed, using traditional accounts could get you Earned Income Tax Credits also.

You could put your actual income amounts into the personal finance toolbox spreadsheet and see what your marginal tax saving rates would be. The higher they are, the more likely traditional will work better for you than Roth.

basspond
Posts: 1099
Joined: Wed Nov 27, 2013 4:01 am

Re: Contribute extra $ into Roth or Mortgage

Post by basspond » Fri Aug 10, 2018 7:20 am

If you will be moving before the ARM resets, I would split between Roth and increasing your savings for a different house. If after, on the house.

User avatar
MedicatedMoney
Posts: 95
Joined: Mon May 28, 2007 11:22 am
Location: Philadelphia

Re: Contribute extra $ into Roth or Mortgage

Post by MedicatedMoney » Fri Aug 10, 2018 7:26 am

FiveK wrote:
Fri Aug 10, 2018 1:05 am
KlangFool wrote:
Thu Aug 09, 2018 9:02 pm
3) So, the correct answer is Trad. 401K and Trad. IRA.
dotdotloop, this is well worth considering. Depending on the number of children and the amount contributed, using traditional accounts could get you Earned Income Tax Credits also.

You could put your actual income amounts into the personal finance toolbox spreadsheet and see what your marginal tax saving rates would be. The higher they are, the more likely traditional will work better for you than Roth.
2nd or in this case, 3rd this advice!
Quick back of envelope calculation looks like a Trad 401k makes most sense depending on 2 or more kids.
If you are not incline to do this, I would do the Roth over the house for reason stated above

BTW - excellent job saving with the numbers you provided. With these numbers and your ability to save, no option presented here is the wrong decision.
-Medicated

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