Where to *invest* additional funds?

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Topic Author
PavlovsCat
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Where to *invest* additional funds?

Post by PavlovsCat » Fri Aug 16, 2019 12:02 am

Hi all,

Trying to figure out where to put extra money for retirement. Wife and I both are local government (education) employees with access to 403b and 457b accounts. Current info:

Age: 37 & 39; three kids

Taxes: Married filing jointly

State of residence: California

Income:Combined ~200k per year

Debt
Mortgage primary house owe ~250k at 4.25% (~550k value)
Mortgage rental 1 owe ~125k at ~6% (~375k value, cash flow positive)
Mortgage Rental 2 owe ~200k at ~3% (~350k home value, cash flow positive)
No other debt.

Emergency Fund
Six months emergency fund in HYSA.

Currently contributing:
Vanguard 403b ($38,000 combined)
ROTH IRA ($12,000 combined)
HSA $7,000
529s for our three kids (extended family has made these accounts healthy, we do about $300/month total)

Where would you put remaining funds: toward the 6% mortgage, a post-tax investment account (probably Vanguard, <.25% fee), or in the 457b? Somewhere else? The drawback to the 457b is there are only annuities offered through VALIC, and the fees are generally >1.5%. There are variable annuities offered like VCNIX, albeit at a 1.53% expense ratio. It seems like with those high of expense ratios, a post-tax account might be preferred?

All help is appreciated, thank you!
Last edited by PavlovsCat on Fri Aug 16, 2019 3:24 pm, edited 1 time in total.

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Tyler Aspect
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Re: Where to spend additional funds?

Post by Tyler Aspect » Fri Aug 16, 2019 1:27 am

One possibility is to sell off rental #1 so that you can pay off the primary home mortgage. Then you would be only left with $200k commercial mortgage. Then any excess cash can be split half into a taxable fund, half paying off the remaining commercial mortgage.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

Topic Author
PavlovsCat
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Re: Where to spend additional funds?

Post by PavlovsCat » Fri Aug 16, 2019 8:32 am

Tyler Aspect wrote:
Fri Aug 16, 2019 1:27 am
One possibility is to sell off rental #1 so that you can pay off the primary home mortgage. Then you would be only left with $200k commercial mortgage. Then any excess cash can be split half into a taxable fund, half paying off the remaining commercial mortgage.
Thanks for that, the thought had crossed my mind. The house holds some sentimental value for my wife, soo think we are probably going to keep it at this point; in that scenario would you put money toward that 6% mortgage, the 457b with poor annuity choices, or a taxable account?

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abuss368
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Re: Where to spend additional funds?

Post by abuss368 » Fri Aug 16, 2019 8:38 am

I would consider both starting a taxable account (many advantages) and paying down the mortgage on the primary residence.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!"

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Tyler Aspect
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Re: Where to spend additional funds?

Post by Tyler Aspect » Fri Aug 16, 2019 12:02 pm

Paying off the 6% loan has the best return.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

Topic Author
PavlovsCat
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Re: Where to spend additional funds?

Post by PavlovsCat » Fri Aug 16, 2019 12:09 pm

abuss368 wrote:
Fri Aug 16, 2019 8:38 am
I would consider both starting a taxable account (many advantages) and paying down the mortgage on the primary residence.

Why would you pick the primary home loan over the 6% home loan?

Thanks again!

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Wiggums
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Re: Where to spend additional funds?

Post by Wiggums » Fri Aug 16, 2019 12:10 pm

Tyler Aspect wrote:
Fri Aug 16, 2019 12:02 pm
Paying off the 6% loan has the best return.
I agree

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abuss368
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Re: Where to spend additional funds?

Post by abuss368 » Fri Aug 16, 2019 12:14 pm

PavlovsCat wrote:
Fri Aug 16, 2019 12:09 pm
abuss368 wrote:
Fri Aug 16, 2019 8:38 am
I would consider both starting a taxable account (many advantages) and paying down the mortgage on the primary residence.

Why would you pick the primary home loan over the 6% home loan?

Thanks again!
I probably would as the rental should pay for itself. Owning your home free and clear is a nice position to be in and really provides additional financial flexibility.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!"

dknightd
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Re: Where to spend additional funds?

Post by dknightd » Fri Aug 16, 2019 12:17 pm

send the additional money to me. Problem solved ;)

seoultrain1
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Re: Where to *invest* additional funds?

Post by seoultrain1 » Fri Aug 16, 2019 5:47 pm

It depends; you might want to talk to a/your CPA.

The 6% is guaranteed return, but nearly all of the collected rent will become taxable income. Depending on where you are in your mortgage amortization schedule as well as federal and state tax implications of said rental income, you might be better off leaving that alone and starting an after-tax account. You might also consider re-financing that high rate mortgage if you don't pay it down.

BlackDiamond
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Re: Where to *invest* additional funds?

Post by BlackDiamond » Fri Aug 16, 2019 9:27 pm

Why not refi that high 6%?

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grabiner
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Re: Where to *invest* additional funds?

Post by grabiner » Sat Aug 17, 2019 8:42 pm

seoultrain1 wrote:
Fri Aug 16, 2019 5:47 pm
It depends; you might want to talk to a/your CPA.

The 6% is guaranteed return, but nearly all of the collected rent will become taxable income. Depending on where you are in your mortgage amortization schedule as well as federal and state tax implications of said rental income, you might be better off leaving that alone and starting an after-tax account. You might also consider re-financing that high rate mortgage if you don't pay it down.
But that 6% return is at worst 6% fully taxable, which is probably 4% after tax risk-free (assuming 24% federal and 9.3% CA tax bracket). Can you refinance it to a lower rate (possibly with a shorter term)?

If you donate relatively little to charity, paying down your home might be an even better deal. You are paying $11,000 in mortgage interest on your home, so you would need $3400 in charitable contributions (and $10,000 in state tax) to reach the $24,400 standard deduction. If you donate less than that to charity, paying down the home mortgage is a risk-free 4.25% return.

I would probably do either of these in preference to investing in a 403(b) with 1.5% expenses, unless you expect to leave the employer soon and roll that 403(b) into an IRA.
Wiki David Grabiner

MotoTrojan
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Re: Where to *invest* additional funds?

Post by MotoTrojan » Sat Aug 17, 2019 9:11 pm

BlackDiamond wrote:
Fri Aug 16, 2019 9:27 pm
Why not refi that high 6%?
This is the obvious first step, agreed.

Topic Author
PavlovsCat
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Re: Where to *invest* additional funds?

Post by PavlovsCat » Sun Aug 25, 2019 3:05 pm

MotoTrojan wrote:
Sat Aug 17, 2019 9:11 pm
BlackDiamond wrote:
Fri Aug 16, 2019 9:27 pm
Why not refi that high 6%?
This is the obvious first step, agreed.
After looking a bit more closely at the numbers, we have decided to sell this property. After looking at the numbers a bit more closely, this property is barely breaking even, thanks to double HOA fees of more than $2100/year.

Now the question is what to do with the leftover funds? Taxable investment account or pay down primary mortgage? Assuming even a ~6% return, a brokerage account would be a better choice, right?

MotoTrojan
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Re: Where to *invest* additional funds?

Post by MotoTrojan » Sun Aug 25, 2019 3:35 pm

PavlovsCat wrote:
Sun Aug 25, 2019 3:05 pm
MotoTrojan wrote:
Sat Aug 17, 2019 9:11 pm
BlackDiamond wrote:
Fri Aug 16, 2019 9:27 pm
Why not refi that high 6%?
This is the obvious first step, agreed.
After looking a bit more closely at the numbers, we have decided to sell this property. After looking at the numbers a bit more closely, this property is barely breaking even, thanks to double HOA fees of more than $2100/year.

Now the question is what to do with the leftover funds? Taxable investment account or pay down primary mortgage? Assuming even a ~6% return, a brokerage account would be a better choice, right?
Sure, a 6% return should win, but that isn't surefire. Have you looked to see what the breakeven would be to refi the primary home?

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grabiner
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Re: Where to *invest* additional funds?

Post by grabiner » Sun Aug 25, 2019 3:37 pm

PavlovsCat wrote:
Sun Aug 25, 2019 3:05 pm
Now the question is what to do with the leftover funds? Taxable investment account or pay down primary mortgage? Assuming even a ~6% return, a brokerage account would be a better choice, right?
This is discussed on the wiki: Paying down loans versus investing

Yes, you might get a higher return by investing in stock, but only with more risk. Paying down your home mortgage is a 4.25% risk-free return. The return is 3.85% after tax if you itemize only CA tax, or 2.83% if you itemize both CA and federal. The best you can do on a low-risk investment in a taxable account is 1.73% on Admiral shares of Vanguard CA Long-Term Tax-Exempt. This is the most fair comparison; if you want to take more risk, you can do that even if you do pay off the mortgage, by moving investments from bonds to stock.

A further benefit is that you should be able to pay off the primary mortgage entirely, either immediately or very soon. This will improve your cash flow, allowing you to use a smaller emergency fund.

I would still recommend filling the 457(b). You pay 24.3% tax on qualified dividends and long-term gains. If you buy a stock fund in your taxable account with a 2% yield, that is a tax cost of 0.48% until you sell, and probably about a 15% cost when you do sell, and you can't get rid of that cost. The 1.5% expense on the 457(b) compounds only as long as you stay with that employer; you can then roll over to an IRA, getting low expenses while keeping the tax deferral. My rule of thumb for this situation is that you should multiply the number of years you will stay with the plan by the extra expense, and consider a taxable account only if that number exceeds twice your tax on long-term gains. For you, 1.5% times 32 is 48%, so you would prefer the 457(b) unless you will be stuck with it for 32 years, and I don't think you intend to stay in this job through ages 69 or 71.
Wiki David Grabiner

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