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Payoff Mortgage in 6 years vs. Invest in Solo 401k and payoff house in 14 years?

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  • Payoff Mortgage in 6 years vs. Invest in Solo 401k and payoff house in 14 years?

    Greetings WCI Forum:

    I've been scratching my head trying to figure out the best way to go about this, any help or guidance would be greatly appreciated.

    Here is a summary:

    Wife (36) is a Psychiatrist at the VA (W-2) and is maxing her TSP + Match for the past 5 years.  She has $174K in Student Loans (all federal consolidated @ 2.75% fixed).  After this year, she will have finished about 2 years of PSLF payments.  Goal is to continue to work for VA until the PSLF kicks in, assuming it is still around, otherwise, it will be paid off in 11 years.  Small private loan from medical school ($15K @ 4.75% variable) which will be paid off either this year or next year).  Backdoor Roth for 2017 and beyond is in the works.

    Me (36); I'm an attorney and have my own consulting firm and receive a 1099 from the firms that I consult for.  I've set up a company with a solo 401k this year and plan to contribute towards it on a yearly basis.  I have $84K in law school loans (federal consolidated @ 3.5% fixed); plan is to pay off in 10 years like Wife's PSLF; $28K in private law school loans @ 5% variable; plan is to pay this off within two years.  Backdoor Roth for 2017 and beyond is in the works.  Essentially, I am a Stay at Home Dad that happens to work part time on my own time.

    We also have a 2 year old and started Florida prepaid program and a 529 on her behalf.  Contributing about $450 per month.  Plan to have one more kid.

    We have a Taxable Account with $13K and contribute $500 per month.  Also contribute $100 per month in Robinhood stock app for fun.

    We refinanced our home last year from a 30 year to a 15 year and have $268K left.  Rate is 2.75%.  House is worth about $550K and we live in a no state income tax state.

    I was doing some calculations and thought about "paying off" our mortgage using my business income alone (approx.. $40K per year) within 6 years.  Ideally, I'd love to pay it off before I was 40, but no dice.  Of course, that would mean zero contributions to my solo 401k for 6.5 years.  Once the house was paid off, then I'd begin my solo 401K contributions...I plan on working until 70, so I'd have approximately 30 years of growth.

    What does the Forum think?  Is it worth it?  Or should I focus on growing solo 401k instead and just plan to pay off mortgage by age 51?

    Thanks in advance!  Great forum!  I'll hang up and listen.

  • #2
    The debt from your mortgage is literally less than two percent after deduction, is simple amortizing interest, and might not even keep up with inflation. It should be the *last* of your priorities.

    Maxing your 401(k) should not only perform well beyond the rates of your mortgage and your student loans, but also has compounding gains and further reduces your tax bill. You can contribute $18,000 in elective deferrals as an "employee" plus 20% of net profit (revenue, minus expenses, minus half of self-employment tax) as an "employer." This should be a must.

    I would put your 4+% loans after that, followed by your other student loans.

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    • #3
      Thanks DMFA.  My wife thought the same too!  I guess the psychological/emotional context of paying off your house was clouding my thoughts.  Thanks for clearing that up.

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      • #4
        I'd compare it to your PSLF payments first of all. Not sure what your income is but student loan interest is not tax deductible for higher income households. Also, I'd do retirement contributions first and foremost since those are tax deferred. Basically with your plan you would not be taking advantage of tax deferment and will get rid of one of the few tax deductions. So Uncle Sam wins.

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        • #5
          Dreamgiver:  You are correct, we don't get the student loan interest tax deduction due to high income.

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          • #6




            Thanks DMFA.  My wife thought the same too!  I guess the psychological/emotional context of paying off your house was clouding my thoughts.  Thanks for clearing that up.
            Click to expand...


            I cannot agree with DMFA more. Lots of threads where its been discussed. Do the math and your psych/emotional outlook should change to sheer horror from leaving so much on the table and not optimizing the best you can.

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            • #7
              I would just add that I still prefer prepaying mortgage interest over bonds. I dont know what your AA is or what overall amount of bonds you hold, but I'd still prefer a 2% guarenteed return (after mortgage interest deduction) to an bond index fund. But I'm likely in the minority on this forum.

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              • #8
                Make that prepaying mortgage principal.....

                Edit function not working

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                • #9




                  I would just add that I still prefer prepaying mortgage interest over bonds. I dont know what your AA is or what overall amount of bonds you hold, but I’d still prefer a 2% guarenteed return (after mortgage interest deduction) to an bond index fund. But I’m likely in the minority on this forum.
                  Click to expand...


                  You dont have to supplant that with a bond though. It would depend on your overall AA allocation and life cycle time period of course.

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                  • #10
                    45 here and struggle with holding off mortgage payoff -- because it's a known fixed cost of 4% -- ~2.5% in high tax Cali for -- for the next 25 years.   I won't get a better deal out there.  My TaxExempt Bond fund is outperforming this and probably will in almost all situations unless another tragic collapse of economy.

                    Also in Cali, I don't want to hold too much RE equity in earthquake prone country -- let the bank take that shared risk.

                    FYI -- VA does offer payback of student Federal loans.  It did in the past, but they usually don't advertise the benefit since comes out of local budget funds, no central funds.

                    EDIT:   EDRP is the program  Title 38 :

                    https://www.vacareers.va.gov/assets/common/print/EDRP_VA_Careers_Page.pdf

                     

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                    • #11
                      Having a paid for home is a great feeling.  It is not great enough however to not fund your 401k!  With any extra money make an extra payment.

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                      • #12




                        Having a paid for home is a great feeling.  It is not great enough however to not fund your 401k!  With any extra money make an extra payment.
                        Click to expand...


                        would you pay the house off instead of funding a taxable account?  I'm really tempted to do this (even though I know its not mathematically optimal)

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                        • #13
                          I funded my taxable first.  I had a 30 year, then a 15, and then a 10 year and then paid it off.  I was funding my taxable like mad because this was the late 90s and the market was very hot.  Now i have a really large taxable and like the flexibility.

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                          • #14







                            Having a paid for home is a great feeling.  It is not great enough however to not fund your 401k!  With any extra money make an extra payment.l
                            Click to expand…


                            would you pay the house off instead of funding a taxable account?  I’m really tempted to do this (even though I know its not mathematically optimal)
                            Click to expand...


                            Nope. Just consider it a side fund. Once to your mortgage payoff size then look at it and see if you'd like to simply pay it off all at once.

                            You have two choices really.

                            Choice 1: pay extra at an accelerated amount so that in the future you wont have to pay an inflation ravaged smaller real payment in the future. Also decrease liquidity day to day for a while. Opportunity cost.

                            Choice 2: Grow money and its purchasing power in real terms for the long term.

                            Unless you are very highly levered to a not sleep well at night and cant handle a reasonable emergency on a cash flow basis, then number 2 should appeal to your rational mind.

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