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Voluntary after-tax deduction (then Roth conversion) vs paying extra mortgage?

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  • Voluntary after-tax deduction (then Roth conversion) vs paying extra mortgage?

    Dear all,

    I was hoping to get some thoughts on this decision. I'm maxing out my traditional 401k (and IRA) and hoping to spend some extra money (roughly $500 or so month) efficiently. Would it better to put that money into the voluntary after-tax deduction (and then converting it to my Roth account, which is allowed by my employer 4 times a year) or paying extra for my mortgage? I live in the Bay area and the mortgage (30-year long fixed rate at 3.75%) is very high. After running some calculations based on online calculators, extra $500 a month towards my mortgage will save me about about $100,000 in interest and cut my mortgage duration by roughly 3 years. By the way, I don't have any other debts right now (no student loan, car, etc).

    I'd appreciate some thoughts. If I'm approaching this from a wrong angle, please also share your thoughts.

    Thank you.

  • #2
    I vote mortgage

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    • #3
      I'd put it in the after tax bucket and then convert because
      1). You're likely to get a better return than 3.75% and
      2) how likely is it that you'll stay in your house until you've paid off your mortgage? Might you sell and move before then?

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      • #4
        It depends on whether you are saving enough for retirement or not. If you are already saving 20% to retirement it’s a different story than if you are behind and only contributing 18k plus match.

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        • #5
          I’m planning to live at my house for a long long time. It’d be great if I don’t have to relocate.

          I’m making full contribution to my 401k.

          Thank you all. Please keep sharing your thoughts.

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          • #6
            o you like your current job? Do you expect to stay for many more years? If not then I'd do the mega backdoor roth you're talking about because not every employer allows after-tax contributions and then non-hardship in-service withdrawals. So take advantage while you have it. If you intend to stay for awhile, how about split the difference 50/50?

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            • #7
              EH hit the real question here.  How much are you saving for retirement as a percentage of your income?  If all you are saving is the $18,500 on a 6 figure salary, then you need to be saving more, and a Mega-Backdoor Roth would be an appropriate place to do it compared to a taxable account.  Are you already saving 15-20% of income and this is un-allocated money at the end of the month?  Then it is a personal choice.  The mortgage is safer and for some it feels better to reduce debt, others don't feel the psychological drag of debt and realize that you will likely have a higher net worth after 30 years by investing the money and getting a higher return than 3.75%.

               

              The good news is that you are in a good place, and neither choice is truly bad.

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              • #8
                I would go with the mega backdoor option.  If you were questioning mortgage vs taxable that is a different story but Roth space is much more valuable in my opinion (and WCI's).

                https://www.whitecoatinvestor.com/student-loans-vs-investing/

                https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

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                • #9
                  Mega backdoor Roth, hands down.
                  Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                  • #10
                    mega backdoor Roth as well. why do you only have 500/m extra? or rather, what are you doing with the rest of your excess?

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                    • #11
                      Just to double check:   What does your Investor Policy Statement (IPS) say?

                      First funded - Insurance : disability, term life, home.

                      Second funded - Retirement - 20% savings -  401k at 18k isn't enough in most cases.  You have a great vehicle available to you.  Maximize what you can out of it.  You won't be able to get 3.75% returns out of most places -- AND Roth is gains protected in the future.

                      --there will be folk who support mortgage first over retirement funding.   As a person living in SoCal, we keep our mortgage high as a sort of insurance policy itself to leverage the bank's power against the insurance company in case of loss of property.  I wouldn't sleep well at night knowing I am full risk of my house and to fight AAA alone after a fire.

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                      • #12
                        I vote Roth.

                        My personal rule of thumb would be that below 3% mortgage, keep it, unless the amount is truly trivial to you.  5% or above, prioritize paying it off.  Maybe even at 4% or above.  Between 3 and 4%, it's a toss up, but in your case, I get the sense that it's early in your career, so I would work on increasing your liquid assets.  Also, if inflation picks up, and I think it will, you'll pay back that mortgage with inflated dollars. ( Yes, that's a bit of market timing.  Deal with it )

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                        • #13
                          Thank you all very much. I've been saving up some cash for partnership cost. Now that I've met that goal, I'm thinking about how to spend (save efficiently) extra income.

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                          • #14
                            You bring up partnership. Before you commit to after tax, discuss with plan administrator and make sure it's going to work as it is that you think it will

                            How large of a group/plan is this? Is there profit sharing? How soon will you be a partner? Are you a Highly Compensated Employee?

                            I will just say that sometimes (most of the time?) elective after tax non-Roth contributions may not work out in a group plan, for a Highly Compensated Employee.

                            These type of contributions may cause plan testing to fail resulting in what could be "a mess" especially if excess contributions have already been rolled over to an IRA - which you may not be trying to do if in plan Roth rollover is allowed - or at a minimum the excess contributions might just be returned to you.

                             

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