Invest in ROTH IRA vs Pay Mortgage Principal

THE THRIFT SAVINGS PLAN ALLOCATION GUIDE Forums Message Board Invest in ROTH IRA vs Pay Mortgage Principal

This topic contains 6 replies, has 4 voices, and was last updated by  EcFlay 3 years, 4 months ago.

Viewing 7 posts - 1 through 7 (of 7 total)
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  • #16399

    frankie13
    Participant

    I am new to this site and I would like to know what your opinions are on whether to start a ROTH IRA with Vanguard or pay down my mortgage by adding extra money towards my principal balance. I contribute 10% to my traditional TSP however, if I am going to start a ROTH I would rather go with Vanguard due to the fact that they have more investment options than we do in the TSP.

    Starting June 1st I will have a mortgage of 243,000 at 4.125% for 30 years. I have the option of either sending an extra $300 towards principal (paying off the mortgage in 20 years) or investing $300 towards a ROTH and taking advantage of compound interest.

    Thoughts?

    #16400

    TS Paul
    Keymaster

    When I make that decision for myself I consider the relative returns I will get for my money in both circumstances. I conservatively estimate I can get 8% annually on my investments. If I compare that to the 4.125% (actually lower once I factor in the mortgage interest deduction) which I would essentially receive by eliminating that debt, it has always seemed like a very simple decision.

    In my case I am at the limit for my Thrift Savings Plan contributions and create a back-door Roth every year so I can maximize my tax-advantaged investments.

    Good luck.

    The TSP Allocation Guide www.TSPallocation.com

    #16459

    Rick

    What is a back-door Roth? I am in a similar situation as frankie13, however my goal is to pay off the mortgage in about 5 years and then retire. I have been struggling between the security of having the house paid off or having a large investment account balance that could be earning 8% and a mortgage payment. How would you calculate the trad-off? and then yes I know it depends on my willingness to accept the risk and how much am I willing to pay for the security.
    Thanks, by the way, I really enjoy your ability to simplify the investment world and call out the talking heads.

    #16532

    Brian

    A back door Roth is a a normal Roth account through any normal brokerage company that we authorized TSP investors can have in additional to our Tsp Roth account to invest in. So for us military people, I for instance investing a full 18k into Roth Tsp while deployed and also was able to contribute another $5500 into a normal Roth. Sound good right!

    #16559

    TS Paul
    Keymaster

    A back door Roth is for people who make too much money to be eligible to contribute to a Roth IRA (over $129,000/year). What you do instead is fund a non-deductible traditional IRA (you do not get a tax deduction because of your income level) and then immediately convert it to a Roth IRA so that you can take advantage of the tax free gains.

    I plan to write a detailed post on “Back door Roths” at some point, but until then just Google that phrase and there are plenty of sites out there which explain it.

    The TSP Allocation Guide www.TSPallocation.com

    #17100

    Charles

    I am law enforcement and Allowed to retire after 25 years and bought my house three years in. I pay just enough extra to have my house paid off 2 months before my 25 year retirement date. That way if my funds are all in place I can retire without a mortgage.

    But I won’t pay anymore because I can make more in the market then what I pay in interest.

    #17102

    EcFlay
    Participant

    I think it really depends how long you plan to live in the house. Is this The House or is it another house before you get the next one?

    I recently bought my second house because I relocated, and decided to go with a 15 year mortgage. Reason being, I am early in my career (27yo) and in 15 years I will be able to sell the house and have a healthy chunk of change to put down on a nicer house without raising my mortgage payment.

    My first house I had a 30 yr mortgage, and only kept it ~3.5 years which got me next to nothing in terms of equity. Luckily I had stashed cash away in a brokerage that I was able to use as a down payment on my current home.

    So I don’t think its as easy as seeing relative returns and being able to pick. Sure, I could lower my mortgage and put money away to use when I’m 59 1/2, but because I’m not planning on staying at this house the rest of my life I feel it’s better for me personally to gain equity that I can use in 10-15 years to possibly buy The House.

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