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by I recently opened two Roth IRAs (one for me, one for my wife) at Fidelity. Although I will roll a good deal into mine (from a 401k with a previous employer), according to a Fidelity agent, both funds are still considered at ground zero as far as contributions are concerned. This means we are able to put $4,000 in each account still this year (i.e., before January 1, 2008) without penalty.
The complicating factor is we also are buying a house on which we will likely close at the end of January 2008. We have enough money saved to make a handy down payment on the house, but I wonder if I shouldn't use some of it to max out the Roth IRAs this year. Although I previously stated Roth IRAs are the first priority, that was comparing retirement options. How does the #1 retirement choice compare to other, non-retirement financial dealings - like paying off a house?
The $8,000 difference in down payment will have an effect on the monthly mortgage payment, but that isn't of concern as we plan to pay extra, anyway. The catch for me is less money down means paying more interest over the life of the loan, resulting in a few more months of payments before mortgage-payment-freedom.
Then again, less money into the Roth IRA means less interest earned over the life of the fund - and that life will probably last significantly longer than my mortgage payments no matter what the down payment is. Given this, I'm leaning heavily towards maxing out the Roth IRAs this year. Is there anything I'm missing?
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what are the interest payments like? if your mortgage is 5% but you only make 4% on your 401 then put it in the mortgage. If your 401 gives you more than the mortgage put it in the 401.
As my father always says, Borrowed money is the most expensive money. Paying off debt quicker leaves more money for saving. Not spending it in the first place is the cheapest. (I would probably wait a little bit long to buy a place anyway - depending on where you live. Foreclosures are so high, that you might be able to snap a cheaper house. The market has not bottomed out yet. - Or so I am told)
Anyway, why would you listen to a complete stranger on the internet?
go to fool.com for some more sound advice.... (-:
And good luck!
if your mortgage is 5% but you only make 4% on your 401 then put it in the mortgage. If your 401 gives you more than the mortgage put it in the 401.
I used to think it was as simple as comparing interest rates, but then I learned better. Things like taxes play a role, as does your home's potential to increase in value.
An interest rate comparison is still interesting, though. I estimate my home mortgage will have an interest rate of about 6.5% and I expect to pay it off in less than ten years. My Roth IRA at Fidelity has the following profile from 1926-2006:
- Average Annual Return: 9.25%
- Worst 12 month return: -52.92%
- Best 12 month return: 109.55%
- Worst 5-year return (annualized): -10.43%
- Best 5-year return (annualized): 27.23%
- Worst 20-year return (annualized): 3.10%
- Best 20-year return (annualized): 15.62%
Put it in the Roth. Putting the $8k into your house is not earning you any return. Yes, it may save you some interest, but like you said, you're going to itemize your interest expense anyway. Your house is going to appreciate (or depreciate) the same regardless of whatever your down payment is. Its based on market conditions. If you sold your house in 10 yrs, your $8k would still come out as $8k. But in 10 yrs in the Roth, your $8k will be will almost be $20k at 9.25%. Granted, you can't touch it and you'll pay taxes on it at withdrawal time, but you'll still be much ahead when you retire. Do the Roth.
Sorry, I misspoke. You won't pay taxes at withdrawal time with the Roth.
I agree with that, your house will appreciate/depreciate according to market conditions and there's not much you can do about it other than home improvements. A Roth will earn you interest on the $8000 which is far greater than saving $60 on monthly mortgage payments by putting an extra $8k down. What's more, if you lose money on your Roth IRA, there is a way to claim the losses on your tax return and withdraw money from your IRA. I thought this was interesting and would share with you.
1) Withdraw Full Balance to Claim Losses
In order to be eligible to claim losses on your tax return from your IRA investments, you MUST withdraw the entire balance from that account. For example, if you faced a loss of $5000 this year on your Roth IRA account, you must withdraw the full balance from your Roth IRA in order to be eligible to deduct this $5000 allowable capital loss from your tax return. On the other hand, if you faced a similar loss from your SEP IRA, SIMPLE IRA or Traditional IRA, you must withdraw the entire balances from all these Traditional IRAs in order to deduct any losses.
Source: www.definerothira.com
2) Losses on your Traditional IRA
You can deduct losses made on your Traditional IRA only if:
*
the total balance you withdraw is LESS than the after-tax amounts (basis amounts) remaining in your Traditional IRA.
* the IRA basis is any non-deductible contributions + after-tax IRA rollovers from 403b plans, 457 plans or other qualified retirement plans.
* you fill out IRS Form 8606 which is used to determine the basis of your withdrawal amounts from your Traditional IRA. IRS Form 8606 is also used to calculate your actual IRA loss to be included in your income tax return, and the total amount of your IRA withdrawal.
I kind of disagree. Debt is not always bad, if you approach it the right way. Just ask any real estate developer. If I can borrow money at 8% but get a return on it at 12%, thats a no brainer.
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Go with the Roth by biffjo :: NR2 :: on 15 November 2007
I just went through this...
IF putting the extra $8K down helps you avoid PMI, put it towards the mortgage down payment, otherwise, the smart move is to max out the Roth. Why put the $8K into a black hole (i.e. some bank) when it can be earning you money.
Additionally, an extra $8K for a down payment only saves you what, ~$60 per month in mortgage payment. This is all psychological. You will earn much more, big picture, by maxing out the Roth. Don't forget, mortgage interest is a tax write off as well.
Good luck
You've got 4+ months to figure it out by NickM69800 :: NR2 :: on 25 November 2007
You can contribute into your ROTH IRA up until the tax deadline of 15 April 2008 for your 2007 contributions. Ypu just need to do it over the phone usually with the banking agency. This may give you the cushion to be able to do both if you can put away about 2k a month.
Max your Roth IRA unless this is equivocally you're Dream Home and you'll never move you'll likely sell and realize very little of the minimum payment difference.