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my name is Jane and this is my first time stumbling across this site. I'd appreciate any quality answers to my question.

Here's my stats:

3 jobs: 55k/year

FT at a church 40k/year

PT at a juvenile detention facility 10k/year

PT at a university as online faculty 5k year

Just graduated from PhD in July. Have no ed debt and no debt but the house.

Paid 98k for house in 2004. Paid down to 70k. City says house worth 41k.

I like house well enough to stay; it's 15 mins from work and my three jobs are all solid. I have 5k in an emergency fund. I have a little in social security (and pay into that with my FT church job) but I have $140k in Ohio pension (I was a FT corrections officer for 7 years before leaving to do PhD and transitioning to juvenile PT). Working 5 shifts a month a juvie keeps me in FT retirement with the state of Ohio. So basically if everything stays like it is for the next 30 years (I'm 35 now), I'd have 30+ years in SocSec, 30+ in OPERS, and will be subject to the Windfall Elimination Provision.

I'm basically trying Dave Ramsey's baby steps and in Nov started listening to him daily on podcast. He says put 15% of your income in retirement but I'm pretty solid that way and want to attack the house instead. I have no Roth and think I also need to start taking advantage of the $5500/year. When I get my tax check back, I'll have enough to either throw $5500 in Roth (counts for 2015 if done by April 15 I guess) and can try another $5500 for 2016 by the end of the year, OR I can put this $11000 toward the house, pay off the house, and then go crazy on retirement once the house is paid off (using the mortgage payment to do that). I just don't know what to do with the $11k I know I can save this year - Roth or on the house? My mortgage payment is 710.44 at 5.5% fixed for 30. I've paid extra when I can (usually 100 a month or so) and I've shaved off 3 years so far I believe. But I could make double payments if I don't start the Roth now. How would you advise your sister? :) Thanks so much for any of your time.

  • by the way, by reading other questions on here I realize I should specify that by Roth IRA I plan to invest it in mutual funds not just a money market or bank account or something. – Jane Leary Feb 5 '16 at 1:22
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    When you say the city says it is worth $41K are you talking about the tax appraisal? It is very common for those to be way lower than market value. – JohnFx Feb 5 '16 at 1:48
  • Yes tax appraisal. It seems low to me. Best comp I have is that my neighbor's home directly next door (same floor plan but brick and mine is siding but very comparable) sold for 67,900 in 2011. But I went on last week and they are saying that one is worth 41,100 and mine is worth 41,700. I figure mine might go up a bit when I add a closet to the third bedroom? Beyond that I don't know much about real estate. It's a bad area (not crime) due to it being in like the 99% percentile for underwater homes in the country (44123) – Jane Leary Feb 5 '16 at 1:57
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    I'm just saying not to put too much faith in tax appraisals. My tax appraisal says my house is worth $60K less than a real estate appraiser recently estimated it when doing a refi. Of course this is a good thing because it reduces your tax liability. – JohnFx Feb 5 '16 at 1:59
  • yes was very thankful when my bill lowered by nearly 150 month (my homeowners dropped by $1000/year too when I realized I was getting hammered by Farmers). The bill had creeped to $860 but is now down to 710 just due to tax eval, PMI falling off, and insurance change. – Jane Leary Feb 5 '16 at 2:03
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I have no feel for how much you have in accessible money. It seems you have no other debt, and that's great, but do you have cash to fix your car transmission, replace your house heating system, and replace the roof?

For a mortgage with such a low balance, you probably don't have enough Schedule A deductions to itemize, so your highest (and only?) interest rate is 5.5%. I'd love to get such a rate, which you can, by paying the loan more rapidly. It's not that I'd suggest trying to get a higher return elsewhere, my only concern is with your lack of savings. The things I mention above aren't likely to need fixing all at once, I just list things that in my opinion, are inevitable, after 20 years in this house, new roof this spring.

Be sure you don't need to finance these things at an even higher rate. Aside from this, paying the mortgage off will give you peace of mind.

Edit ---

With all the comments, it occurs to me, this should be part of the answer

enter image description here

It's the tax rate chart for a single filer, for 2015. Note, absent any other unusual deductions, you start at

  • Gross income $55K
  • Exemption for single $4K
  • Itemized deductions (Sch A) $15K**
  • Taxable income $36K

** I estimated, $9K church, under $4K mort interest, $1K property tax, $1K state tax. If you comment, I'll adjust.

What this means is that you straddle the 15/25% marginal rates. The mortgage interest saved you 25% for some, and 15% for the rest. If I am near the final number, this implies that your effective rate on the mortgage is about 4.4-4.6%. The deduction should not be a reason to keep the mortgage. To John's point, you keep the mortgage if you are comfortable investing for the long term. As I commented, this is the personal part. It's also not all-or-none. You've said you can save $1000/mo. Why not do both? Send the maximum to the Roth, and the other $6500 to the mortgage?

Last - You don't need to decide between Roth or Traditional (tax deducted) IRA until you make the deposit, which you can do after you file. I'd suggest you look at your exact taxable income, the final line which determines your rate, and deposit to Roth if you are in the 15% bracket, but Traditional if it's over 25%. You can split it to 2 accounts if it's over the line by just a small amount.

  • She did say that she has a $5k emergency fund, but I agree that it is not enough. +1 for the guaranteed 5.5% return, especially since refinancing is not an option, being upside down. – Ben Miller Feb 5 '16 at 1:44
  • Well I'm in a situation where I left a sheriff dept job FT in 2011 making 50k to go do a PhD making 12-8k (yes, you read that right it went down from 12k to 8k the last of the three years, and I lost 3k in a side job). During that time I rented out my home, did the grad school thing as a GA, and would drive 5 hours round trip every weekend to keep this PT juvenile job that I returned to upon graduation. So, while my 5k in savings is yes, minimal, now that I've returned to 55k across the three stable jobs, I'm adding to that at the rate of $800-$1000 a month (which is why I could start – Jane Leary Feb 5 '16 at 1:48
  • doubling up on the mortgage OR doing the ROTH. The house is a 1951 but the roof was BRAND new in 2004 when I moved in the house and doing well for a variety of reasons (snow drift, no trees around to affect gutters, etc.). My car has 100k on it, yes, but I fix it and drive it and pay cash for that. I live very very inexpensively. I started tracking my budget expenditures last month and found that I even spend less than 100/mo on food! Alot of this is due to free food always being at the church and the jail. Like today I spent nothing on food. I also am launching some online classes. – Jane Leary Feb 5 '16 at 1:50
  • so my question is less about emergency fund balances as i'm pretty confident they'll grow steadily and more about, I guess, and please correct me if I'm wrote, whether or not the 6.9-7.9% average returns for ROTH IRA mutual funds is a dependable enough guess that it would imply I should put the $5500 there instead of toward the 5.5% mortgage (which I guess is actually lowered when you consider tax writeoff). I just don't know much about these things but I live and drive cheaply and add to my emergency fund about 800 a month now that I'm done with school so I don't know if that extra infohelps – Jane Leary Feb 5 '16 at 1:53
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    Personal finance is just that, personal. My answer is more conservative than John's, and followed what I sensed was your desire to be done with the mortgage. There's a tough concept to explain, risk-adjusted return. It's why 5.5% guaranteed might be better than a 10% return with a 14% standard deviation. See Is paying off your mortage a #1 personal finance priority? too. – JoeTaxpayer Feb 5 '16 at 3:11
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I would advise you to fund your retirement account before accelerating payments on your mortgage, for a number of reasons:

  1. Your retirement account will easily get a better return than the ~5.5% on the mortgage.
  2. Given that your house is already upside down (Maybe. See my comment on the original question), paying down the house is going to lock up money and reduce your liquidity. Although it is not ideal to take money out of a Roth, you can take back your contributions without penalty in case of an emergency.
    1. Take it from someone who did pay off their house early and had plans to use the savings from mortgage payments for some smart investing. It takes a lot of discipline to do that, most people will eventually settle into the habit of increasing their lifestyle to eat up the extra money.

I know it feels good to be debt free and do the Ramsey shout, but it just doesn't make sense in your situation.

Answering a few of your questions:

  • The ability to write off mortgage interest would make paying off your house even less of a desirable option. However, many people take the standard deduction nullifying this benefit.
  • To me the better tax benefit is the growth of the account over the years with the gains being tax free.
  • A reasonable fee for what type of account? If brokerage, I wouldn't pay for a full service brokerage that charges a fee. Rarely is it worth it. Find a broker that just charges transaction fees for trades
  • Does the fact you have 140K already in retirement accounts factor in? Of course, but I'd suggest using an online calculator to see how much retirement you will need to save up before retiring, that number is often HUGE. I'd still suggest the retirement account or an emergency fund before paying off the house.

Other considerations: Do you have or plan to have kids? College savings is another big thing you might consider using the savings for.

  • This seems like solid advice. I'm def a new listener, not a Ramseyite shouter :). Two questions:Does the fact that I can write off a portion of the mortgage interest against my taxable income (I really don't know what I'm talking about exactly) contribute to retirement fund being better choice than mortgage? and question 2) What are reasonable fees to service such an account? I see an ad with Wealthfront popping up and they'll manage up to the first $15k for free. Is that the best place to start? – Jane Leary Feb 5 '16 at 2:07
  • And sorry one more question three: Does the fact that I already have 140k in retirement (plus a 24k Retiree Medical Account I forgot to mention) factor into your recommendation at all? (Meaning like I already have some retirement so ROTH is a bit less beneficial for me versus people who don't?) Some people I know said pay the house first because the Roth advice is for people who have NO retirement? – Jane Leary Feb 5 '16 at 2:09
  • One reason I like the Roth idea is that anything that I make above $5500 can, after taking into account steadily continuing to grow the emer fund, go toward the mortgage because I've maxed the roth AND have my 140k pension. So it almost seems like if I have 11k in a year (not this year because I'm going to try to contribute pre-April for 2015 and post April for 2016), but say next year if I have 11k I can put 5500 in the house and 5500 in Roth and see progress on both instead of only on one which seems like a win-win – Jane Leary Feb 5 '16 at 2:12
  • and sorry I'm so "verbal" but just another tidbit I didn't give earlier. The 140k I have is in OPERS pension but more specifically 100% across the stock index fund within that pension. It has done 7.86 or something for the past ten years which is better than any of the other funds so I chose well that way. That just gives you an idea of longitudinal performance of what I currently have although that may be meaningless for Roth comparison or making this decision I just don't know. – Jane Leary Feb 5 '16 at 2:15
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    @JaneLeary Just look at last year's tax return. Was a Schedule A included? – Ben Miller Feb 5 '16 at 2:58
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Some additional considerations involve your current and future financial flexibility:

  • Roth contribution limits are for the tax year -- once the deadline for 2015 has passed, you can never contribute funds towards 2015's $5500 Roth IRA contribution limit.
  • You can withdraw your (e.g.) full contribution of 2015's $5500 from your Roth at any time. It's only the earnings that are subject to penalties for early withdrawal.
  • You can make smaller or larger payments against your mortgage at any time in the future, when you have the funds.

So if your financial situation in the future

  • Improves: you'd have already taken advantage of those tax years' Roth IRA contribution limits -- you can't use your newly improved finances to retroactively 'populate' those 'slots'.
  • Gets worse: you have the option to retrieve your Roth IRA contributions (not earnings) without taxes or penalties if you feel it's (in your considered opinion) necessary to spend those funds on something else.

Another couple incidental items:

  • Contributing to your first Roth IRA starts a 5-year clock for (depending on your age) penalty-free withdrawal of Roth earnings.
  • Once you retire, current tax law requires you to take yearly withdrawals ('required minimum distributions') from a 401k/403b or Traditional IRA. It doesn't require you to ever withdraw anything from your Roth IRA.

    As such, you can withdraw Roth IRA funds when you choose to, or never, in which case they will pass on as an inheritance to your beneficiaries.

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