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We're 5.5yrs into a 15yr note with a rate somewhere in the high 3% range and are on our way to early payoff as-is. However, I have found a way to payoff the remaining $100k within 11mo by aggressively curtailing elective spending, withdrawing the principal from a Roth IRA, cashing out all corporate stock, and redirecting all contributions to my current non-matched R401(k) to mortgage payoff.

The objective is to pay off the home we are in (home #1), buy home #2, and rent home #1. Rent from #1 will cover most of of #2's mortgage.

The R401(k) contributions will be restored once home #1 is paid off.

Question:
Does it make sense to reinvest* about a year of Roth 401(k) contributions and the principal of a small Roth IRA into our mortgage to pay it off so we can rent it and apply the revenue to pay the mortgage of #2?

*I call it "reinvesting" because I believe it's an investment into a rental property, not a primary residence. I count this as portfolio diversification. Please set me straight if I'm wrong or rationalizing.

  • A lot of this will depend on tax laws where you live. As a rule of thumb invest in reducing non-deductible expenses and leave deductible expenses alone. If mortgage payments are deductible then there is no reason to pay down your mortgage in favour of your 401. – BevynQ Apr 3 '17 at 5:29
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    I think you would also need to consider the opportunity cost of doing it. For instance if your Roth IRA and company stock was earning say 7% and you are paying a 3% mortgage you are not only paying capital gains on stock you are forgoing the future return of 4% (7-3). In addition I personally do not like the idea of owning or investing in company stock unless it is unusual circumstance. You have 100% of your human capital invested in the company. What happens if they lay people off? Your income and retirement will both take a hit! – BWMustang13 Apr 3 '17 at 21:42
  • Exactly. Holding stock in the company employing me feels like a lot of eggs in one basket. – acpilot Apr 3 '17 at 23:52
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It is great that you came up with a plan to own a rental home, free and clear, and also move up in home. It is also really good of you to recognize that curtailing spending has a profound effect on your net worth, many people fail to acknowledge that factoid and prefer to instead blame things outside their control. Good work there. Here are some items of your plan that I have comments on.

11mo by aggressively curtailing elective spending

How does your spouse feel about this? They have to be on board, but it is such a short time frame this is very doable.

cashing out all corporate stock,

This will probably trigger capital gains. You have to be prepared to pay the tax man, but this is a good source of cash for your plan. You also have to have an additional amount that will likely be due next April 15th.

redirecting all contributions to my current non-matched R401(k)

This is fine as well because of the short time frame.

withdrawing the principal from a Roth IRA

This I kind of hate. We are so limited in money that we can put into tax favored plans, that taking money out bothers me. Also it is that much more difficult to save in a ROTH because of the sting of taxes. I would not do this, but would favor instead to take a few extra months to make your plan happen.

buy home #2

How are you going to have a down payment for home #2? Is your intention to pay off home and save a while, then purchase home #2? I would do anything to avoid PMI. Besides I would take some time to live in a paid for house.

Overall I would grade your plan a B. If take a bit longer, and remove the withdrawing from the ROTH, it then becomes an A-. With a good explanation of how you come up with the down payment for house 2, you could easily move to an A+.

  • My wife is aligned to the idea as long as we can revisit the lifestyle impact topic periodically, which is fair. The capital gains comment is a good point but I veiw it as a pay now or pay later proposition. Either way, tax getting paid. The down for #2 is banked. We don't want to use that nugget pay down #1 because we want to be able to move on a good home quickly without having to get PMI...which is a non-starter. – acpilot Apr 3 '17 at 19:22
  • Considering your comment, your plan is A-. Remove the ROTH withdrawal, then A+ (IMHO). In the end its your and your wife's money so do what you want, but you two are looking pretty darn good either way. – Pete B. Apr 3 '17 at 19:25

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