Annika - this isn't an either/or answer - you are probably looking at it from a comfort point of view - the security of owning the home free and clear, while he is looking at financial maximization. Why not split the difference and make an extra principal payment every month to convert the loan to a 15-year, while also investing regularly? Remember, although mortgage interest is deductible, it still leaves a real cost - can you earn, after-tax, more than the cost? Guaranteed?
Annika, a 3.75% interest rate on your loan is a good rate and from a numbers perspective, it may not make sense to pay off the loan using your investments (assuming that they are are returning more than 3.75% per year). And if you are itemizing deductions on your tax return then there is the added benefit of getting a tax deduction on the mortgage interest paid. There is always the emotional side....some people just don't like to have mortgage debt. It may be helpful to consult a financial advisor www.napfa.org to help you make sense of this decision from a long range financial planning perspective.
Here's our next question from Andy
Andy - I suspect that you may have a further option: at the four-year mark, extend your deferral for one or more years. At that point, you can do some solid research as to the financial strength of your company. That match program is very attractive. It appears that you are fairly young and not close to retirement, so the longer you can defer this compensation, the better. Are you sure that this deferred comp plan is not covered by ERISA? If it is, you have no serious concern. If not, you are right to be cautious.
Andy, I am assuming that this is not a 457 plan, but a deferred comp through a private company. I believe that those plans are subject to the companies fortunes or problems. If you worry about your company in the short run, ie it isn't JNJ or Exxon, then 4 years is not a bad idea if it mades you feel comfortable. If the deferred compensation is not put into a specific trust (used to be rabbi) then if the company declares bankruptcy, you will have a problem with the money set aside for you from the match. I would check with your human resources to see what money is at risk. the match or your contribution.
Readers, bear with us here as the advisors change shifts
Greetings. This is Eric Ross, CFP(R) with Sequoia Wealth Counsel in Cincinnati, OH. I look forward to answering your questions.
Alright, Eric, Bill and Shannon, here are your first few questions from "Going Green"
Going Green - The non-business energy credits were extended though 12/31/2013. The credit is 10% of the amouint paid for the improvements to your residence. Improvements covered include exterior windows, exterior doors, insulation in attic or walls, qualified air-circulating fans. Some of these items have a maximum credit amount, some allow the credit for materials only, and some cover labor costs. I would discuss this with a tax professional to get the specific details related to the improvements that you might want to make.
NUA - Net Unrealized Appreciation can be a very beneficial technique to use in the case when you have appreciated employer stock in a company retirement plan. In a nutshell, NUA allows you to take a distribution of employer stock from your company retirement plan, pay ordinary income tax on the cost basis, and treat all appreciation above the basis as long-term capital gain.
NUA - there are many nuances to using this strategy and I strongly encourage you to seek professional assistance from an advisor who has experience with this technique.
Thanks, all. When you're ready, here's our next question from Gigi
Hi Gigi, I like Vanguard's low cost variable annuity program. Full disclosure: I worked there for 8 years. In addition, I assume this exchange makes sense within the context of your broader financial plan.
Planners, when you're ready, here's our next question from Alan
Alan - Congratulations on your excellent savings habits! The investment options available in a Roth are the same as in a traditional account - for the most part. There are some exceptions but they only come into play for a very small percentage of investors.
If you can convert to a lower share class with lower expenses without incurring transaction costs or taxes, then it is worth possible consideration. Expenses take away from your bottom line over time.
Alan, with regard to the Roth vs. traditional accounts, one option is to locate different assets into the different accounts to take advantage of the tax rules. For instance, you could put your bond investments into the Roth account, and thereby not have to pay any taxes on the interest generated from these bonds. Another option would be to put your most aggressive investments into the Roth with the hope that they grow the most and could provide you the highest after-tax returns.
Eric, a follow-up for you from Bill
Alan - You state that you like to use Vanguard and that you have a concern about converting to an "identical" ETF from a mutual fund. This sounds like you are currently invested in Vanguard mutual funds and want to convert to a Vanguard ETF. Vanguard is unique in that the ETF's they provide are essentially just a different share class of their mutual funds. My concern in converting would be if you have a gain in the mutual fund and the conversion would result in a taxable event. Due to the unique nature of the Vanguard ETF's, you may be able to do the conversion without it being a taxable event. I recommend that you ask Vanguard if the conversion would be a taxable event.
Alan, your savings habits look very good. Your question about saving too much would be hard to answer in this format. I would suggest finding a NAPFA advisor in your area to work with and help you answer this question by looking at you full financial status. Check out the "Find an Advisor" link on the NAPFA website, www.napfa.org.
Alan - I believe Shannon's response addressed your question. He describes an asset location technique that can be very helpful to maximize your after-tax returns.
Thanks, all! Here's our next question from Jerry H
I think in this strategy you are really prepaying your taxes for your heirs (assuming you don’t need the IRA money in your lifetime). I would give this thought some weight in addition to your RMD calcuation. Your heirs will appreciate inheriting a Roth rather than a traditional IRA. Also, most calcuations that I have seen typically likes conversions when you have the outside cash pay the taxes.
Jerry - Be careful that the amount you convert doesn't bump you into a higher tax bracket too. In general, I don't like having clients pay the taxes out of their IRAs but each case is unique.
Thanks, all. Ready for our next question from Lisa?
Hi Lisa, I'm not familiar with your SERS plan, but if the plan is organized as a 457 or 403(b), then the $5,500 catch-up provision should apply. Please contact your plan administrator to verify.
Lisa, if your SERS provides you with a pension upon retirement, my guess is that there is no catch-up contribution available. However, your state retirement system might provide you with a 401k or 403b plan that you could contribute more money to in order to provide you with a larger retirement benefit and some extra tax savings now.