Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
529 or Mortgage retirement?
Old 02-07-2006, 12:32 PM   #1
Recycles dryer sheets
 
Join Date: Jan 2006
Posts: 77
529 or Mortgage retirement?

I have a question. If I anticipate having an extra sum of money each year for the next 4 years, would I be better off paying off the house, or putting it towards the kids 529 plans? Kids 8 & 11. In ~4 yrs (ER age), I could have either ~ fully funded the anticipated college needs, or pay off the house.

Opninons?
__________________

__________________
Most People are about as happy as they make up their mind to be - A. Lincoln
getoutearly is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: 529 or Mortgage retirement?
Old 02-07-2006, 12:34 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,616
Re: 529 or Mortgage retirement?

Tell us about the mortgage? Rate? Term? Fixed or not? Years left?

Also, are you going to pay for kids college no matter what?
__________________

__________________
LOL! is offline   Reply With Quote
Re: 529 or Mortgage retirement?
Old 02-07-2006, 12:37 PM   #3
Thinks s/he gets paid by the post
SteveR's Avatar
 
Join Date: Jul 2005
Posts: 2,803
Re: 529 or Mortgage retirement?

Good question.

Most 529 accounts have an annual limit on how much an individual or couple can put into each plan per year. *If this is an issue with the amount of money you will have to put in these accounts then you could put the left overs into your mortgage.

Keep in mind the tax laws on 529 accounts expires in 2011 (?) so unless Congress reapproves the tax advantages of these accounts you could lose out on the tax free status of the gains in these accounts in the future. *Who knows what those guys will end up doing with taxes?
__________________
Work? I don't have time to work....I'm retired.
SteveR is offline   Reply With Quote
Re: 529 or Mortgage retirement?
Old 02-07-2006, 07:06 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: 529 or Mortgage retirement?

Ah ha ha ha ha ha ha ha...

Get me a straightjacket... :P
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: 529 or Mortgage retirement?
Old 02-07-2006, 07:51 PM   #5
Recycles dryer sheets
 
Join Date: Jan 2006
Posts: 77
Re: 529 or Mortgage retirement?

Quote:
Originally Posted by LOL!
Tell us about the mortgage?* Rate?* Term?* Fixed or not?* Years left?

Also, are you going to pay for kids college no matter what?
LOL, mortgage info:* 6.75% 30 yr fixed with about 23 yrs left on it.* Paying bimonthly payments.* Only owe about $58k on it.*

I'm planning to at least help with the tuition.* I'm not budgeting to pay for an Ivy league school 100% though...

Steve R., I'm assuming the bozos in Washington will extend the tax advantages - but who knows...
__________________
Most People are about as happy as they make up their mind to be - A. Lincoln
getoutearly is offline   Reply With Quote
Re: 529 or Mortgage retirement?
Old 02-07-2006, 08:37 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,616
Re: 529 or Mortgage retirement?

I'm an advocate of keeping a low interest fixed rate mortgage forever. but your interest rate is not low.

Our 529 plans have an annualized return of 16.8% (potentially tax-free)and our mortgage is fixed at 4.875% (tax-deductible). So the numbers mean we have done the right thing to fund 529 plans and not pay off mortgage.

Your interest rate of 6.75% is not so low nowadays and the amount of $58K is probably too low to make refinancing cost effective. Bimonthly? What's the point? You want to use other people's money, don't you?

OTOH, if you want to pay some college for your kids, then the sooner you start investing for that the better. But I'm not a big advocate of 529 plans unless you have maxed out your retirment plans ($15,000 into a 401k and $4000 into Roth IRAs for you and your spouse). If you are paying early on your mortgage without having all your retirement plans, I would consider that a problem as well.

So if I had an extra sum of money for the next 4 years, I'd make sure my retirement plans were maxed out and not pay off the mortgage nor contribute to a 529 plan.

Another note. 529 plans have some of the highest annual limits possible for saving for college. The annual limit for 529 plans is $12K this year per parent, but you can put 5 x $12K per parent in if you do not add any more for the next 5 years.
__________________
LOL! is offline   Reply With Quote
Re: 529 or Mortgage retirement?
Old 02-08-2006, 09:33 AM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: 529 or Mortgage retirement?

Ok seriously. I looked at all of the college plans. All of them seemed to have something that made me decide against them. From recollection, which may be bad, 529's HAVE to be used for some sort of education by someone in your immediate family or you have to pay a percentage penalty plus taxes, yes?

Salient points:

- Your mortgage rate is ridiculous. Either pay it down or refinance it aside from the college savings plan
- The period you have from now until the first one goes to school is short. You're looking at 6-7 years. Investments in stocks and bonds have had some fairly lousy returns in periods that short. But we've just had a wild ride for 5 years so maybe the next 5, not so bad? But who knows
- Your kids might not decide to take any further schooling
- You may choose to not fund their schooling. Yeah I know. Wait until they're teenagers.

I decided after looking at the range of options that just doing what i'm doing and paying for Gabes schooling out of our taxable or IRA's (we will be in our 60's if and when he goes off to college). If he decides to start a business instead and seems to have his head stapled on right, I can help him start that. If he has a good career figured out and wants to get married and have kids and buy a house instead, I can help him with that instead.

Seemed I was giving up some of the tax advantages of the various plans, but gaining a lot of flexibility.

Consider paying the mortgage down and somewhat increasing the risk/return of your portfolio. Cut the low paying bonds a bit. You'll be getting a 6.75% return on the pay down (ok, 96,000 arguments why that changes a quarter or half percent, it doesnt matter much). If the market does well or great, your increased equities will give some nice returns.

You say that in four years you'll have paid off the house. Your kids will be 12 and 15. You should have a real good idea of what the deal is going to be with the 15 year old and 2-3 years to sock some cash away. By then you'll have a pretty good idea of what is going to happen with the younger one.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: 529 or Mortgage retirement?
Old 02-08-2006, 09:55 AM   #8
Thinks s/he gets paid by the post
tryan's Avatar
 
Join Date: Mar 2005
Posts: 2,449
Re: 529 or Mortgage retirement?

Quote:
~4 yrs (ER age),
... pay off the house. The kids can borrow for college; you can't borrow for ER.

BTW the mortgage rate is awful.
__________________
FIRE'd since 2005
tryan is offline   Reply With Quote
Re: 529 or Mortgage retirement?
Old 02-08-2006, 09:48 PM   #9
Recycles dryer sheets
 
Join Date: Jan 2006
Posts: 77
Re: 529 or Mortgage retirement?

Hmm.* We are already maxing out on the retirement accounts.* We're already putting $6k/yr per child in the 529's (so I guess, per LOL's note, we could put an additional $6k/child/yr into the 529's). I did not realize there was such a small yearly amount. I must have been thinking of the total amount allowed (~$150k?)*

LOL, what do you recommend for college savings(if you do not like 529's)?* Just taking from the taxable investmant accts?* You're right, they could both decide to go into the army and let Uncle Sam pay for college.* Then I'd have to go back to school so I would not have to pay a penalty to Uncle Sam myself.* Actually, that sounds pretty good...

Mortgage rate is not that great, but it is such a small amount.

Think maybe I'll do a bit of both; pay some of the morgage down and increase the 529's; just maybe not as much as I originally thought.

Thanks for the opines
__________________
Most People are about as happy as they make up their mind to be - A. Lincoln
getoutearly is offline   Reply With Quote
Re: 529 or Mortgage retirement?
Old 02-08-2006, 09:59 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,616
Re: 529 or Mortgage retirement?

I'm not against 529 plans, but you have to pick one with low expenses and/or a state-income-tax break.

We use the Utah 529 plan, but did not until a couple years ago. We just used tax-managed after-tax investing without specifically earmarking it for college for the kids. Then, when it became obvious that we would reach our "Number" we started the 529 plans.

I worked out once that investing and paying the 15% long term capital gains tax rate was better than a 529 plan with an expense ratio above 0.85% for our time frame. It may also be possible to gift appreciated stock to kids (with our basis), then have them sell it to go to college. They would have low enough incomes that they would pay long term cap gains at 5%.

Anyways, the Utah plan is below 0.85%, but many 529 plans have expense ratios above 0.85%, so watch out.
__________________
LOL! is offline   Reply With Quote
Re: 529 or Mortgage retirement?
Old 02-09-2006, 02:37 PM   #11
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,616
Re: 529 or Mortgage retirement?

Quote:
Originally Posted by LOL!
I worked out once that investing and paying the 15% long term capital gains tax rate was better than a 529 plan with an expense ratio above 0.85% for our time frame.* It may also be possible to gift appreciated stock to kids (with our basis), then have them sell it to go to college.* They would have low enough incomes that they would pay long term cap gains at 5%.
Bingo. Plus the "regular" investment doesn't depend on being used for education.
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Re: 529 or Mortgage retirement?
Old 02-09-2006, 04:21 PM   #12
 
Posts: n/a
Re: 529 or Mortgage retirement?

Quote:
I worked out once that investing and paying the 15% long term capital gains tax rate was better than a 529 plan with an expense ratio above 0.85% for our time frame.
That's interesting. It's relevant to me, because I pay an extra .5% expense ratio on my HSA funds plus a $35 per year maintenance fee.

So, basicly the calculation is: is it better to pay .85% every year, or pay 15% once, yes? Did you figure in that there would be some taxable distributions every year?
__________________
  Reply With Quote
Re: 529 or Mortgage retirement?
Old 02-09-2006, 05:45 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,616
Re: 529 or Mortgage retirement?

Quote:
Originally Posted by TromboneAl
So, basicly the calculation is: is it better to pay .85% every year, or pay 15% once, yes?* Did you figure in that there would be some taxable distributions every year?
As I recall, I took a 8.85% return vs a 8% return over 8 or so years with $X added each year.* Gains from the 8.85% return were taxed at 15% once on withdrawal.* The 8% return was tax-free.

Intuitively, if the return was lower, then 0.85% would take a bigger chunk of your return.

I was thinking of using something like SPY or VTI.* Yep, these have dividends that would be taxed at 15% each year, but right now the yield is less than 2%.

Anyways, maybe I messed up the Excel spreadsheet.* You'll have to do your own calculations.
__________________

__________________
LOL! is offline   Reply With Quote
Reply

Tags
mortgage


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
A new debate on paying off the mortgage (or not). Nords FIRE and Money 87 05-01-2010 08:49 PM
Mortgage payments after Early Retirement walkinwood FIRE and Money 19 04-28-2007 07:45 PM
500 search phrases for 2006 dory36 Other topics 2 01-16-2007 08:00 AM
many paths to ER (or, in the retirement house there are many rooms) Martha FIRE and Money 37 07-20-2005 09:43 PM
Advice Needed - Taxable Invest vs Pre-Pay mortgage Trace Young Dreamers 5 09-14-2004 07:16 PM

 

 
All times are GMT -6. The time now is 12:52 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.