Discontinue Roth contributions to pay off mortgage?

[PawPrint53]

I did search the forum to see if this question had been asked, but couldn't find anything that matched our situation. We owe about $37K on our rental home that will be our residence next September when DH retires. The mortgage rate is 5 1/8%. I tried to refinance a while ago, but nobody was interested in such a small loan and a HELOC didn't work out either. We currently rent an apartment in another state from our two rentals (one paid off, which will continue being a rental).

We're funding DH's Roth and my spousal Roth to the max plus a 401(k) that does not have a match. We believe we'll be in a lower tax bracket when retired so the 401(k) works to reduce taxes now. With savings and throwing the Roth money at the mortgage, we could pay it off by the time we move into the house. I just don't know if that's a good idea or not. Any thoughts? Thank you.

 

[GrayHare]

If your taxes will be lower during retirement, a traditional 401k (or IRA) now will give you more tax savings than will their Roth versions.

 

[PawPrint53]

Thank you. We are funding the 401(k). I just didn't know if we should focus all our $ on paying off the mortgage instead of also funding the Roth.

 

[Brat]

My return on my Roth exceeds the interest rate you are paying on that house. Personally I wouldn't use the Roth to pay off that loan.

 

[Aeowyn]

I can see merits of both.

But when given the choice between A and B, I often choose something else.

It certainly would be a good feeling to retire and not have to worry about debt. But I also really like the Roth for the tax free growth and the opportunity for substantial growth (depending on how invested). But based on how I invest, that growth is definitely not guaranteed. So when I compare my "risk adjusted" return on my retirement accounts to the guaranteed return you'd get by paying off the mortgage then don't seem so far apart.

I don't think you are making a mistake which ever way you go.

But I would try to do them both. If you are both going to be retired, you won't be able to contribute to a retirement plan in the future. I would fund the Roth and then cut back on "life style" and/or work overtime if available - basically do everything I could to also get the mortgage paid off before next September.

If there is a balance remaining in September, I would just wait until the following January (next tax year) and pull a lump sum out of the 401K to pay off the balance.

 

[PawPrint53]

Thank you for the thoughtful responses. I appreciate the guidance.

 

[target2019]

Continue to fund the Roth until you can't. When earned income stops, you won't be able to fund the Roth in the following year.

What you can do with the mortgage is put additional money towards the principal each month, and pay the loan off much quicker.

 

[Sunset]

The interest you pay on the rental mortgage is a deductible expense, so its real cost is about 3/4 of the stated interest, so it costs you 3.84%
I feel you will over the long term do much better than that by continuing to fund the ROTH.
Once you move into the house, then of course unless you itemize like crazy, you are paying the full 5.12%. At that point I would pay it off with savings (after tax savings).

However a $37K mortgage is pretty small, so if you think you won't have the 37K in a regular savings/brokerage account to pay it off, I would question the idea of retirement.

 

[Brat]

If they have had the Roth over 5 years from the date of first funding they can withdraw $ from it to pay off the mortgage. The risk, of course, is that the market could turn sour in the next 10 months.