New year's budget and Roth
Just looking at numbers on my 2006 budget, fun when I pretend I can predict most of my expenses, not fun to realize how off I can be when unpredictable expenses occur.
Big decision now is perhaps a "no brainer" to most people. Do I "max out my Roth IRA" contributions ($4000) or put extra money to my mortgage? Standard answer may be invest in retirement which will be "tax free interest".
My Roth IRA got a "high" 4.96% APR rate for Q4/2005, while I'm paying 5% APR for my mortgage. Close enough to not matter.
I can contribute up to $4000/year and not contributed for 2005 yet, and can contribute as late as April 15, but not after that. I can deduct mortgage interest from my income tax, while interest earned on a ROTH is tax free on retirement.
So by "long term" advantage numbers say Maxing Roth is best. Of course this is intentional - to encourage me to save for retirement. BUT isn't investing in a debt-free home ALSO saving for retirement? Why should I WASTE more money now on debt interest, just for a little financial advantage later? Isn't that a little insane?
I'm actually rather annoyed at a system that REWARDS debt. Let's see, I SAVE money by giving less money to the government, and WASTE money by giving more to large bank profits? Isn't that a little bit "selfish" of me?! A bit too capitalistic, with too little regards for the greater good? Or should I say bank profits ARE the greater good?
I'd PREFER to defer my 2005 and after Roth IRA contributions until after I've paid off my mortgage. Then I can constribute REAL money, and not just borrowed money. But the system won't let me do that. Maybe for good reason - why would I want to (or be able to) give thousands later for retirement? The system offers carrots to savings, while I'd optimize in a different way. Probably I'm just not a good candidate for needing carrots anyway.
It is a crazy thing to me, I can't get around it. TECHNICALLY the government would encourage me to borrow money from my house, give interest to the bank, invest a retirement account tax-free, and later hopefully pay off my debt. I'm trading a seriously TINY reward for a somewhat LARGE risk that may enslave my future to debt I can not repay.
SURE, you can point out that Roth IRA contributions can be withdrawn early without penalty if I needed the money. AND it's more flexible than paying a mortgage early which would require a new loan if I needed more money in some future crisis period.
Well, this blog isn't about really making a choice. I've already "compromised", plan to give $500 in April to my Roth. I'm just pissed, but also curious I guess.
What EFFECT would it have if 100 million people EITHER invested in reducing debt or invested in a ROTH. That's potentially $400 billion dollars floating around!
Case 1: $400 billion on extra mortgage payments
RESULT? Banks have $400B they have to reinvesting it.
Case 2: $400 billion on Roth IRA investments
RESULT? Banks have $400B they have to invest.
Well, I guess Roths can be invested in stocks and other places as well.
Both cases are "good" in my view of increasing savings, compared to doing NEITHER and just blowing money on extravagant vacations or gambling or toys or whatever.
In the first case mortgage tax deductions are reduced and the government gets MORE money now. In the second case the government gets LESS tax money later.
For me I'm more interested in the "sure bets", and having a debt-free house offers me more security than a stash of money for when I'm 65. Worse that stash of money has to be invested in SOMETHING to gain value. What's a better investment than my HOME?
I always say invest in what you need first and you've got a more dependable future. Why "speculate" on higher risk investments that are dependent upon "exploiting somewhere else" for your returns?
Maybe what troubles me is that I offer a "cute" compromise, $500 for my ROTH, while in fact I've already BEEN compromised. Compromise is a way of saying I'm unsure which is best, while in fact, I've mentally put my bet on reducing my debt.
I have a "stash" of some $14700 in my Roth. Of that $12500 is "principle" and ~$2200 is interest. By optimistic projections I can pay off my mortgage by December 2011. That's 6 years of paying interest, and my interest rate rises in 2008 when my fixed ARM rate ends, so say it rises to "only" 6%. That $12500 in my mortgage held in my Roth is worth $17700 with 6 years of interest.
SO basically I'm GIVING the mortgage company $5200 over 6 years for the PRIVILEGE of holding money in my Roth for retirement. In exchange I'll get perhaps a $1300 tax break for this interest deduction (at 25%), and later more tax breaks when I take it out after 65. It just doesn't make senses to me, even if it SEEMS everyone wins!
How does this sound?
"Hey bud, I have a deal for you. I give you $12,500 for 6 years,. You invest that money in a special account and later pay me back the principle plus $5200. The government will give you $1300, so you really only have to pay me $3900. PLUS if you can keep the money in the account until you are 65, it'll generate $40,000 in interest. No worries if you can't keep it in the account since the account interest will earn $5200 in interest in 6 years anyway, so you're UP $1300 worse case!"
I'll adjust it slightly to account for inflation. With inflation included, perhaps interest rates cut in half (optimistic!). That lowers bank returns from $5200 to $2000, and my retirement returns to $11000 and later tax bill by $2500.
RESULT:
BEST: Me: +$15,500, Bank +$2,000, Government: -$3800, [Magic investment +$13700.]
WORSE: Me: $0, Bank +$2000, Government: -$1300 [Magic investment +$700]
The bank is the only guaranteed "winner" and the government is the only guaranteed "loser". I'm best off assuming I can find a good investment.
So there does seem to be a real decision yet - do I not only abandon contributing to my Roth, but also cut it to reduce my debt?!
The question is real, and exists at the level of my security too. At the moment, I'm free of needing the money, BUT later might need it. I'm basically under a "no loss" agreement. Nom actually since I can't access the Roth interest, in the short run, worst case I can be out money.
I suppose I'm beating a rather minor issue to pieces and I'm still unsure. It SEEMS that a logical answer can be found in favor of either MAX-ROTH or MAXCUT-ROTH. Under no cases should a PARTIAL-ROTH or HOLD-ROTH be best, which are my main directions without a decision.
If I was a bold libertarian I could say, screw the Roth. I don't need no stinking government tax rewards to encourage wise investment for my future.
It is an interesting question. Say I've suddenly got $12500 sitting in my hands at this minute. What do I do with it? Keeping it in savings is hopless for my 0.55% interest rate! No hope that'll match inflation. Putting it into a 5% CD is nice enough, even if still silly for paying same interest o my mortgage. Investing in my house, new driveway, reshingling could cost that much possibly for all I know! Delaying some investment may not be helpful. If I could put it all into a ROTH, but couldn't take it out, I'd be uncomfortable with that. If I put it all into my mortgage, it's also tricky for losing access if large expenses do arise.
Overall, my "no decision" decision is best to surrender 2005 (and 2006) Roth contributions but hold it as-is. Someday hopefully my mortgage will be paid, and having that flexible money available is very nice. Seriously if I truly believe I can pay off my mortgage it's good to know I'll have it available for serious financial hardships. A local credit union Roth is as safe as you can get.
There is some reality that with more money available now (not added to Roth), I'll spend more than otherwise, possibly good investments, but also just wasting it.
So I'll take the safe road (GAIN: $155 tax break/year, $600 Roth interest, LOSE: $625 mortgage interest.)
But I'll freeze Roth contributions into the indefinite future.
Big decision now is perhaps a "no brainer" to most people. Do I "max out my Roth IRA" contributions ($4000) or put extra money to my mortgage? Standard answer may be invest in retirement which will be "tax free interest".
My Roth IRA got a "high" 4.96% APR rate for Q4/2005, while I'm paying 5% APR for my mortgage. Close enough to not matter.
I can contribute up to $4000/year and not contributed for 2005 yet, and can contribute as late as April 15, but not after that. I can deduct mortgage interest from my income tax, while interest earned on a ROTH is tax free on retirement.
So by "long term" advantage numbers say Maxing Roth is best. Of course this is intentional - to encourage me to save for retirement. BUT isn't investing in a debt-free home ALSO saving for retirement? Why should I WASTE more money now on debt interest, just for a little financial advantage later? Isn't that a little insane?
I'm actually rather annoyed at a system that REWARDS debt. Let's see, I SAVE money by giving less money to the government, and WASTE money by giving more to large bank profits? Isn't that a little bit "selfish" of me?! A bit too capitalistic, with too little regards for the greater good? Or should I say bank profits ARE the greater good?
I'd PREFER to defer my 2005 and after Roth IRA contributions until after I've paid off my mortgage. Then I can constribute REAL money, and not just borrowed money. But the system won't let me do that. Maybe for good reason - why would I want to (or be able to) give thousands later for retirement? The system offers carrots to savings, while I'd optimize in a different way. Probably I'm just not a good candidate for needing carrots anyway.
It is a crazy thing to me, I can't get around it. TECHNICALLY the government would encourage me to borrow money from my house, give interest to the bank, invest a retirement account tax-free, and later hopefully pay off my debt. I'm trading a seriously TINY reward for a somewhat LARGE risk that may enslave my future to debt I can not repay.
SURE, you can point out that Roth IRA contributions can be withdrawn early without penalty if I needed the money. AND it's more flexible than paying a mortgage early which would require a new loan if I needed more money in some future crisis period.
Well, this blog isn't about really making a choice. I've already "compromised", plan to give $500 in April to my Roth. I'm just pissed, but also curious I guess.
What EFFECT would it have if 100 million people EITHER invested in reducing debt or invested in a ROTH. That's potentially $400 billion dollars floating around!
Case 1: $400 billion on extra mortgage payments
RESULT? Banks have $400B they have to reinvesting it.
Case 2: $400 billion on Roth IRA investments
RESULT? Banks have $400B they have to invest.
Well, I guess Roths can be invested in stocks and other places as well.
Both cases are "good" in my view of increasing savings, compared to doing NEITHER and just blowing money on extravagant vacations or gambling or toys or whatever.
In the first case mortgage tax deductions are reduced and the government gets MORE money now. In the second case the government gets LESS tax money later.
For me I'm more interested in the "sure bets", and having a debt-free house offers me more security than a stash of money for when I'm 65. Worse that stash of money has to be invested in SOMETHING to gain value. What's a better investment than my HOME?
I always say invest in what you need first and you've got a more dependable future. Why "speculate" on higher risk investments that are dependent upon "exploiting somewhere else" for your returns?
Maybe what troubles me is that I offer a "cute" compromise, $500 for my ROTH, while in fact I've already BEEN compromised. Compromise is a way of saying I'm unsure which is best, while in fact, I've mentally put my bet on reducing my debt.
I have a "stash" of some $14700 in my Roth. Of that $12500 is "principle" and ~$2200 is interest. By optimistic projections I can pay off my mortgage by December 2011. That's 6 years of paying interest, and my interest rate rises in 2008 when my fixed ARM rate ends, so say it rises to "only" 6%. That $12500 in my mortgage held in my Roth is worth $17700 with 6 years of interest.
SO basically I'm GIVING the mortgage company $5200 over 6 years for the PRIVILEGE of holding money in my Roth for retirement. In exchange I'll get perhaps a $1300 tax break for this interest deduction (at 25%), and later more tax breaks when I take it out after 65. It just doesn't make senses to me, even if it SEEMS everyone wins!
How does this sound?
"Hey bud, I have a deal for you. I give you $12,500 for 6 years,. You invest that money in a special account and later pay me back the principle plus $5200. The government will give you $1300, so you really only have to pay me $3900. PLUS if you can keep the money in the account until you are 65, it'll generate $40,000 in interest. No worries if you can't keep it in the account since the account interest will earn $5200 in interest in 6 years anyway, so you're UP $1300 worse case!"
I'll adjust it slightly to account for inflation. With inflation included, perhaps interest rates cut in half (optimistic!). That lowers bank returns from $5200 to $2000, and my retirement returns to $11000 and later tax bill by $2500.
RESULT:
BEST: Me: +$15,500, Bank +$2,000, Government: -$3800, [Magic investment +$13700.]
WORSE: Me: $0, Bank +$2000, Government: -$1300 [Magic investment +$700]
The bank is the only guaranteed "winner" and the government is the only guaranteed "loser". I'm best off assuming I can find a good investment.
So there does seem to be a real decision yet - do I not only abandon contributing to my Roth, but also cut it to reduce my debt?!
The question is real, and exists at the level of my security too. At the moment, I'm free of needing the money, BUT later might need it. I'm basically under a "no loss" agreement. Nom actually since I can't access the Roth interest, in the short run, worst case I can be out money.
I suppose I'm beating a rather minor issue to pieces and I'm still unsure. It SEEMS that a logical answer can be found in favor of either MAX-ROTH or MAXCUT-ROTH. Under no cases should a PARTIAL-ROTH or HOLD-ROTH be best, which are my main directions without a decision.
If I was a bold libertarian I could say, screw the Roth. I don't need no stinking government tax rewards to encourage wise investment for my future.
It is an interesting question. Say I've suddenly got $12500 sitting in my hands at this minute. What do I do with it? Keeping it in savings is hopless for my 0.55% interest rate! No hope that'll match inflation. Putting it into a 5% CD is nice enough, even if still silly for paying same interest o my mortgage. Investing in my house, new driveway, reshingling could cost that much possibly for all I know! Delaying some investment may not be helpful. If I could put it all into a ROTH, but couldn't take it out, I'd be uncomfortable with that. If I put it all into my mortgage, it's also tricky for losing access if large expenses do arise.
Overall, my "no decision" decision is best to surrender 2005 (and 2006) Roth contributions but hold it as-is. Someday hopefully my mortgage will be paid, and having that flexible money available is very nice. Seriously if I truly believe I can pay off my mortgage it's good to know I'll have it available for serious financial hardships. A local credit union Roth is as safe as you can get.
There is some reality that with more money available now (not added to Roth), I'll spend more than otherwise, possibly good investments, but also just wasting it.
So I'll take the safe road (GAIN: $155 tax break/year, $600 Roth interest, LOSE: $625 mortgage interest.)
But I'll freeze Roth contributions into the indefinite future.
posted by Ares Olympus at 4:01 PM
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