What to do w/30k inheritance

**jIM_Ohio** · 06-25-2008, 04:32 PM

If you put this 30k towards retirement- would it be tax deferred, tax free, or taxable.

Tax deferred- you would need to open a deductable IRA or increase 401ks to point where max was going to 401k, then you would spend this money to replace lost income from 401k contributions.

Tax free- put 5k in Roth IRA for you and spouse for 2008. Do again for 2009, do again for 2010.

Taxable- invest all 30k into a taxable account now.

If you do the taxable account there is nothing **requiring** you to spend the money on retirement.

Is the money for kids 529 growing at higher than 6%? If it;s close I would change the financial plan. Here are the options which I am thinking about:

1) Make sure 15% of gross income is being applied to retirement funding. Fund long term financial goals first (fund the long term goals now before they become a mid term goal).

2) Make sure the plan for house payoff and kids education is sound. Both are mid term goals (house paid off in 9 years, first kid going to college in 6 years). You are using $375/month to invest for college and pay down mortgage. What if this money was all put to same purpose and then you worked backwards?

a) Use 30k to pay off mortgage (29k balance left)
b) send all $375 to mortgage each month (this payoff would be less than 6 years- probably 2.5 years based on my calculation)
c) then you have $375+765=$1140/month to allocate to kids education in 2 years.

Here is my logic:
kid 1 gets 72 months of $121=$8712 in current plan
kid 1 gets $1140 for 10 months= $11400 in new plan

kid 2 gets 96 months of $108=$10368 in current plan
kid 2 gets $1140 for 10 months=$11400 in new plan

kid 3 gets 132 months of $96=$12672 in current plan
kid 3 gets $1140 for 10 months= $11400 in new plan.

In 2.5 years (30 months) mortgage is paid off. In 30 more months the full college contributions for all kids have been made (you made equal contributions in new plan for all 3 kids). Kids 2 and 3 missed out on some compounding over next 40 months, so they get a higher contribution.

In 5 years (60 months) you and your wife get the $1140 into your budget to pay off HELOC, boost retirement savings and savings in general.

If the 2.5 years without college contributions is going to "eat" at you, tell each kid you will pay the last half of their college tuition (meaning junior and senior years) and you then get the additional 2 years of compounding you lost otherwise.

Why I think this plan makes sense: the size of the contributions is small when compared to cost of mortgage and extra payment to mortgage. You have a broad approach with current plan, where as if you concentrate on one goal, you could accomplish more and probably sooner. The 6.8% mortgage rate is also high enough that paying down the debt is as good a return as you could find. This also takes away some "liquid" assets from financial aid calculators (I assume the calculations look at home equity and brokerage accounts differently, but I do not know this for sure).

If I had to look at this another way, consider putting 10k into each college fund, then allocate the $375/month to pay down mortgage. This will take longer but gives college funds more time to compound.

I do not think 2 years of compounding is an issue (if you miss 2 years of contributions/compounding). One reason for this is missing 24 months of a $121 contribution is $2904, which might be $290 of interest if you picked investments REALLY well. The $1140 plan helps on top side by getting the max contribution in earlier (all kids will have money in accounts with a year or two or 5 to spare and get compounding on that. 10% of $11400 is $1140, so kid 3 especially benefits from this plan, and kid 2 will as well. You could probably add an extra contribution for kid 1 if you felt like this short changed him.

**maat55** · 06-25-2008, 04:34 PM

Fund your roths if not funded, maybe payoff the hel and use the 188.00 to boost the 529's and put additional toward 1rst mortgage. Unless you are in need of a great vacation.

**LivingAlmostLarge** · 06-25-2008, 05:25 PM

Don't pay off the HELOC 4% is a great rate. I'm leaning towards the 1st mortgage or Roth IRAs for 3 years if you have that. How funded are you for retirement? What do you save now for it?

**Thrif-t** · 06-25-2008, 05:43 PM

Originally posted by LivingAlmostLarge View Post

Don't pay off the HELOC 4% is a great rate. I'm leaning towards the 1st mortgage or Roth IRAs for 3 years if you have that. How funded are you for retirement? What do you save now for it?

We have 10% of each of our pays put in our 401k for me and deferred comp for my DH. We have funded Roths for each of us for 2007 & 2008 so 10k each in those....like I said just finally done w/daycare and able to save a more substantial monthly amount. $700/mo goes to our emergency fund which we'll also use some of to buy a new car when the need arises, I'm hoping we can hold off a few more years.

I just am confused on what would be the best option and worried about the kids' school. I really don't want them coming out with any higher debt then a car loan..but I don't want to shortchange our retirement either.

Jim thanks for all your analysis I'll need to re-read it a few more times to catch onto all you're saying.haha Oh but I'd be leaning towards using the 30k in Roths for the next 3 years if I didn't use it for the house or 529's.

**maat55** · 06-25-2008, 08:45 PM

Originally posted by Thrif-t View Post

We have 10% of each of our pays put in our 401k for me and deferred comp for my DH. We have funded Roths for each of us for 2007 & 2008 so 10k each in those....like I said just finally done w/daycare and able to save a more substantial monthly amount. $700/mo goes to our emergency fund which we'll also use some of to buy a new car when the need arises, I'm hoping we can hold off a few more years.

I just am confused on what would be the best option and worried about the kids' school. I really don't want them coming out with any higher debt then a car loan..but I don't want to shortchange our retirement either.

Jim thanks for all your analysis I'll need to re-read it a few more times to catch onto all you're saying.haha Oh but I'd be leaning towards using the 30k in Roths for the next 3 years if I didn't use it for the house or 529's.

Congrats, your doing great.

**tripods68** · 06-25-2008, 08:57 PM

I would pay off the mortgage since the interest is way high IMO.

**Thrif-t** · 06-26-2008, 08:58 AM

Originally posted by tripods68 View Post

I would pay off the mortgage since the interest is way high IMO.

I'm hesitant to pay off the mortgage worrying about not having that tax deduction and owing taxes. I know stupid and eventually we'll be paying so much more to the principal that we won't have a lot of interest to write off but I still feel aprehensive using the money for the house. I guess it's all the talk about this terrible economy...I feel like I want to keep it where I can get my hands on it if I needed it. Oh what to do, what to do???

**LivingAlmostLarge** · 06-26-2008, 11:10 AM

Since you have a deferrred comp and 401k, why not use the $30k to pay the roths 2009, 2010, and 2011. AND maximize your contributions to your 401k and Deferred comp (state 401k, my mom has one) for $15.5/year for each person, or as close as possible?

Basically increase your 401k contributions and stop saving for the Roth IRA for 3 years and you get a nice tax break and a HUGE retirement!

The kids can always get loans for college. Plus how I plan on doing it? I'm going to make my kids get loans and pay for them if they do well. 100%. If they flunk out or do poorly they can pay for it themselves. It will be a grading system of A and B = 100%. C = 50%, and D and F = 0%. Plus it will make them decide how important college is to them. They can go anywhere and as expensive as they want, if they study. If not, then heck go blow your own money.

**simpletron** · 06-26-2008, 11:25 AM

i would put 12k to the mortgage, 18k to kid1 and give 120 a month to kid1, 125 to kid2, 80 to kid3. this might seem unfair to kids2&3 but it wont be. also add the heloc payment to kid1, once it is paid off in 2013.

12k to the mortgage changes the payoff date to june 2014, which just before kid1 goes to college.
assuming no compound interest on the 529 accounts and no raises, you'll to able to contribute 15k/year for each kid to college expense. when they enter college, kid1 has 33k, kid2 has 15k, kid3 has 15k. once you pay off the mortgage all extra money goes to the kid in college with the longest to go, so 2 years to kid1, then 3 years to kid2, then 3 years to kid3.

remember you can rollover 529 accounts to another child without a tax penalty, so heavily funding kids1&2 is ok because the extra can flow down to kid3. also if you get near the end and you're short on funds then you can take out a small loan for the last year, because there is 16k extra income while kid3 is a senior not accounted for anywhere.

the best strategy with you not taking additional debt, is to payoff the house before kid1 goes to college, have a 2 year buffer in kid1 and 1 year buffers in kids2&3. basically you use the 529 to cover the double tution years, while also having a one year buffer which is restock with current income. while it is debatable what is the best way to do this(depends on the rate of return on your investments and how comfortable you are with debt), you should try to get to this because it will allow you to give a high substainable output of money to all three of your kids' college expenses. i just gave one of many ways to do this.

as for retirement savings, you seem be on track to retire comfortably(100+% of income) in 20 to 25 years, if i am reading everything correctly. adding 10k to roth and 7k to 401k with 116k in savings(almost a 25% saving rate... nice), husband pension replacing ~42% of total income and once social security starts chipping in, that will definitely put you over the top.

you do realize that the standard deduction for married couples in 2008 is 10,900. the mortgage interest is less than 7% of 60k or 4200. do you have another 6700 in itemized deductions?

**jIM_Ohio** · 06-26-2008, 11:54 AM

Originally posted by Thrif-t View Post

I'm hesitant to pay off the mortgage worrying about not having that tax deduction and owing taxes. I know stupid and eventually we'll be paying so much more to the principal that we won't have a lot of interest to write off but I still feel aprehensive using the money for the house. I guess it's all the talk about this terrible economy...I feel like I want to keep it where I can get my hands on it if I needed it. Oh what to do, what to do???

The less you earn, the less the mortgage deduction helps you. The 70k income you make puts you in 15% tax bracket (because 7k to 401k puts income at 63k and 15% bracket caps at $66100 for married filing jointly).

You get 15% of your interest back. Not worth keeping a 6.8% mortgage (which is really [1-.15]*6.8%=5.78% after deduction).

If this is the reason you want to keep the mortgage, I would suggest spending some of the 30k to meet with an accountant and do some tax planning. If you earned higher than $66100 as taxable income, you would be in 25% tax bracket and then it might make sense to keep mortgage, but the 6.8% interest still makes me say PAY IT OFF. You mentioned todays market and I would be curious if you are earning 6.8% anywhere in 2008?

For better tax planning long term, try this:

1) make sure the retirement savings is 15% of gross income (70k). 10% to 401k and 5k to Roths is 7k+10k=17k. 17/70=24% savings rate. This goal (mentioned already) is being met without issue. Use the 401k to lower taxable income below $66100 so taxes paid are in 15% tax bracket.

Maintain 401k and Roth plans as you are doing now- this takes care of you, which is priority 1. Roth is being contributed right now in the 15% tax bracket and your withdraws might be in 25% tax bracket, saving you 10%. Excellent work.

2) pay down the mortgage with the 30k and redirect the current $375 from 529s to pay off the mortgage (should take less than 3 years).

3) Invest the current mortgage payment and $375 extra into the 529s for kids once the mortgage is paid off. Consider increasing 401k at this time as well (increase from 10% to something higher).

4) Once the 529s are funded (based on previous post by me) in 60 months (5 years), do the following tax planning:

a) when in 25% tax bracket, increase 401k contributions.
b) when in 15% tax bracket, increase contributions to taxable accounts
c) maintain an asset allocation during a) and b) keeping growth and dividend oriented investments in taxable accounts, and bond/cash type investments in tax deferred accounts.

**this is really a balancing act. If you identify $500/month which can be saved, then you want to direct a portion of the $500 to the 401k to reduce taxable income into 15% bracket, then invest the rest of the money in a taxable account. The end goal is to keep your marginal tax bracket at 15% if at all possible**

The 401k is a better tax savings on many many levels when compared to the mortgage interest deduction.

If you think the deduction is better for you, please list the following for 2007:

1) Gross Income
2) Adjusted Gross Income
3) Taxable income
4) Total deductions
5) total refund/total owed

**anonymous_saver** · 06-26-2008, 11:54 AM

Originally posted by Thrif-t View Post

Gross 70k/yr

House loan $59,709.35 @ 6.8% fixed left will paid off Jan 2017 = 765/mo + extra $50 applied to principal

HEL 10k @ 4% fixed for 5 yrs =188/mo pay off 2013

27k in Mutual Fund
116k in retirement funds
19k emergency fund

Then kids 529's
kid 1 who has 6 years till college $4,500..$121 mo contribution
kid 2 who has 8 years till college $4,500..$108 mo contribution
kid 3 who has 11 years till college $4,100..$96 mo contribution

With $30,000 I would max out both of your Roth's for 2008. I would really put your retirements as more of a priority than funding your children's 529 plans. There are other options to pay for school (loans, grants, scholorships, PT work). Maybe you could shoot for 25% funding instead? Just a thought anyways.

Then I would put $20,000 towards your house loan. The 6.8% is pretty high, and like you said yourself, it's stupid not too.

Try not to worry about the economy so much., you seem to be doing well. I would even consider trying to refinance that mortgage. How many months worth of an emergency fund is $19,000 for your family?? Out of curiousity, do both of you work?

**jIM_Ohio** · 06-26-2008, 12:21 PM

Originally posted by Thrif-t View Post

We have 10% of each of our pays put in our 401k for me and deferred comp for my DH. We have funded Roths for each of us for 2007 & 2008 so 10k each in those....like I said just finally done w/daycare and able to save a more substantial monthly amount. $700/mo goes to our emergency fund which we'll also use some of to buy a new car when the need arises, I'm hoping we can hold off a few more years.

I just am confused on what would be the best option and worried about the kids' school. I really don't want them coming out with any higher debt then a car loan..but I don't want to shortchange our retirement either.

Jim thanks for all your analysis I'll need to re-read it a few more times to catch onto all you're saying.haha Oh but I'd be leaning towards using the 30k in Roths for the next 3 years if I didn't use it for the house or 529's.

I don't think you are shortchanging your retirement.

I would focus on rates of return.

The mortgage costs you 6.8% (5.8% after taxes). I doubt you are getting a 6.8% return anywhere right now for 2008.

Keep the 401k fully invested, then get the guaranteed 6.8% return by paying down the mortgage. Once the mortgage is paid off, use the extra cash flow to catch up the 529's (missed payments from paying down mortgage). The increased cash flow can more than make up for the missed contributions (my estimation is you could pay off mortgage in 2.5 years if you focused resources on that objective).

**Thrif-t** · 06-26-2008, 02:42 PM

Originally posted by anonymous_saver View Post

With $30,000 I would max out both of your Roth's for 2008. I would really put your retirements as more of a priority than funding your children's 529 plans. There are other options to pay for school (loans, grants, scholorships, PT work). Maybe you could shoot for 25% funding instead? Just a thought anyways.

Then I would put $20,000 towards your house loan. The 6.8% is pretty high, and like you said yourself, it's stupid not too.

Try not to worry about the economy so much., you seem to be doing well. I would even consider trying to refinance that mortgage. How many months worth of an emergency fund is $19,000 for your family?? Out of curiousity, do both of you work?

The stumbling block I came up against on the house was I always thought you shouldn't re-fi unless you could go 2 or 1 & 1/2 points down and 15 years are still in the 6's. We used to have a 30 yr fixed @ 8 then re-fi to 15 at the 6.8..then I was locked in for a time period (I think 3 years) that I couldn't pay off the loan w/o penalties so I never looked into doing it again.

We already funded our '07 & '08 Roths with the first half of our inheritance 20k. And the 19k is around 7 mos...which I'm just basing on our net pay per month (I'm really a novice at all this

)..but that is such an improvement we've had the same 5k emergency fund all our married life never seeming to add to it because of using it for this or that when we'd get over 5k. But now we really want to get that built up. And yes we both work. I went part time after our 3rd was born.

**Thrif-t** · 06-26-2008, 02:48 PM

Originally posted by jIM_Ohio View Post

The less you earn, the less the mortgage deduction helps you. The 70k income you make puts you in 15% tax bracket (because 7k to 401k puts income at 63k and 15% bracket caps at $66100 for married filing jointly).

You get 15% of your interest back. Not worth keeping a 6.8% mortgage (which is really [1-.15]*6.8%=5.78% after deduction).

If this is the reason you want to keep the mortgage, I would suggest spending some of the 30k to meet with an accountant and do some tax planning. If you earned higher than $66100 as taxable income, you would be in 25% tax bracket and then it might make sense to keep mortgage, but the 6.8% interest still makes me say PAY IT OFF. You mentioned todays market and I would be curious if you are earning 6.8% anywhere in 2008?

For better tax planning long term, try this:

1) make sure the retirement savings is 15% of gross income (70k). 10% to 401k and 5k to Roths is 7k+10k=17k. 17/70=24% savings rate. This goal (mentioned already) is being met without issue. Use the 401k to lower taxable income below $66100 so taxes paid are in 15% tax bracket.

Maintain 401k and Roth plans as you are doing now- this takes care of you, which is priority 1. Roth is being contributed right now in the 15% tax bracket and your withdraws might be in 25% tax bracket, saving you 10%. Excellent work.

2) pay down the mortgage with the 30k and redirect the current $375 from 529s to pay off the mortgage (should take less than 3 years).

3) Invest the current mortgage payment and $375 extra into the 529s for kids once the mortgage is paid off. Consider increasing 401k at this time as well (increase from 10% to something higher).

4) Once the 529s are funded (based on previous post by me) in 60 months (5 years), do the following tax planning:

a) when in 25% tax bracket, increase 401k contributions.
b) when in 15% tax bracket, increase contributions to taxable accounts
c) maintain an asset allocation during a) and b) keeping growth and dividend oriented investments in taxable accounts, and bond/cash type investments in tax deferred accounts.

**this is really a balancing act. If you identify $500/month which can be saved, then you want to direct a portion of the $500 to the 401k to reduce taxable income into 15% bracket, then invest the rest of the money in a taxable account. The end goal is to keep your marginal tax bracket at 15% if at all possible**

The 401k is a better tax savings on many many levels when compared to the mortgage interest deduction.

If you think the deduction is better for you, please list the following for 2007:

1) Gross Income 60,245 (this is from our w-2's right wages salary tips?)
2) Adjusted Gross Income 74,349 (had to claim 10k ira we cashed out won't happen again)
3) Taxable income 45,654
Total deductions 11,695
total refund/total owed

refund 2280
Thanks so much Jim I appreciate the help!!!

What to do w/30k inheritance