My wife is about to receive an $15,000 inheritance from a deceased relative that she was not expecting. We’re wondering what to do with the money (invest in an IRA, standard mutual fund, or pay against the mortgage). Below is our financial background:
-We live in Iowa.
-My salary is $119,000, with a 12% yearly bonus (adjusted for company performance, so after taxes around $7-8k).
-My wife’s salary is ~$50,000.
-So combined income puts us in the 28% tax bracket. Someday I could see us reaching the 33% bracket, but that’s gonna be awhile (we’ll never be higher than that unless tax brackets drastically change).
-We both contribute the minimum amount to our 401ks to receive the company match (8% in my case, 6% in her case).
-We built a new house in 2015 for $389,000 (5 br, 3 ba). We have two mortgages, one with original balance $309,500 (30 year, 4%) and one for $58,000 (15 year balloon, 4.75%). The minimum payments come out to be $1660 and $302 respectively (the 1660 will probably rise to 2200 once full property taxes kick in). We’ll eventually need to pay more on the balloon so that the remaining amount doesn’t hit all at once at the end of the period, but we’re not too worried about it since it’s a much smaller amount (was notionally planning to just put my yearly bonus against it for the next 7 years).
-We just had our first child, and opened an Iowa 529 Savings plan.
-We have a $550 a month auto payment, but it’s a 0% interest loan for the life of the loan.
-We have a reasonable emergency fund stashed away already.
-One of our main goals is to eventually buy / build an even better house. Not talking basketball courts or bowling alleys or anything, but stuff like a theater room, bigger kitchen, etc. Right now houses like that around here are probably in the $500k range.
So given all this, I started researching what to do.
Option 1: Roth IRA / Backdoor Roth IRA
My initial thought was that it’s a no brainer to put the money in a Roth IRA. However, after 5 minutes of research I found that Roth IRAs have salary limits ($117k for single, $184k for married). While we don’t hit the $184k limit yet, I expect that within 5 years we would exceed the phase out limit. I also found that even while under this limit, the yearly contribution limit is only $5,500. Since we would only have ~5 years investing time while under the married limit, that’s “only” $27,500 that we’d be able to contribute to the Roth account before phasing out.
I then started reading about Backdoor Roth IRAs. This seemed like a good way to get around the salary limits, but there are a few problems. For one, you need to have a traditional IRA account to convert. Aside from our 401ks, neither of us have a traditional IRA account. After some quick searching it appears the traditional IRA also has a $5,500 per year contribution limit. So even if we went this more complicated route we’d be stuck putting the $15,000 into checking and only contributing $5,500 a year to the traditional IRA, then converting that to a Roth.
Option 2: Traditional IRA
After looking into it a bit more, a traditional IRA might make more sense for us than a Roth, since we're already in a higher tax bracket (not really saving by getting taxed later). I haven't done a detailed spreadsheet yet figuring it out. Regardless, I was bummed when learning you can only contribute $5500 a year to this as well. So again, we'd be stuck putting it into checking now, then contributing the $5500 the next 3 years.
Option 3: Pay against the balloon mortgage
This was actually what we assumed we’d do before thinking about investing. However after using some online calculators, the total interest of the $58,000 loan is “only” $23,206, for a total loan cost of $81,206. Since the $15,000 would really only help us pay off the loan 2 years earlier (6 years instead of 8 years), it doesn’t really seem worth it. I haven’t done the math to figure out what 2 years’ worth of interest is, but my guess is not really that much. We’d probably make more investing the money in anything than we would save in interest payments.
Option 4: Mutual Fund
My old manager at work advised me to simply invest the money in a decent mutual fund (Ex. something based of S&P 500 or Berkshire Hathaway). His reasoning is that in his personal experience he’s found it nice to have more liquid sources of cash. He felt like he has all this “wealth” locked up in his 401k, but when big events happened (daughter’s wedding, etc) he sometimes felt cash poor. To be honest I hadn’t even thought of this option, since I assumed the tax benefits of an IRA outweighed all standard investing options. However looking into this it seems we won’t be able to deduct our contributions to the traditional IRA since we’re already covered by a 401k and make too much income. So it comes down to paying taxes on capital gains when we eventually sell (mutual fund) vs. tax free gains but paying income taxes on all distributions (traditional IRA). The mutual fund option would also have to report the dividends as income, but with “only” $15,000 starting investment those would be tiny.
Given all of this I am leaning toward just investing in a regular mutual fund. My reasoning is that by doing this and paying off the balloon loan in 8 years we’d have enough equity and could use the mutual fund “liquid cash” as a down payment towards a better house.
Does anyone have any advice on what to do here? Thanks in advance!
Submitted June 10, 2017 at 10:38AM by DarthVayne50 http://ift.tt/2t6elOb
