401k Investment Question

[brocket]

I am in a matching 401k at work, and I have taxes taken out pre-investment, so there will be a tax free withdraw.

Is this what DR recommends, as most of the time I see him recommended Roth IRA's, which come off the top of your income, but tax is taken out when you withdraw.

Can anyone elaborate on these two strategies and if I am doing the correct one?

[Greebo]

I am in a matching 401k at work, and I have taxes taken out pre-investment, so there will be a tax free withdraw.

Is this what DR recommends, as most of the time I see him recommended Roth IRA's, which come off the top of your income, but tax is taken out when you withdraw.

Can anyone elaborate on these two strategies and if I am doing the correct one?

When you have a matching 401k, what DR says is to invest into the 401k up to the match amount, then to the Roth with post-tax dollars, and finally back to the 401k for the rest of the 15%, if applicable.

Why?

The match amount is hard to beat - even if they give you a 1/4 match that's an INSTANT 25% return on your income - which is worth paying potentially higher taxes on later.

The Roth is 2nd (first if no matching 401k) because we don't really know for sure what taxes will be when you retire, but it's likely they'll be higher, so paying the taxes now on the money means you won't pay it later.

[mek42]

You have a Roth 401(k) - you are the man! Best of both worlds, you get the employer match and tax-free withdrawal at the end.

One of the reasons that a Roth is attractive to me is that if our retirement investments perform under expectations or if we just don't get enough put away (hopefully not an issue now that we have a plan) we don't have to live on only a portion of what we have saved due to taxes.

A Google search for Roth 401(k) will give several links to read more about this plan.

[brocket]

Great.

So up to this point I have done the maximum matching contribution, which I think is 3000 each year, with a 100% matching, for a 6000.00 total investment.

The confusion I am having now, is understanding where to invest next as my income seems to be too high collectively to be able to get any tax advantage of another IRA.

Or do I start fulling contributing to my work IRA which I think is capped at 15k, 6k of which is my current contribution + match.

[Greebo]

Oh I'm sorry, I missed that you had a Roth inside the 401k.

Hmm... so they're matching funds and that's going into the Roth portion? Or at least, 5k of it is, right?

Assuming 15% of your income > 12k (15k-3kmatch) then after you max out the 401-Roth and the 401k non-roth, the remainder can go into a standard IRA account I think.

[brocket]

Thanks Greebo.


I also posted a question after your most recent totals in the 2010 Debt challenge, once that is answered I am pretty much set and have a great road map.

[Greebo]

Could you please repost your question here?

The Debt Reduction Totals thread is for totals only, not discussion.

[brocket]

Greebo. Thanks

I am about to ramp it up on my principal payments, and have a goal of $55k by the end of the year. Do I start to pay down:

a. My LOCKED IN 4.15% 15 year HELOC at $55k
b. My 1st Mortgage at 4.5% locked for 3.5 years, and locks in at 7% later.

Normally the HELOC would be it for sure, but due to the locked in status of the loan, it is tempting to pay the same amount down in the ARM.

Thanks

[Greebo]

Since you're posting this in the Dave Ramsey forum, let me ask you a few DR questions first. Are you otherwise debt free outside of this house debt?
2) Do you have a fully funded emergency fund to cover 3-6 months of expenses?
3) Are you contributing 15% of gross to your retirement?
4) What is your household income?
5) Where do you live (what country, mainly, as mortgages vary by national border)?


Now REGARDLESS of the above:

b. My 1st Mortgage at 4.5% locked for 3.5 years, and locks in at 7% later.

If you're in the US, then i would refinance that yesterday to get rid of that future change. If you're not in the US...dunno what your terms are

[brocket]

Greebo,

#1. Yes, debt free outside of this
#2. We have approximately 3-6 months in the EF(but are considering using it and rebuilding to pay down the mortgage or HELOC, and used 20k to pay off my wife's SL.)
#3. Currently we are not contributing the 15%
#4. Approx 120k-140k/yr
#5. USA, Washington State

We just started with the program last year, and have made much headway, however with such a huge housing debt load it can get tough to keep an eye on the prize. The things we do not have that most people do have are major car expenses, and zero commute, and live in a great great area.

Since you're posting this in the Dave Ramsey forum, let me ask you a few DR questions first. Are you otherwise debt free outside of this house debt?
2) Do you have a fully funded emergency fund to cover 3-6 months of expenses?
3) Are you contributing 15% of gross to your retirement?
4) What is your household income?
5) Where do you live (what country, mainly, as mortgages vary by national border)?


Now REGARDLESS of the above:

If you're in the US, then i would refinance that yesterday to get rid of that future change. If you're not in the US...dunno what your terms are

[Greebo]

Greebo,
#2. We have approximately 3-6 months in the EF(but are considering using it and rebuilding to pay down the mortgage or HELOC, and used 20k to pay off my wife's SL.)

Advise against - the earlier you pay a debt down, the less you pay long term in interest, so saving up to pay it off in one lump sum is less beneficial in the long run.

#3. Currently we are not contributing the 15%

Fix this, depending on what you choose below.

Your HELOC is less than half your income. Technically, DR would tell you to put it in BS2. To do that would mean you stop all retirement contributions (ok maybe not the matching part), drain the EF down to $1,000, and dump all that onto the HELOC, then bust it killing the rest.

But ... it's close enough to 50% that you could roll it into BS6.

EITHER way, the 55k comes before the 1st mortgage.

BUT regardless - you need to address that pending adjustment on the 1st. REFINANCE THAT ASAP. You've got 2 years and 6 months or so to get the total owed on the house down below it's worth, so if you can't refinance it now due to the amount owed, work on that like nobody's business, cause doubling your interest portion in 3 years is going to CRUSH your plan.

If your HELOC were adjustable I'd say roll that into the refi - but since it is fixed, you'll need to get them to subordinate to the new first - which can take a while - so if I were you I'd start that refinance NOW if you can.

[brocket]

Gotcha.

So I should focus strictly on getting my first mortgage paid down asap and refi asap. Let's say I find a place that will refi my house in a traditional 80% 20%(downpayment) scenario(I mention this since the bank I want to work with wants 30% so I need to go somewhere else.), and they will give me 5.5%, and it will cost 8k.

Is it still worth doing?

The plan, if you were in my shoes would be :

Stop Investing.
Drain EM to 1k
Pay all I can extra to the 1st mortgage to get it below what it is worth, and potentially subordinated the 2nd mortgage so I can refi the first.

BTW, I have approximately 40k to pay it down immediately. I can then contribute an addition 1500-2500k a month towards principal.

Thanks,

G

[mek42]

Oh I'm sorry, I missed that you had a Roth inside the 401k.

Hmm... so they're matching funds and that's going into the Roth portion? Or at least, 5k of it is, right?

Assuming 15% of your income > 12k (15k-3kmatch) then after you max out the 401-Roth and the 401k non-roth, the remainder can go into a standard IRA account I think.

I think he has a Roth 401(k). This was enacted in 2006 and recently made permanent. The total contribution limit to 401(k) plans, Roth or traditional is $16,500 if you're under 50. Any employer match is not included in this limit, but said employer match must go into a traditional 401(k) using pre-tax dollars.

[Greebo]

Gotcha.

So I should focus strictly on getting my first mortgage paid down asap and refi asap. Let's say I find a place that will refi my house in a traditional 80% 20%(downpayment) scenario(I mention this since the bank I want to work with wants 30% so I need to go somewhere else.), and they will give me 5.5%, and it will cost 8k.

When they evaluate you for a refi, they'll do it on total amount owed - 1st AND Heloc combined, so you can focus on paying down the HELOC fast first.

I don't know what you currently owe on the first so I can't tell you if the deal is worth it.

The plan, if you were in my shoes would be :

Stop Investing.
Drain EM to 1k
Pay all I can extra to the 1st mortgage to get it below what it is worth, and potentially subordinated the 2nd mortgage so I can refi the first.

No pay the HELOC first. The HELOC would be the BS2 debt.

BTW, I have approximately 40k to pay it down immediately. I can then contribute an addition 1500-2500k a month towards principal.

Hmm. this changes things and I should have read ahead first...

So you can immediately pay down 40k on the HELOC, and pay the last 10k off in 5 months?

Hmm.

In your case then, I'd:
Stop Investing.
Drain EM to 1k
Pay all I can extra to the heloc (40k) and kill it in 4-5 months.
Save 3-6 months income for the EF
Invest 15%
And THEN I'd start looking into refinancing the first down to a fixed rate FIFTEEN year mortgage. You'll get a lower rate overall for a 15 year, and you can wait a few months while you deal with this last BS2 debt. 15 years generally go for 4.5% and get paid off twice as fast anyway.

[Greebo]

I think he has a Roth 401(k). This was enacted in 2006 and recently made permanent. The total contribution limit to 401(k) plans, Roth or traditional is $16,500 if you're under 50. Any employer match is not included in this limit, but said employer match must go into a traditional 401(k) using pre-tax dollars.

But is the money going into the Roth 401k pre-tax? If so, what's the point of calling it a Roth? The point of the Roth is using POST tax dollars...