Pay off Mortgage or Max TSP?

[DreamboatAnnie]

Strategy to keep itemizing as long as possible: Once the mortgage interest plus property taxes get below standard deduction or your deductions with interest and real estate taxes, etc get too low to itemize, you can try paying two years of taxes in one year (January and in December) to pull it back up above standard deduction to enable you to itemize one year and then use standard deduction the next year. Just keep alternating years until you can no longer itemize.

 

[k0nkuzh0n]

What is YMMV??? I agree with you PO, but you gotta be positioned to take advantage of the markets when it wants to be generous and giving.

YMMV = your mileage may vary

Another thing I was looking at: paying off a 30 year mortgage in 5 years saves me nearly $60k in interest.

That is likely misleading though because of inflation. Its very likely $60k will not be the same as $60k in 30 years from now.

 

[Khotso]

Strategy to keep itemizing as long as possible: Once the mortgage interest plus property taxes get below standard deduction or your deductions with interest and real estate taxes, etc get too low to itemize, you can try paying two years of taxes in one year (January and in December) to pull it back up above standard deduction to enable you to itemize one year and then use standard deduction the next year. Just keep alternating years until you can no longer itemize.

Pay 2 years of taxes in 1 year? Can you explain that a little further for me? My ability to itemize may be gone by this year, but certainly next.

 

[bazinga!]

JP,
I am very new at all of this. May I ask acouple of questions?
First, What is the difference between a Roth IRA and a TSP Roth? How would one go about getting into a "Roth IRA"?
I am getting ready to max out my TSP contributions and add the $5000 catch up but would also like to get involved in a Roth of some sort. I don't want to sit here everyday pulling my hair out about where to move my money, (TSP is enough already)
My knowledge is too limited to trade with the big dogs as of now.
Any suggestions, comments?
Thanks in advance.

Lori (Bazinga)

Let me simplify the math if I may....

You're passing up a possible 10, 20 or even 30% gains in TSP in order to eliminate 3.75% interest fees a year as well as pass up the tax write off of your mortgage(resulting in higher taxes)
Also, lets not forget that your tsp contribution lowers your taxable income so more money in your pocket and less money to Uncle Sam.

Please consider the glowing:
1. Get rid of the credit card and car debt.
2. Keep the good debt (mortgage).
3. Increase TSP contribution
4. Start Roth IRA (not TSP Roth)
5. If you get bored watching your money multiply, you could try passing up Birch just for fun. That should get some bull tinky flying.

 

[jpcavin]

JP,
I am very new at all of this. May I ask acouple of questions?
First, What is the difference between a Roth IRA and a TSP Roth? How would one go about getting into a "Roth IRA"?
I am getting ready to max out my TSP contributions and add the $5000 catch up but would also like to get involved in a Roth of some sort. I don't want to sit here everyday pulling my hair out about where to move my money, (TSP is enough already)
My knowledge is too limited to trade with the big dogs as of now.
Any suggestions, comments?
Thanks in advance.

Lori (Bazinga)

Lori
There are way more qualified members of this board that can give you a better answer than I can. However, I'll give you my elementary anwer and hopefully someone else can elaborate and correct me if necessary. I am also new to investing

The TSP Roth and the regular TSP refers to the same 401k type account. The main difference is that the regular TSP contribution is pretax and the Roth TSP contributions are post tax. You can contribute to each as you see fit but your contributions cannot exceed $23,000 ($17,500 in regular TSP contributions
plus $5,500 in catch-up contributions) between the two TSP types combined.

A Roth IRA is in the same category as the traditional IRA exept that the traditional IRA is pre-tax and the Roth IRA is post-tax. Again, you can contribute to either one or both as you see fit but your contributions cannot exceed $6500 ($5,500 in regular contributions plus $1000 in catch-up conrtibutions) between the two IRA tyoes combined.

There are more rules with the Roth IRA based on your income, etc. that limit your contribution. I didn't cover those details but it is easily googled.

I have my Roth IRA account with USAA and it is a Self Directed IRA (SIDRA). I can invest in stocks, mutual funds, etfs, etc.. It's a bit limited but I am new to this so I don't need anything complicated. You can make a lot of money in the stock market but you can also lose your shorts if you don't know what you are doing. Study, study, study, use caution, and then study some more!

 

[dannyboy]

I am currently giving TSP 10% of my base pay.
Why not cut that down to 5% and get the full match? Leaving money on the table is hard to do. If you are in a non-match agency, "Active Duty"
" then start doing everythig you can to get out and find any agency in the government, that has potential for you. DOD is dying?

 

[Birchtree]

Just remember that the money in a defined benefit plan is not your money, only a promise to provide a benefit. It can be diddled with anytime.

 

[EricDeLee]

Just remember that the money in a defined benefit plan is not your money, only a promise to provide a benefit. It can be diddled with anytime.

Rewind here a second...
The money my spouse is throwing into her Defined Contripution plan isn't neccesarily hers?

And another question being that your spouse has a defined plan as well: Can she earn dividends, if she is using the Brokerage route?

 

[Birchtree]

You fully own your money in a defined contribution plan because you are responsible for the inherent risk of managing the money and benefit from any gains. My wife's defined contribution plan doesn't offer a brokerage plan as yet - but there has been mention of one - it would be purrfect to increase deferred income. The days of the defined benefit plan are numbered - thus the 401Ks and the need to be investment educated. Most people fear being responsible for their own retirement but that is the way forward. My daughter has an employer Roth 401K and is invested in three large cap funds that will grow very nicely over the next 25 years.

 

[Scout333]

Rewind here a second...
The money my spouse is throwing into her Defined Contripution plan isn't neccesarily hers?

And another question being that your spouse has a defined plan as well: Can she earn dividends, if she is using the Brokerage route?

I'll let BT speak for himself, but I think he means a defined benefit plan such as a pension promised by a company, etc. NOT a defined contribution plan such as a 401(k). Sounds like your wife has a 401(k) type plan. Her contributions should always be hers, but company matches are usually vested in over a period of time depending on the plan. For example, some plans vest in matches at 20% per year for five years. Sounds like you need to check into her plan so you and she understand how it works. Hope this helps!

 

[Birchtree]

Another beauty of a defined contribution plan is that you can name any heir or beneficiary that you want- it's your money. Defined benefit plan usually restrict beneficiares to a spouse. When the spouse is gone the pension is gone.

 

[EricDeLee]

Okay.. That makes sense. She is in a Defined Contribution. not a Defined benefit. So she's get her normal pension of around $3500 a month, as well as whatever she gets from the DC plan. So having the brokerage thing is a good thing. I am going to look at that and see where we can make some gains.

 

[Birchtree]

My wife is not required to take any money out of her defined contribution plan until the required minimum distribution age of 70 - that helps keep the AGI under control. You have to have built in flexibility to avoid some taxes when in retirement. I face the same issue in my TSP.

 

[DreamboatAnnie]

Pay 2 years of taxes in 1 year? Can you explain that a little further for me? My ability to itemize may be gone by this year, but certainly next.

States often have taxes due towards the end of the year and they sometimes allow payment into the following year without penalty. Here in Texas we have property taxes that are assessed in the Fall and you have until January 31 to pay without any penalty.

So for example, you can pay property taxes in Jan 2013 for 2012, and then in December 2013 you can pay the state tax for 2013. If you do that, you have just doubled up the amount of taxes paid in one calendar year and you can deduct it on your Federal tax return for that year because Federal tax returns are typically cash based for individuals. That tax double up might be enough to get you above the standard deduction so you can itemize and save more on your individual Federal taxes when you are just falling slightly under the std deductible amount and thus unable to itemize.

Then the next year you would pay 2014 taxes in Jan 2015. So calendar year 2014would have no real estate taxes and you would just use the std deduction. It just depends on where you are at in exceeding the standard deduction amount. Also during the year of double up, you might want to do more medical procedures if you are even close to exceeding the medical deductions threshold, or increase your charitable contributions, clothing and donations to goodwill, etc... And make sure to count your mileage for charity and doctor visits,etc