Pay down our home, add to savings, or invest?

[ambellamy]

• We collectively make $74,000.00
• We are both 27 years old without Kids
• We are debt free minus our condo (refinanced to a 20 yr fixed at 3.75% a few months ago)
• Emergency Fund = $12,500 (approx 6 months of expenses)

We put 15% of our money into retirement via my defined pension (2.7% at 55 through Cal Pers), his 401k with employer match, and a Roth IRA. (so a little over 11,000 a year when we add that all in).

We essentially "live off" my income approx $54k and we don't really have a plan for my husbands income because we were a one-income family when we got married. His job is relatively new and we have been using his income to do some postponed purchases (new couch, newer to us car, and then building some savings up).

Now our major question becomes what to do with his income. We know we will want to start a family in the next 2 to 3 years, and will ultimately need to sell our condo in less than 5 years (we figure once our future kid turns 2 we won't be able to make the 1 bedroom condo work).

We want to continue to live off my income when we get a new home so my husband can be a stay at home dad and work part time since I'm the one with the pension and benefits.

So should we save money just in a money market account, pay down the condo (we can't itemize our taxes because our loan is only $111,000)... or open a second Roth IRA... or gasp, try investing outside a retirement vehicle (which I don't know how to do).

Thanks!

[Deleted]

Open a second ROTH IRA.   Combined you can contribute $11k.  That is what you should shoot for before using any "extra" money for anything else.

[gooddecisions]

Max out your roth if you're not already, open that 2nd roth and max that out, open a brokerage account and start dumping whatever is left over in low fee index funds, vanguard 500 for example. Do not pay anything extra toward the condo mortgage. Personally we also max the 401(k)s because we like the tax break and then the rest in the brokerage. Forget about percentages for what's going to retirement and focus on how much the maximum amount you can contribute is.

Congrats on getting a great start on your future!

[justme]

Forget about percentages for what's going to retirement and focus on how much the maximum amount you can contribute is.

If you're planning on having kids in a few years, I'd throw everything you can into retirement accounts. You'll get a decent amount in and it'd be there to compound over the years even if you have to decrease your retirement savings once you have kids. You'll earn a lot more money maxing 401k/Roth now than if you max it after the kids are grown and gone.

[ambellamy]

Oct 10, 2013 11:10:34 GMT -5 @wxyz said:

I would definitely NOT pay down the condo.  You already have a great low interest rate and are paying it down via the 20 year term of your loan.

Roth would be fine since you can pull your contributions out if needed without a tax hit.  I would also consider a regular investment account.  Over your life you are going to need to have some investment outside of retirement. 

The main issue is what are the funds going to be used for?  The new house?  At your young ages it is very important to the extent you can to get funds into the stock markets and let compounding take over.  Investing in a non-retirement account is really no different than investing in a Roth. (at least for me)  Both are just long term investing and compounding over time.

How is your IRA invested?

Keep in mind, I am not advising you....this is simply what "I" would do "if it was me".  You have to do what is right for you.

The Roth is a target date 2040 account at Vanguard.

We just weren't sure if opening another Roth account there was smart move with my penison. Essentially if I work until i'm 55, and never get a raise, my base pay before benefits is $3,884 a month, and my pension would be $3,399.00 a month with a 2% COLA and $825.00 in monthly medical benefits.

So on top of that we will have my Roth IRA (which gets $5,500 a year) and my hubby's 401-k (6% salary plus 3% match) in a target date account as well.

I wasn't sure since we'd need the money in less than 5 years if we should invest because ideally we would be using the money for a new home as a downpayment to go along with the funds from selling our condo... and for any baby costs. (My health care will cover delivery and hospitals, etc)

[gooddecisions]

By the way, I also had no clue how to open a brokerage account and was really overwhelmed when people here told me to open one, but didn't tell me how. I was so clueless I almost ended up at my bank, which would have been a huge mistake since that's pretty much the most expensive type of brokerage account to have. And, banks do not have good investment backgrounds to be charging so much for managed accounts. In the end, I went to vanguard.com and followed the prompts to open a free account, linked it to my bank account and am able to make easy/hassle free transfers between the two. personal.vanguard.com/us/help/FAQBrokerageOverviewContent.jsp

[ambellamy]

Oct 10, 2013 12:01:37 GMT -5 gooddecisions said:

By the way, I also had no clue how to open a brokerage account and was really overwhelmed when people here told me to open one, but didn't tell me how. I was so clueless I almost ended up at my bank, which would have been a huge mistake since that's pretty much the most expensive type of brokerage account to have. And, banks do not have good investment backgrounds to be charging so much for managed accounts. In the end, I went to vanguard.com and followed the prompts to open a free account, linked it to my bank account and am able to make easy/hassle free transfers between the two. personal.vanguard.com/us/help/FAQBrokerageOverviewContent.jsp

Thank you for the link!!! I'll look into that so I can see what the process looks like.

[ambellamy]

If we go ahead an max out another Roth IRA, how do we get to use that money for our new mortgage downpayment if we need it?

Can't you only pull money out for your "first home" and considering I already have one, would we be able to do that?

Or is that what the brokerage account is for?

[Peace Of Mind]

My vote goes to adding to savings and invest.   You are still very young and your interest rate is great so I think slow and steady on the mortgage and save/invest like crazy now. 

[justme]

Oct 10, 2013 15:56:04 GMT -5 @wxyz said:

If you put it into a Roth you can take out your contribution amount tax free since the money is put in as money that has already been taxed.  (as opposed to the earnings which would be taxable)

So you would just need to keep track of what you contributed and when the time comes for the home just take any amount out that you need up to the amount of your contribution with no taxes due.

Taxable if you withdraw them before the 59 1/2 and five year rule are satisfied.

[kittensaver]

Man, I wish Roth's had existed when I was your age and in your circumstances (late 20's, young marrieds, no debt except mortgage and no kids). I'd be sitting on a very pretty pile of $$ right now.

Go for the Roths. Good luck!

[ambellamy]

I'm wondering about the "account for 5 years provision."

I originally had a sharebuilder Roth IRA with ING Direct so I could learn my investing tolerance. I opened it in 2007 and put in $4k., in 2008 I put in $5k and in 2009 another $5k...
When the market got weary I opened a different Roth IRA directly with ING Direct and put in $5k there for 2010... Later that year or early 2011 I believe I "rolled" what I had at sharebuilder to the new ING Direct Roth IRA to think things through and get out of the market since I didn't want my money at sharebuilder...

In 2011 I opened a new account at Vanguard since I finally realized that was where I wanted to invest with the lower fees and better options... so I dumped $5k there, and then $5k for 2012.... in 2013 I transferred 10k from my ING Direct Roth to Vanguard... and I plan to $5,500 in for 2013 into Vanguard at the end of the year...

I still have $10k in the ING Roth (in CD's that close soon), but since I didn't open that one until 2010 should I refrain from rolling that into my vanguard account because I should be able to pull it out if we need it in 2015... or are $9k of those funds okay because I originally put funds in 2007 and 2008?


If I roll everything into Vanguard, will I have to wait until 2016 to be able to access the first $5k I dumped in there?

[ambellamy]

THANK YOU EVERYONE...    (sorry i'm a little slow). If it makes you all feel better, all my knowlege has come from the internet and message boards since my mom is not a "financial role model" in any means. Her plan is social security...

I'll be calling vanguard today

[ambellamy]

I called Vanguard.

I can pull out my contributions at anytime without penalty, even if I opened the account yesterday, so WXYZ was right. So we will combine my two existing Roth IRA's in January once my last Roth IRA CD "matures" since I don't need to "hold" onto my old account that was open for 5 years.

As for "investing," since we can access Roth IRA contibutions at any time, we will open a second Roth IRA in my husband's name instead of a brokerage account since an extra $5k a year would be a good starting point for us to begin investing with. We will probably wait until January to open the account since we A) need $1,000 to start the new account, and B) we would like to replace a few things around the house first. 

We won't "accellerate" our mortgage payments at this point... but if we decide to stay in the condo (ie we find out we can't have kids) or if we can keep it as a rental, we may pay more on it since we can't write off the interest.

Thanks everyone. I'm really glad I came on here to ask, because if I hadn't I may have just decided to add more liquid money... and $12.5k is enough liquid...