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Question for the Money Doctors

Question submitted on Jun 2, 2020.

Question

I will soon pay off my mortgage, but do not want to adjust my budget/monthly expenditures. Hence, I need a plan to invest $1,700/month. I am already contributing the maximum to 401k. I am over 50 and eligible to contribute to Roth IRA (~$583/mon), and can switch from FSA to HSA (net ~$117/mon). This leaves me $1000/mon and I am torn between two options:
1. I plan to sell my current house and buy a retirement home in the future. I do not want a mortgage when I retire. Hence, I can invest/save $1000/mon to cover future mortgage/purchase costs.
2. Switch payroll 401k contributions from traditional to Roth, which would “cost” about $618 in additional state and federal income taxes, but would leave me only $372/mon to invest for future mortgage expenses.
I confused on best course of action as I don’t know if my tax burden will be less when I retire, nor do I know how much real estate inflation will affect me when I buy my retirement home. I have about 12-15 years until I retire. What do you recommend?

Answer

Congratulations!    You are doing all the right steps towards financial security.

I fully agree with steering your mortgage money to a savings account.

I suggest staying with the Traditional 401(k) and maxing out.   There is value to the tax deferral.   You do not have to take distributions from the 401(k) until age 72 so you have 12 more years of tax deferred growth.

I expect your tax burden will be less when you retire.  I have yet to meet someone who has higher taxes when they retire, I only see this in hypothetical articles.

However, if you have the cashflow, take a look at your 401(k) plan if you can also make After Tax contributions to your 401(k) plan.   You might be able to do an In Service Withdraw to a Roth.   This is known as the Mega Back Door Roth IRA.   Check with your 401(k) administrator to see if you have this option.

Good luck!

You are doing great!


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