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Author: rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75335  
Subject: Re: Roth IRA vs. Mortgage pre-pay Date: 1/16/1998 11:21 AM
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I said:
The best things to do, in order are:
1) Your deductible IRA (only if it is deductable, though).
2) Your 401(k), up to the employer match.
3) Your Roth IRA (if you can't do #1).
4) Your 401(k), up to the max.

LifeGuard said: " I would like to see the justifications foryour list and its ordering."

My response:
Your points are all good. BTW, most people are in 28% bracket, so that figure is what I assume.

I won't quibble about the relative order of deductible IRA vs. employer-match 401k. Most people here aren't eligible anyway. The IRA gets you an immediate tax break of (est.) 28%. The employer match gets you free money. Free is good!
Obviously, you need to look at what they are doing with your 401k funds. Color Tile was "investing" these back into Color Tile stores----flat out fraud in my opinion. If you have both alternatives, but can only afford one, I'd go for the ded-IRA, because it's quite likely that you'll eventually become ineligible for it. So get it while the getting's good.

Once you've captured the free employer match, you want to get the totally-tax-free returns of the Roth IRA.

And finally, after you've taken maximum advantage of all the tax-deferred IRA, the free 401k money, and the tax-free Roth IRA, then you go back to the tax-deferred 401(k).

As for lower tax bracket in retirement: For most of us, I don't buy it. Example: My Mom (age 73) was appalled to find that she stayed in the 28% bracket after she retired. My folks were never rich, or even well-to-do. But even so, with their modest pensions and retirement, and small retirement investments, their retirement income was enough to keep them in the same bracket.

And, who knows what the future will bring in taxes? All my experience (and history before I was born), is that the government has a strong tendence to increase taxes. Money in hand (or in your own name) is a better bet than "money in the future, depending on the graces and whims of the government". (This is also why I'm having second thoughts about converting my IRA to a Roth---I think it's a good possibility that I'll pay taxes now AND later.)

I agree that the "psychic income" of having a fully paid-for house is very large. But it's certainly possible to make a financial mistake by burying too much of your assets into the house. "The Truth about Money" had a chapter on this.
Q: How does a retired couple with no debts lose their house?
A: Simple. One of them gets ill, and they face large medical bills. They have few liquid assets, and their major asset is the house. But they can't get a mortgage to raise cash (after all, one is deathly ill, and neither has a job), so they have to sell the house to raise cash. Or the hospital puts a lien on their house for the medical bills.

I've said this for several years. But this November it was brought home (and my relatives began to think that maybe I wasn't a nut after all). My uncle has a massive heart attack, had emergency quintuple bypass surgury, then a small stroke. They are quite well-off, but their assets are all in real-estate, their own house & acreage, and other real-estate. Even with medicare & insurance, they face some pretty hefty bills, and have very little cash to pay them with. All my aunts and uncles (and Mom) looked at this and said "Oh, shit. If this can happen to Mason, it can happen to me."
If you have your assets in the stock market, you can convert them to cash with one phone call to your stockbroker. You can't do that with your house.

When/if my Mom moves, I'm going to suggest that she get a mortgage on her new place, even if she could pay cash (from selling her current free-and-clear house). That money in the market can pay the mortgage for a long time--plenty enough to ride out bear markets, even if you have to draw down principle.

Regards,
Ray
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