Starting over: Roth 1st, or home purchase?

**terry1156** · 08-15-2007, 08:09 PM

I think that maxing out your IRA is the most important step for you at the moment. A house can be a huge drain on your finances with all the little things. Hold off on the home and keep saving for the downpayment with extra money after funding your retirement account.

**Fern** · 08-16-2007, 01:29 PM

I don't think you mentioned what other savings you might have. If you have none, age 50 is a late age to purchase a home, especially using a conventional 30-year mortgage.

How much are you planning on putting toward the condo down payment? Since your income is not that high, I would rather wait a bit longer so as to save more and put down a larger down payment, effectively lowering your monthly mortgage bill.

**seanof30306** · 08-16-2007, 02:37 PM

Originally posted by Fern View Post

I don't think you mentioned what other savings you might have. If you have none, age 50 is a late age to purchase a home, especially using a conventional 30-year mortgage.

How much are you planning on putting toward the condo down payment? Since your income is not that high, I would rather wait a bit longer so as to save more and put down a larger down payment, effectively lowering your monthly mortgage bill.

Right now, I have:

1500 in my 401K. At 11%, with the 6% match, it'll average out to about 3000-3500 per year.

7000 in my Roth. On track to make the full 5000 contribution for this year, and plan on maxing out every year from now on.

3000 in personal savings

Zero debt.

I have two cars; both are paid for. Both are older, but reliable and neither is needing repair. 1 is daily transportation, and has at least 5 more good years in it; more if I continue to take care of it. The other is a playtoy. It's currently running reliably, and any further mods are on hold until I get my financial situation further sorted out. It's not a money pit. My budget for vehicles (excluding gas, oil changes, and insurance) is 50.00 per week, and that includes repairs, etc. on the daily driver. No money goes into the toy if the daily driver needs something.

I also have a motorcycle. It's an old one I picked up very cheap, and got running reliably with under a grand invested. It gets 55 mpg, and will cost me in the neighborhood of 1500.00 per year less in fuel (at an average price of 2.75 per gallon) by using it as daily transportation when weather permits. After the initial investment, all repairs, etc. to the bike fall under the Vehicles budget line, so again, the toy sits idle if the bike or Jeep need anything.

I'm budgeting 50.00 per week towards a down payment on a home. Have just under a grand, so far. I want to put enough down to avoid PMI, without having to take out a second loan to do so.

Even if I only put 10% down, the condo I'm looking at would save me just under 200.00 per month over the rent I'm currently paying, even after including insurance, property taxes, and homeowners' association fees. I'm figuring would take a hundred of that each month and park it in savings, building a fund for the inevitable additional expenses home ownership entails. I'd take the rest of it and funnel it into the Roth. I figure the sooner in the year I get the contribution for the Roth for the next year, the more I'll be able to earn with that money before it goes into the Roth.

I'm thinking would then take the yearly windfall from the tax benefits of being able to deduct the interest on the mortage and apply enough each year towards principle reduction to pay the home off by the time I retire. I have no heirs, so, I'd then have the option of a reverse mortage. I have a lot more research to do there.

I budget 125.00 per week for the Roth. With no other contributions, I'll make my full contribution for 2007 before the deadline, and will get 3 months further ahead of that deadline each year. My goal is to get to the point where I can put a year's contribution into a CD each year, maturing on or near the first of the year. I'd then be able to earn more than I would in the savings account before funneling it into the Roth.

I will be getting tax refunds back in the next few months in the neighborhood of 5000-7000.00. I could apply them to the Roth, which would put me at my goal of not only being able to make each year's full contribution on Jan 1 of the year, but to be able to place that contribution in a CD for 4-5-6 months beforehand and increase earnings.

The other option is to use that money to get into home ownership MUCH sooner, with the resulting savings over renting, tax benefits, and growth in value of the home. If I choose to do that, I will still make the maximum contribution to the Roth this year, I just won't be able to get as far ahead of the game as I'd like to be.

**Hot dog** · 08-17-2007, 06:33 AM

I just wanted to say welcome to the forum you will get good advice here without all the criticism that usually comes with it. Just wanted to say you really sound like you have educated yourself on all of the options you have available and you have a good plan. One thing I have learned on this site is not to wait for a tax refund till the end of the year change your withholdings now so that you can have your money now instead of giving the government a free loan. Also, you should not rely on a reverse mortgage later I hear they are a bad deal and charge you about 15% interest which is as bad or worse than some cc debt. Good luck in whatever you decide.

**Fern** · 08-17-2007, 10:01 AM

I would not include the $$ you have in your 401k or Roth right now cus those are retirement monies, so they shouldn't factor in to any calculations for saving for your condo.

What part of the country do you live in? I guess the likely purchase price of the condo is an issue, but generally, and i don't mean to disappoint you, but IMHO you are not ready to purchase a condo. I think you definitely should continue to contribute as much as possible to your retirement. At what age do you plan to retire? Forgive me if i am missing details in your posts, but i'm at work and 'scanning.'

Also, i count 3 vehicles among your possessions. Do you really need to have 3? Why not sell 2 and you'll get the cash plus lower insurance premiums, not to mention registration and inspection fees.
I think Terry is right, there are many costs of home ownership most people overlook, and i'm quite sure that $200 in monthly savings you're anticipating will be eaten up by other expenses.

Reverses mortgages don't make sense for anyone under 70, becus of the likelihood that if you do it sooner, you'll outlive the equity.

I would prepare carefully before taking on what will likely be the biggest debt of your life. I don't think you have thoroughly thought this out.

**Fern** · 08-17-2007, 10:12 AM

i forgot to comment on the tail end of your last post, where you asked about where to apply that big tax refund. I would put it toward your retirement savings. Look at it this way. You can live comfortably in retirement while still renting if you have to. I'm not sure you could live comfortably in retirement if you are house rich and cash poor.

You CAN'T count on the growth in value of your home, especially now with the sub-prime debacle. The value of will likely remain stagnant, or even drop, during the next few years.

**kv968** · 08-17-2007, 10:16 AM

Originally posted by seanof30306 View Post

I budget 125.00 per week for the Roth. With no other contributions, I'll make my full contribution for 2007 before the deadline, and will get 3 months further ahead of that deadline each year. My goal is to get to the point where I can put a year's contribution into a CD each year, maturing on or near the first of the year. I'd then be able to earn more than I would in the savings account before funneling it into the Roth.

Let me just make a couple of suggestions and comments here. The deadline to contribute to an IRA is April 15th of the following year. Therefore, you can still make contributions for 2007 until April 15th 2008. But this leads me to question, why do you want to hold the money outside of the IRA and deposit it all at once? Why not just contribute to it monthly? That way you'll get the possible earnings and won't have to pay taxes on them like you would with the interest from a cd.

**seanof30306** · 08-17-2007, 11:27 AM

Originally posted by Hot dog View Post

I just wanted to say welcome to the forum you will get good advice here without all the criticism that usually comes with it. Just wanted to say you really sound like you have educated yourself on all of the options you have available and you have a good plan. One thing I have learned on this site is not to wait for a tax refund till the end of the year change your withholdings now so that you can have your money now instead of giving the government a free loan. Also, you should not rely on a reverse mortgage later I hear they are a bad deal and charge you about 15% interest which is as bad or worse than some cc debt. Good luck in whatever you decide.

Thanks for the response. As I said, I have a lot more research to do on reverse mortages, I know nothing more about them than what I've seen on tv commercials.

As far as the tax refunds are concerned, they are from past years. The accountant I was using wasn't aggressive on deductions. I switched to an accountant who had a lot of experience in my industry and refiled for past years. Previously, I was claiming single/0 because my old accountant actually had me owing for several years. Future tax filings won't yield refunds nearly as large.

**seanof30306** · 08-17-2007, 12:02 PM

Originally posted by Fern View Post

I would not include the $$ you have in your 401k or Roth right now cus those are retirement monies, so they shouldn't factor in to any calculations for saving for your condo.

Right. I was merely trying to be thorough in providing an accurate representation of where I'm at financially.

Originally posted by Fern View Post

What part of the country do you live in? I guess the likely purchase price of the condo is an issue, but generally, and i don't mean to disappoint you, but IMHO you are not ready to purchase a condo. I think you definitely should continue to contribute as much as possible to your retirement. At what age do you plan to retire? Forgive me if i am missing details in your posts, but i'm at work and 'scanning.'

I'm in Oklahoma. The purchase price of the condo is very low; less than 70,000.00. It's not a specific condo, by the way, others in the development come on the market now and then, so I'm under no pressure or "deadline" to buy before I'm ready. I like these condos because they're in a great part of town and are very inexpensive.

And, I'm not disappointed. The plan I have is not set in stone at all. That's why I joined this forum, to get advice from people who know more than me so I can adjust my plan. I appreciate your help very much.

Originally posted by Fern View Post

Also, i count 3 vehicles among your possessions. Do you really need to have 3? Why not sell 2 and you'll get the cash plus lower insurance premiums, not to mention registration and inspection fees.
I think Terry is right, there are many costs of home ownership most people overlook, and i'm quite sure that $200 in monthly savings you're anticipating will be eaten up by other expenses.

As far as the vehicles go; If I bought a new car, I'd have a payment somewhere in the neighborhood of 300-400.00. I budget 50 bucks a week for repair and upgrade on my paid-for vehicles, and stick to it religiously. That's a little more than 200.00 per month. If I had a car loan, I'd also have to carry full coverage insurance. My liability insurance bill for all three of my vehicles is less than full coverage would be for me if I owned my girlfriend's 2007 Accord; I checked into it. It costs more to tag her Accord than it does to tag all three of my vehicles, and we have no inspections in Oklahoma.

Also, buying the motorcycle was a money-saving move. I have less than a grand tied up in it. Last month, the miles I rode on my motorcycle saved me 112.35 over what those same miles would have cost to drive in my Jeep.

Sure, I could sell them all and buy a small gas saver, but, while my cars are old, they're not classics, so they don't have any real value to anyone but me. Acquisition costs would eat up much of any savings. More importantly, I like my cars (and now my bike; Millie the Mileage Maven).

I'm really concerned with rebuilding my financial "house", but I want a little bit of a life while I do it. I don't drink or smoke. I don't hunt, fish, golf, etc. None of those very expensive hobbies (Ok, I Disc Golf, but, there are no greens fees, and I have less than 50 bucks tied up in equipment). The way I see it, I have a hobby that I budget 50 bucks a week towards (and no more), that also provides me with my transportation. I think that's a bargain.

Originally posted by Fern View Post

Reverses mortgages don't make sense for anyone under 70, becus of the likelihood that if you do it sooner, you'll outlive the equity.

Yeah, that's what i was thinking. I have no heirs, and won't be getting any. My ideal situation has me spending my last dime as i pass away. On it's face, a reverse mortage looks like a way of doing that; at least with your home.

Originally posted by Fern View Post

I would prepare carefully before taking on what will likely be the biggest debt of your life. I don't think you have thoroughly thought this out.

Thanks for your advice.

**seanof30306** · 08-17-2007, 12:20 PM

Originally posted by kv968 View Post

Let me just make a couple of suggestions and comments here. The deadline to contribute to an IRA is April 15th of the following year. Therefore, you can still make contributions for 2007 until April 15th 2008.

Yes, I opened my Roth this year by making my full, 4000.00 2006 contribution on April 12th of this year

Originally posted by kv968 View Post

But this leads me to question, why do you want to hold the money outside of the IRA and deposit it all at once? Why not just contribute to it monthly? That way you'll get the possible earnings and won't have to pay taxes on them like you would with the interest from a cd.

Forgive me, I haven't been clear. I budget 125.00 per week for my Roth, making monthly contributions. I started right after I made the 2006 contribution on April 12th of this year, and am on schedule to make the full 2007 contribution by the middle of January of 2008.

Since I don't have many years for the Roth to earn before I hit retirement age, though, getting the most out of the Roth is my first priority. Ideally, I want to make my full Roth contribution on January 1st of the year for the contribution, so it has as much time to earn as possible. If I'd been able to make my full 2007 Roth contribution on January 1, 2007, for example, the money would have earned more than if I make the full contribution by mid-January of 2008, as I'm scheduled to do.

Over and above that, If I had my full 2008 contribution right now, for example, I could invest it (buy a cd, etc.), and earn something with it before I contribute it to the Roth on January 1, 2008. That is the goal I'm working towards with the Roth; first, to get to where I can make each year's full contribution on January 1st of that year, and second, to have each year's contribution in hand far enough ahead of that contribution date to make some money with it before it goes into the Roth.

**kv968** · 08-17-2007, 12:47 PM

Originally posted by seanof30306 View Post

Over and above that, If I had my full 2008 contribution right now, for example, I could invest it (buy a cd, etc.), and earn something with it before I contribute it to the Roth on January 1, 2008. That is the goal I'm working towards with the Roth; first, to get to where I can make each year's full contribution on January 1st of that year, and second, to have each year's contribution in hand far enough ahead of that contribution date to make some money with it before it goes into the Roth.

Ok, I see what you're saying now. If you do have the full amount for next year then getting a 1 yr-cd until then would make sense. However if you're still putting away money monthly for next year and don't have the full amount right now, you should be putting the it in a high yield MMA. Remember, since you're 50 you can contribute $6000 in your IRA for 2008.

**seanof30306** · 08-17-2007, 01:09 PM

Regarding the home purchase, specifically

First, please don't think I'm being argumentative and/or ungrateful for the responses. I'm absolutely not. But, I'm not understanding why I wouldn't put home purchase first on the list of priorities. Here's what I'm not getting.

Immediate monthly savings: I can get into one of these condos and save right at 200.00 per month over renting; and that's including insurance, property taxes, and homeowner's association fees. That's a net savings over my current situation, before any other considerations are factored in. These are small condos; less than 900 sq. ft. For many, that's a negative, but, for me, it's not. I live alone, and want a small, efficient space.

Unanticpated expenses of ownership: In my experience, keeping 100.00 per month of that savings liquid in a budget line for home repair and maintenence should be more than enough. I've owned homes much larger than this in the past, and that number has always been more than sufficient. Also, in this case, all I have to worry about is interior maintenance and repair; the homeowner's association fee, which has already been factored into the equation, covers all outside repair and maintenance.

Prior to purchase, I always invest in having a thorough inspection done, not only of the structure, but all wiring, appliances, heat & ac, etc., so at least for the first few years, the likelihood of any major, unexpected expenses is pretty low. As time passes, and the chance of that increases, the 100.00 per month budget line has grown to cover, so, in my experience, it's pretty much a wash.

Tax benefits: Filing 1040EZ, I got 216.00 back as my 2006 federal tax refund. I had over 4000.00 in legitimate deductions that I was unable to take, as they didn't reach the EZ form's standard deduction threshhold. Being able to duduct the interest on the home loan, however, opens the door for that 4000.00+ in deductions as well. A rough recalculation of 2006 increases my refund by about 700.00. If I did nothing more than apply that amount towards principal reductions on my mortage each year, I'd pay that 30 year mortage off in somewhere in the neighborhood of 15 years.

Now, I've always heard you don't buy a home for tax savings, alone. In this case, though, I'm looking at an immediate reduction in my monthly housing expenses, growing my savings by the 100.00 per month I place there for home repair (as long as I don't have to spend it!), adding the other 100.00 or so in savings to my other investments, and saving on taxes, allowing me to pay the loan off by retirement, leaving me with a very low housing expense at that point.

Understand that, if I apply all, or a significant portion of the windfall refunds I'm getting back towards buying a home, rather than putting them into the Roth, I will still make my full Roth contribution for this and every year, it'll just slow me down in my plan to get ahead of the game with the Roth, as I outlined in a previous post.

Thanks again for your help and advice.

**seanof30306** · 08-17-2007, 01:11 PM

Originally posted by kv968 View Post

Ok, I see what you're saying now. If you do have the full amount for next year then getting a 1 yr-cd until then would make sense. However if you're still putting away money monthly for next year and don't have the full amount right now, you should be putting the it in a high yield MMA. Remember, since you're 50 you can contribute $6000 in your IRA for 2008.

I turn 50 next month, so I'm allowed to make 5000 for 2007, right? I understood it doesn't go up to 6000 till next year.

**Fern** · 08-20-2007, 09:28 AM

Just getting back to the 3 vehicles, i wasn't at all suggesting you buy a new car. I was saying why not get rid of 2 of them and just keep one as your primary means of transporation?

You said the condo is small, 900 sf. Is that about the same size or smaller than where you're living now? If so, then I think it is possible to not have too many more day to day living expenses, as, theoretically, you wouldn't need to buy a lot of new stuff, like furniture, etc., for a new place, unless it was bigger.

I still don't think $100 a month is nearly enough for routine maintenance, even for a condo. What if the hot water boiler blows? Then you pay a couple hundred for a new one plus labor, another hundred or so. That's 3 months' worth of your $100 savings right there. What if you find out if you ants or some other undesirable insects inside? Then you've got to get a Terminix guy to spray, right? If you've owned homes before, you know that just to get someone to show up is $100 right there.

I guess it's possible to do, if you're very disciplined about not spending extra cash when you have it in pocket and you're diligient about just socking it away. But most people will be tempted by whatever their weakness is, whether it's a daily latte, a few beers with friends, the latest techie toy, enhanced cable TV, new jeans, you name it. $100 goes quick!

Also, what would the monthly condo charges be? At least around here, they increase these fees every year. So you've got to factor that in.

I do understand how important owning a condo is to you. To be honest, i would feel the same way, though i am not in the same financial situation as you and i don't think i would be willing to make that purchase with so narrow a comfort zone.

Did you say what your monthly payments would be?

Starting over: Roth 1st, or home purchase?