Intriguing Question

**MKKShah** · 03-04-2012, 09:40 PM

What is rent now? What will be the mortgage payment?

Given your savings rate, the question really boils down to a 6 months or so delay in a home purchase, should you decide to pay off the SL. Not that big a deal either way. Have you already decided the type of home or the locality? I personally don't think home prices are going to go up any time soon. So waiting may not be a big deal, unless your current rental is so bad that you want to move ASAP.

With your income, there should be no cash flow problem for a 400K house. Since it's alredy March, if I were you, I would look for homes right away, since this the time of the year when a lot of properties get listed. Your chance of finding a house you like is high through the end of summer / start of fall.

**YLTL_Dan** · 03-05-2012, 06:12 AM

Normally, I would say stick it out a little longer and pay off your student loan. However, it sounds like you and your wife have your money under control with little debt and paid for cars.

Based on this, it becomes more of a standard of living discussion. If you're comfortable where you're at now, it's probably worth it to pay off the student loan and not risk keeping it around the rest of your life.

However, if the rental life is no longer doing it for you and you (or more importantly, your wife) aren't happy with where you are, I'd move first. I love home ownership and it would be really hard for me to go back to an apartment (or even a rental property for that matter). I really enjoy having my own house to work on, playing with my dog in our yard, and changing things on the house as we feel like it.

Why is it that the people who make great financial decisions never have the mentality that they automatically 'deserve it' like people who don't make the best decisions?

**MonkeyMama** · 03-05-2012, 06:56 AM

I don't see that it makes a difference either way.

I'd personally just pay off the student loan, to simplify and be done with it. As said, if it delays home purchasing by 6 months, what difference does that really make?

On the flip side, I don't get the impression the student loan would be around much longer if you bought the home first. & it's not going to affect your ability to afford a home. So, basically, I don't see what difference it really makes.

**bjl584** · 03-05-2012, 07:04 AM

I agree with MM. It doesn't matter much to your longterm financial outcome. You can pay off the loan today, wait a few extra months to build your savings back up, then buy. Or you could buy and pay them off afterwards.

From a cashflow standpoint, you may want to just pay them off now. It will be one less bill to worry about once you have a mortgage, property taxes, home maintance, etc.

**disneysteve** · 03-05-2012, 07:13 AM

Originally posted by MonkeyMama View Post

I don't see that it makes a difference either way.

Same here. It sounds like you guys have a great handle on things. A 400K house is perfectly reasonable for a 175K income and you're putting down 20%. I don't see any reason to delay buying because of the student loans. We didn't when we were in a similar situation.

**Slug** · 03-05-2012, 10:55 AM

Personally, I would fund your 2011 Roth's and your 2012 Roth's. You are sitting on a pile of cash, and you could be taking a portion of that, putting it into the Roth's, and owe no taxes on it. And, in your case it's got about 30 years to grow. I would delay the house to fully fund these. Interest rates are not going up for a good while. You'll have plenty of time to save up a nice down payment.

The tax adjusted rate on your student loan leaves me pretty unconcerned about that.

**disneysteve** · 03-05-2012, 11:13 AM

Originally posted by Slug View Post

Personally, I would fund your 2011 Roth's and your 2012 Roth's.

I think a 175K income puts them over the Roth limit.

**bjl584** · 03-05-2012, 12:06 PM

Originally posted by disneysteve View Post

I think a 175K income puts them over the Roth limit.

For 2012, If married and filing jointly, your MAGI can be 173K or less and you can still contribute the full amount.

**jpg7n16** · 03-05-2012, 05:08 PM

In general, knowing the little that I do about your situation, I would save for the house. What prompted the decision to buy a home?

I would also max the 401ks, and max your Roths.

It's my understanding that 401k contributions are not added back when determining income limits.

175,000 * .15 = $26,250

175,000 - 26,250 = 148,750 which is below Roth income limits

Publication 590 (2011), Individual Retirement Arrangements (IRAs)

Rationale: since SLs are at such a low rate, and housing costs figure to be very reasonable as a percent of income, no real incentive to eliminate SLs before proceeding to buy. Esp if rationale for buying home is very strong.

Reasons for max 401k and Roth before paying extra on SLs: you just expect to make more long term by being invested than the interest is cost you.

**Nika** · 03-05-2012, 07:48 PM

I'd prioritize the ROTH above the rest of these things -- it is a limited time opportunity.

**mcsmith76** · 03-09-2012, 08:03 PM

Thanks...A Few More Questions

I read through the responses and I want to say a heartfelt thank you for the feedback. I am seriously thinking I need to put off our house and get my retirement in order. With that said, I am very confused as to the best way to approach it.

This new "retirement" thinking was prompted by the Roth IRA suggestions. Also, after doing my taxes, I realized we were NOT maxing out the retirement contributions as I should have. My wife and I were doing this for two reasons: to help meet our $80k house goal of 12/2012 and to contribute more to our HSA's.

A few things to clear up:
-Our AGI is $161k; gross is around $181k. (I had some investment gains)
-We put in closer to 12% into 401k.
-As I said on my original post, we didn't fund the Roth IRA for 2011.
-My employer also offers a traditional 401k and Roth 401K; my wife's 401k only.

At this time, based again on some of the suggestions here, I am leaning toward the following:
1. Maximize our retirement plans for 2012.
2. Fund the Roth IRA's for 2011 at $10K (if possible).
3. Pay off student loan to get rid of it.
4. Save ~12 months longer to get our required $80K for our house (uggh).

The concerns/questions:

1. If I want to fund our employer sponsored retirement plans of $17K for me and $10K for my wife (She is only allowed to do 18% of her salary per her employer plan), how should I go about doing it ? Is a Roth 401k the answer?

2. Regarding even contributing to the Roth IRA, based on my income, I have to add back the $10K Roth IRA contribution to my AGI to get new MAGI, which puts me in a partial status so I can only give 1K or something like that for 2011. I can barely understand what this means, so if anyone can help it would be appreciated. Plus, I already filed my taxes for 2011, so I unsure how this would even work.

Your suggestions on the above will help me in many ways including when I can get the house fund to where I need it.

Thanks once again everyone.

**MonkeyMama** · 03-10-2012, 06:34 AM

Generally, if you are on the young side, I wouldn't put so much emphasis on maxing out retirement. But, I see your age is 37. So that does change my opinion. But if your retirement is well on track, I still think it's fine to set retirement aside and get into a house. "Setting aside," meaning 15% is great and I wouldn't sweat the max. IT sounds like we are maybe talking just one year, either way. I think retirement will be fine if you divert savings for house, for one year, and *then* focus on the max.

I would personally max out the regular 401ks (get the current tax break). If you can do a ROTH and you have the cash flow, is fine, but I'd make it a second priority. {The ROTH is better than nothing, but the 401ks will do so much more for your tax situation}.

Your tax situation will benefit substantially with home ownership and by maxing out your 401ks. Both are significant tax breaks. {Though I agree with the sentiment not to get caught up in the tax break when figuring a mortgage, it can't be ignored that going from rent to a $400k house will be a HUGE Tax break for you}.

P.S. At your income level I would not fund a ROTH until you do your taxes and are sure you qualify. It's just a pain to put it in and then have to take it out (What if you get a surprise bonus or windfall that makes you ineligible to contribute?}. When you do your taxes, fund the prior year if you are eligible. It may be wise to fund 2011 - you have until April 15th.

**mcsmith76** · 03-10-2012, 07:33 AM

Originally posted by MonkeyMama View Post

Your tax situation will benefit substantially with home ownership and by maxing out your 401ks. Both are significant tax breaks. {Though I agree with the sentiment not to get caught up in the tax break when figuring a mortgage, it can't be ignored that going from rent to a $400k house will be a HUGE Tax break for you}.

I agree that home ownership would significantly help me in terms of lowering taxes. Do you believe that if I max my 401k that I will actually pay less in taxes? I ended up paying in over $5k this year...are you suggesting I would pay less if I contributed more to my 401k ?

Originally posted by MonkeyMama View Post

P.S. At your income level I would not fund a ROTH until you do your taxes and are sure you qualify. It's just a pain to put it in and then have to take it out (What if you get a surprise bonus or windfall that makes you ineligible to contribute?}. When you do your taxes, fund the prior year if you are eligible. It may be wise to fund 2011 - you have until April 15th.

Unfortunately, like I mentioned, I only can contribute a paltry ~$1k to Roth IRA based on my income, but I appreciate your suggestion to not pre-fund the contributions.

**MonkeyMama** · 03-10-2012, 07:42 AM

Originally posted by mcsmith76 View Post

I agree that home ownership would significantly help me in terms of lowering taxes. Do you believe that if I max my 401k that I will actually pay less in taxes? I ended up paying in over $5k this year...are you suggesting I would pay less if I contributed more to my 401k ?

Unfortunately, like I mentioned, I only can contribute a paltry ~$1k to Roth IRA based on my income, but I appreciate your suggestion to not pre-fund the contributions.

I didn't catch that part- I'd just skip the ROTH. Problem is if you can put in $1k now and $0 later, then you are just stuck with an account with $1k that you can't add any money to.

Yes, you will pay less in taxes if you put more into a 401k, for sure. The thing is that your withholding will adjust with the contributions. You may still owe $5k next year, but you will have paid less tax throughout the year.

Intriguing Question