Where to Allocate Extra Money?

[Phant1984]

My wife and I have been debating throwing more money at the mortgage, but I'm not sure if it's the best move. Here's our situation:

We are both 28 years old, and we just had our first child. We plan to have one more in a few years.

Current combined income: $120,000/yr

Roth IRA: $35,000 - Contributing $5,500/yr

Traditional IRA: $4,000 - Contributing $2,400/yr (This is our savings vehicle for college. If it's not needed when the time comes, it can continue to grow as a retirement vehicle.)

Other Fund Based Investments - $5,000 - Contributing $2,400/yr

401k: $40,000 Total - I contribute 5% (fully matched), my wife contributes 8% (2% matched) - Including the employer match, this adds up to just about $12,000/yr

Primary Mortgage: $238,000 remaining @ 3.875% - Been paying on it for one year. I have made some additional principal payments to reduce the term by one year, reducing our overall interest burden by $9,600, so far.

Rental Property: $147,000 remaining @ 4.875% - Been paying on it for almost one year after a refinance from 6.125%. The home currently generates approximately 30% profit per month, before income tax is taken out at tax time.

With the employer match, we are adding about $22,000/year to our investments. I like the idea of paying down the house and diversifying with the much more conservative guaranteed 3.875% return (minus tax breaks from the interest). Is it worth it, or should we be putting more money in to certain investments? What about paying down the rental, since the interest is higher? Alternatively, should we be modifying certain investments up or down?

Thanks for any advice! I'll be happy to provide any other information about us, if it would be helpful.

[bjl584]

A few comments:

You are contributing $5500 a year to a Roth IRA, which is great, but why doesn't your wife also have a Roth IRA? She could also be contributing $5500 a year to her own account.

Why are you using a Traditional IRA as a college saving's vehicle? Why not open up a 529 college savings plan?

I probably wouldn't throw extra at the mortgage. Do you have an emergency fund or a new car fund that needs to be funded? Do you have any auto loans or credit card debt? If so, those should be made a priority to pay off before a mortgage. Is your mortgage a 30 year note? It may make sense to refinance to a 15 year. That way you will be mortgage free by the time the kids are ready for college.

[Phant1984]

A few comments:

You are contributing $5500 a year to a Roth IRA, which is great, but why doesn't your wife also have a Roth IRA? She could also be contributing $5500 a year to her own account.

Why are you using a Traditional IRA as a college saving's vehicle? Why not open up a 529 college savings plan?

I probably wouldn't throw extra at the mortgage. Do you have an emergency fund or a new car fund that needs to be funded? Do you have any auto loans or credit card debt? If so, those should be made a priority to pay off before a mortgage. Is your mortgage a 30 year note? It may make sense to refinance to a 15 year. That way you will be mortgage free by the time the kids are ready for college.

Thanks for the reply.

My wife could open a Roth IRA, but we couldn't invest the full $5,500, as the traditional IRA is currently in her name. The two reasons for using this as opposed to a 529 is the flexibility of the funds and the options of how to invest the funds. Also, to the best of my understanding, this IRA can be withdrawn without the typical pre-59 1/2 year old penalties when used for educational purposes, and we generate a decent tax break each year that the Roth doesn't offer. I like the idea of having both, hedging against future taxes with the Roth but also getting the break now with the traditional.

Large oversight on my part, but we do have $25,000 in cash, earmarked as our emergency fund and another $5,000 in cash earmarked as a new car fund. We are not planning to buy any new cars within 5 years or so, but we do set aside money every month specifically for that future purpose.

We currently have no debt, apart from the two mortgages. The mortgage is a 30 year note. I like the idea of lowering our rate on a 15 year note, but I guess my primary concern with a refinance would be locking in to that higher payment. Since the 15 year rates are now barely 1% lower than our current rate, I'm not entirely sure it's worth the risk and closing costs.