DoingHomework wrote:josetann wrote:If only there was some other deduction you could make, that would reduce your taxable income so you could contribute to a Roth IRA...aha!
Mortgage interest deduction. Take out a mortgage on your primary residence, make sure the interest paid will be just enough to reduce your income to a Roth IRA eligible amount, and pray your boss doesn't decide to give you an end of year bonus.
Um, it doesn't work that way actually.
Indeed... josetann's key misunderstanding there is that AGI is after "reductions" but before deductions. So more itemized deductions has no effect on your eligibility for a Roth IRA. Some things do, including 401(k) contributions and other pre-tax paycheck deductions like an HSA or FSA.
josetann's biggest mistake, of course, is:
josetann wrote:So...paying $14,000 in interest saves you a total of $525...woohoo! Tell you what...give ME $14,000, I'll turn around and give you $1,050...that's DOUBLE what you'd "save" by having a mortgage and getting to deduct the interest paid.
Hey, I'll take that deal. But you also have to give me $250k up front, to do whatever I want with (though if I'm smart I'll invest it).
Which is to say, josetann is ignoring the opportunity cost of the $250k that the person has access to.
Basically, having a guaranteed place to live is more important than the *potential* upside of money invested if your goal is to retire on schedule. By "investing" in the mortgage you're reducing your downside potential. And when you retire, reducing the downside is more important than increasing the upside.
But you are giving this advice to people who are not, in fact, retired. So that doesn't really apply. Marginal utility applies only past a certain point, when you have enough money for a reasonably comfortable lifestyle. That is a point which most people have not reached. In the meantime, keeping a low-interest mortgage and investing instead, gives the person upsides, e.g. of potentially retiring earlier.
nelson wrote:I paid off my mortgage last year (after 8 years) and it was one of the best decisions I've ever made. I have more disposable money than I know what to do with *and* I max out the retirement plans without a problem.
Ah, that explains why you keep beating that drum. You're a born again mortgage freeer. Come back in a decade when you've had time for that decision to sink in.
And you continue to ignore the fact that you can't more than max out retirement accounts. The max is, wow, a maximum. I have a mortgage and I max out the retirement plans without a problem. If I instead stopped doing that and paid my mortgage, there is no way I would be able to make up for that lost opportunity later.