“Should I be funding a Roth IRA or a traditional IRA?” - This question comes up often in social gatherings that I have been a part of, and is always an interesting debate. The answer is obvious to anyone who knows what the tax code and their tax rate will look like at retirement. If you expect your tax rate to be higher at retirement, you are better off paying taxes now and putting money in a Roth IRA. On the other hand, if you expect the tax rate to be lower at retirement, then you are better off taking the tax break now.
However most 30 something folks like me do not have a crystal ball. We have no clue on when we will retire, let aside, what our tax bracket will be when we retire. Also we have no idea how the congress will change the tax code in the next 20-30 years when we approach our golden years. So, for my planning purposes, I have stopped trying to predict these changes. I assume that the tax rate will be the same when I retire as it is now. That lets me remove one variable and lets me focus on how I can maximize the size of my retirement nest.
Interestingly, there seems to be no consensus on whether the Roth IRA or the traditional IRA is a better saving vehicle. I had done a math earlier in a spreadsheet and found the Roth to be a better savings vehicle for me:
Roth effectively lets me contribute more towards a tax sheltered account than an IRA would let me. The limits for both the Roth IRA and traditional IRA (and for that matter Roth 401K and traditional 401K) are exactly the same. However since the Roth contribution is after tax, effectively, you can stash more money away into your retirement account than with a traditional IRA. You will come out ahead just because you put more money in there to begin with. If you have the extra cash to stash away while you are young, compounding growth can provide significant tail wind to your retirement investments in the future.
Roth IRA lets you withdraw your contributions (not the earnings on the contributions) penalty-free, after 5 years, so you have access to your money for unforeseen things that may come up.
If you fall behind in college savings for your kids and are ahead in your retirement savings, you can always use Roth to fund your kid’s higher education.
Roth ensures tax-free income when you retire.
However I should point out, that if you are like some people that I have talked to, who are not contributing to either Roth or traditional IRA because you are trying to decide which one to set up, doing either one is certainly better than making no contributions. Remember you have until April 15, 2008 to make IRA contributions for the 2007 tax year.
Leave a comment or contact Tarun at: tgoyal@hotmail.com
Saturday, December 29, 2007
Saturday, December 22, 2007
It does not make sense to pay for refinancing your mortgage...
Don’t get me wrong… I am not saying do not refinance your mortgage. You absolutely should refinance if you can get a rate that is lower than your current rate. What I am saying is that it usually does not make sense to pay for refinancing.
You have probably seen plenty of ads with no cost refinancing. Even if the lender does not charge any fee, costs of refinancing a mortgage can quickly add up to a couple of thousand dollars. These costs include non lender fees like settlement fee, title insurance fee, appraisal fee, etc.
As interest rates have come down, I have been wondering over the past few weeks whether to refinance or not. I am considering doing what I have done twice in the past.
Most mortgage companies and brokers are willing to offer you a mortgage with a slightly higher interest rate (usually around 12.5 basis points) and in return they agree to pay for all the costs for refinancing. Last year, I refinanced my principal of $320,000 down from a 6.5% mortgage to a 6.125%. I could have gotten a rate of 6.0% if I had paid all the fees. However I opted for a rate of 6.125% and made the lender pay $2,200 to cover all refinancing costs.
Here is how the math worked for me. My monthly principal and interest on my original loan of $320,000 at 6.5% 30 year fixed mortgage was $2,022.62. By refinancing to a 6.125% rate, I was able to bring the monthly payment down to $1,944.35 a savings of $78.27 a month or $939.24 a year. If I had chosen the 6.0% rate, the monthly payment would have been $1918.56, an additional savings of $25.79 a month or $309.48 a year. To recover the refinancing cost of $2200 it would take me 85 months or roughly 7 years. I am not sure if we will be in house for that long. Besides the interest rates could come down again within that time, tempting me to refinance once more. Hence it made a lot of sense for me to pay an extra 0.125% or $25.79 a month and save $2,200 on costs of refinancing.
Also when I refinanced, I used http://www.lendingtree.com/ that gave me around 40,000 frequent flyer miles which paid for one of our air tickets during our recent vacation.
As I refinance, I have always made sure that I do not extend the term of the loan. My original mortgage that I took out a year and half ago had a 30 year term. As I refinanced last December, I have calculated what the monthly payments would be for a 29.5 year loan and hold myself to that payment. I also avoid offers that have prepayment penalties on the loan that prevent me from making extra payments towards the house.
I am looking at http://www.bankrate.com/ and it shows 30 year fixed to be at 5.74%. May be it is time for me to explore refinancing again.
Here is a spreadsheet that I have used to calculate monthly payments. There are plenty of calculators available on line but this is useful for the excel lovers.
http://mtgoyal.googlepages.com/MonthlyPaymentcalculator.xls
Leave a comment or contact Tarun at: tgoyal@hotmail.com
You have probably seen plenty of ads with no cost refinancing. Even if the lender does not charge any fee, costs of refinancing a mortgage can quickly add up to a couple of thousand dollars. These costs include non lender fees like settlement fee, title insurance fee, appraisal fee, etc.
As interest rates have come down, I have been wondering over the past few weeks whether to refinance or not. I am considering doing what I have done twice in the past.
Most mortgage companies and brokers are willing to offer you a mortgage with a slightly higher interest rate (usually around 12.5 basis points) and in return they agree to pay for all the costs for refinancing. Last year, I refinanced my principal of $320,000 down from a 6.5% mortgage to a 6.125%. I could have gotten a rate of 6.0% if I had paid all the fees. However I opted for a rate of 6.125% and made the lender pay $2,200 to cover all refinancing costs.
Here is how the math worked for me. My monthly principal and interest on my original loan of $320,000 at 6.5% 30 year fixed mortgage was $2,022.62. By refinancing to a 6.125% rate, I was able to bring the monthly payment down to $1,944.35 a savings of $78.27 a month or $939.24 a year. If I had chosen the 6.0% rate, the monthly payment would have been $1918.56, an additional savings of $25.79 a month or $309.48 a year. To recover the refinancing cost of $2200 it would take me 85 months or roughly 7 years. I am not sure if we will be in house for that long. Besides the interest rates could come down again within that time, tempting me to refinance once more. Hence it made a lot of sense for me to pay an extra 0.125% or $25.79 a month and save $2,200 on costs of refinancing.
Also when I refinanced, I used http://www.lendingtree.com/ that gave me around 40,000 frequent flyer miles which paid for one of our air tickets during our recent vacation.
As I refinance, I have always made sure that I do not extend the term of the loan. My original mortgage that I took out a year and half ago had a 30 year term. As I refinanced last December, I have calculated what the monthly payments would be for a 29.5 year loan and hold myself to that payment. I also avoid offers that have prepayment penalties on the loan that prevent me from making extra payments towards the house.
I am looking at http://www.bankrate.com/ and it shows 30 year fixed to be at 5.74%. May be it is time for me to explore refinancing again.
Here is a spreadsheet that I have used to calculate monthly payments. There are plenty of calculators available on line but this is useful for the excel lovers.
http://mtgoyal.googlepages.com/MonthlyPaymentcalculator.xls
Leave a comment or contact Tarun at: tgoyal@hotmail.com
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