Go from 12% to 22% federal income tax rate to pay off mortgage?

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mesaverde
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Go from 12% to 22% federal income tax rate to pay off mortgage?

Post by mesaverde »

Hello! I'm 47, have an emergency fund, and no debt other than my mortgage (3% fixed rate, 50% LTV, $210k balance, 358 payments remaining).
I don't make any extra principal payments on the mortgage.
Instead, I save 60% of my gross income by contributing towards a pension and maxing out a 403b, 457b, and Traditional IRA (I use the 3 fund portfolio).
These contributions reduce my taxable income to $39,000, just within the 12% federal income tax bracket (no portion of my income is taxed at a rate of 22%, the next bracket up).
I'm single and anticipate being in the 12% income tax bracket (or equivalent) in retirement, even with my mortgage and the health insurance premiums I will need to pay. I live in Virginia and pay state income tax of 5.75%. There's a good chance I will return to my home state of Tennessee in retirement (In TN there's no state income tax, so potentially another 5.75% in savings). In Tennessee I could buy a home outright with the equity I have in my current home.
I plan on starting my pension at age 65 (when an "unreduced" benefit can be drawn) and social security a few years after that. Those two alone will cover the bulk of my living expenses.
I will retire no later than age 55, and use income from the 403b/457b/IRA (currently $750k in those accounts) as a "bridge" between age 55 and 65.

I know Dave Ramsey and other debt-averse people would advise me to contribute less towards retirement accounts and raise the federal income tax rate on that portion of my income from 12% to 22% in order to pay off my mortgage. Why?
I get a risk free return of 10% (in income tax savings) plus investment return/tax deferred growth on top of that risk free return.
Last edited by mesaverde on Tue Dec 22, 2020 6:12 am, edited 3 times in total.
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livesoft
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Re: Go from 12% to 22% federal income tax rate to pay off mortgage?

Post by livesoft »

I'm laughing if you want to believe everything you hear from experts and other people. How do you know if I am not crazy as well? Well, you know I am not crazy because I didn't drink the Kool-Aid.
Last edited by livesoft on Mon Dec 21, 2020 8:54 am, edited 1 time in total.
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smitcat
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Re: Go from 12% to 22% federal income tax rate to pay off mortgage?

Post by smitcat »

mesaverde wrote: Mon Dec 21, 2020 8:51 am Hello! I'm 47, have an emergency fund, and have no debt other than my mortgage (3% fixed rate, 50% LTV, 358 payments remaining).
I don't make any extra principal payments on the mortgage.
Instead, I save 60% of my gross income by contributing towards a pension and maxing out a 403b, 457b, and Traditional IRA.
These contributions reduce my taxable income to $39,000, just within the 12% federal income tax bracket (no portion of my income is taxed at a rate of 22%, the next bracket up).
I anticipate being in the 12% income tax bracket (or equivalent) in retirement, even with my mortgage and the health insurance premiums I will need to pay.

I know Dave Ramsey and other debt-averse people would advise me to contribute less towards retirement accounts and raise the federal income tax rate on that portion of my income from 12% to 22% in order to pay off my mortgage. Why?
I get a risk free return of 10% (in income tax savings) plus investment return/tax deferred growth on top of that risk free return.
"I know Dave Ramsey and other debt-averse people would advise me to contribute less towards retirement accounts and raise the federal income tax rate on that portion of my income from 12% to 22% in order to pay off my mortgage. Why?"
Because that is the 'product' that they sell.
bling
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Re: Go from 12% to 22% federal income tax rate to pay off mortgage?

Post by bling »

mesaverde wrote: Mon Dec 21, 2020 8:51 am I know Dave Ramsey and other debt-averse people would advise me to contribute less towards retirement accounts and raise the federal income tax rate on that portion of my income from 12% to 22% in order to pay off my mortgage. Why?
huh? what? that makes no sense. you might as well light your money on fire.
EnjoyIt
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Re: Go from 12% to 22% federal income tax rate to pay off mortgage?

Post by EnjoyIt »

mesaverde wrote: Mon Dec 21, 2020 8:51 am Hello! I'm 47, have an emergency fund, and have no debt other than my mortgage (3% fixed rate, 50% LTV, 358 payments remaining).
I don't make any extra principal payments on the mortgage.
Instead, I save 60% of my gross income by contributing towards a pension and maxing out a 403b, 457b, and Traditional IRA.
These contributions reduce my taxable income to $39,000, just within the 12% federal income tax bracket (no portion of my income is taxed at a rate of 22%, the next bracket up).
I anticipate being in the 12% income tax bracket (or equivalent) in retirement, even with my mortgage and the health insurance premiums I will need to pay.

I know Dave Ramsey and other debt-averse people would advise me to contribute less towards retirement accounts and raise the federal income tax rate on that portion of my income from 12% to 22% in order to pay off my mortgage. Why?
I get a risk free return of 10% (in income tax savings) plus investment return/tax deferred growth on top of that risk free return.
358 payments left is pretty much 30 years. Is that accurate? Did you just get the loan?

If you are confident in being below the 22% tax bracket in retirement. Then yes, I would agree not paying it dow. faster because the 10% difference is higher than 3%. You may consider decreasing pretax contributions right up to the 22% bracket and paying your mortgage a little extra with the hope/goal of being mortgage free by the time you retire.
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Re: Go from 12% to 22% federal income tax rate to pay off mortgage?

Post by Minty »

Great work. You might also see if you can save half a point on your mortgage with a no-cost refi.
Core Four w/ nominal bonds & TIPS. Refi Rampage: Purchase: 3.875% 30 -> R1 3% 20 -> R2 2.375% 15 -> R3 1.99% 15
Topic Author
mesaverde
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Re: Go from 12% to 22% federal income tax rate to pay off mortgage?

Post by mesaverde »

smitcat wrote: Mon Dec 21, 2020 8:54 am
mesaverde wrote: Mon Dec 21, 2020 8:51 am Hello! I'm 47, have an emergency fund, and have no debt other than my mortgage (3% fixed rate, 50% LTV, 358 payments remaining).
I don't make any extra principal payments on the mortgage.
Instead, I save 60% of my gross income by contributing towards a pension and maxing out a 403b, 457b, and Traditional IRA.
These contributions reduce my taxable income to $39,000, just within the 12% federal income tax bracket (no portion of my income is taxed at a rate of 22%, the next bracket up).
I anticipate being in the 12% income tax bracket (or equivalent) in retirement, even with my mortgage and the health insurance premiums I will need to pay.

I know Dave Ramsey and other debt-averse people would advise me to contribute less towards retirement accounts and raise the federal income tax rate on that portion of my income from 12% to 22% in order to pay off my mortgage. Why?
I get a risk free return of 10% (in income tax savings) plus investment return/tax deferred growth on top of that risk free return.
"I know Dave Ramsey and other debt-averse people would advise me to contribute less towards retirement accounts and raise the federal income tax rate on that portion of my income from 12% to 22% in order to pay off my mortgage. Why?"
Because that is the 'product' that they sell.
Indeed. I like Ramsey, but it's so odd... practically every day he says that you should save precisely 15% of your income in retirement accounts, as if that's some kind of magic number. At the same time, he goes on and on about keys to building wealth and what "everyday millionaires" do.
I know for a fact that if I called in and asked if I should pay off my mortgage his automatic answer would be yes.
"Learn from the past, live in the present, plan for the future"
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Re: Go from 12% to 22% federal income tax rate to pay off mortgage?

Post by smitcat »

mesaverde wrote: Mon Dec 21, 2020 6:43 pm
smitcat wrote: Mon Dec 21, 2020 8:54 am
mesaverde wrote: Mon Dec 21, 2020 8:51 am Hello! I'm 47, have an emergency fund, and have no debt other than my mortgage (3% fixed rate, 50% LTV, 358 payments remaining).
I don't make any extra principal payments on the mortgage.
Instead, I save 60% of my gross income by contributing towards a pension and maxing out a 403b, 457b, and Traditional IRA.
These contributions reduce my taxable income to $39,000, just within the 12% federal income tax bracket (no portion of my income is taxed at a rate of 22%, the next bracket up).
I anticipate being in the 12% income tax bracket (or equivalent) in retirement, even with my mortgage and the health insurance premiums I will need to pay.

I know Dave Ramsey and other debt-averse people would advise me to contribute less towards retirement accounts and raise the federal income tax rate on that portion of my income from 12% to 22% in order to pay off my mortgage. Why?
I get a risk free return of 10% (in income tax savings) plus investment return/tax deferred growth on top of that risk free return.
"I know Dave Ramsey and other debt-averse people would advise me to contribute less towards retirement accounts and raise the federal income tax rate on that portion of my income from 12% to 22% in order to pay off my mortgage. Why?"
Because that is the 'product' that they sell.
Indeed. I like Ramsey, but it's so odd... practically every day he says that you should save precisely 15% of your income in retirement accounts, as if that's some kind of magic number. At the same time, he goes on and on about keys to building wealth and what "everyday millionaires" do.
I know for a fact that if I called in and asked if I should pay off my mortgage his automatic answer would be yes.
Interesting - I have found limited use for most sales folks including Dave Ramsey.
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Re: Go from 12% to 22% federal income tax rate to pay off mortgage?

Post by willthrill81 »

A person with enough motivation to come to this site no longer has much, if any, need for DR's advice.
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Re: Go from 12% to 22% federal income tax rate to pay off mortgage?

Post by MathIsMyWayr »

mesaverde wrote: Mon Dec 21, 2020 8:51 am Hello! I'm 47, have an emergency fund, and no debt other than my mortgage (3% fixed rate, 50% LTV, 358 payments remaining).
I don't make any extra principal payments on the mortgage.
Instead, I save 60% of my gross income by contributing towards a pension and maxing out a 403b, 457b, and Traditional IRA.
These contributions reduce my taxable income to $39,000, just within the 12% federal income tax bracket (no portion of my income is taxed at a rate of 22%, the next bracket up).
I anticipate being in the 12% income tax bracket (or equivalent) in retirement, even with my mortgage and the health insurance premiums I will need to pay.
Are you sure you will be in the 12% tax bracket in retirement with pension and maxed 403b/457b/IRA?
123
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Re: Go from 12% to 22% federal income tax rate to pay off mortgage?

Post by 123 »

MathIsMyWayr wrote: Mon Dec 21, 2020 7:13 pm ...Are you sure you will be in the 12% tax bracket in retirement with pension and maxed 403b/457b/IRA?
+1 Many people don't really think about it until 5 years or less before they retire but it's really helpful to have a mix of taxable, tax-deferred, and tax-free investments. Many people end up with over 75% - 90% of their money at retirement in tax-deferred accounts. A problem with that is that it makes it expensive tax-wise to get at that money should you decide you need it. It is hard to pass up the tax-deferred value of contributions to retirement accounts but that tax deferral comes at the cost of the loss of capital gains taxation benefits on any qualifying holdings.

Your taxes in retirement could be higher than you pay now.
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mesaverde
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Re: Go from 12% to 22% federal income tax rate to pay off mortgage?

Post by mesaverde »

MathIsMyWayr wrote: Mon Dec 21, 2020 7:13 pm
mesaverde wrote: Mon Dec 21, 2020 8:51 am Hello! I'm 47, have an emergency fund, and no debt other than my mortgage (3% fixed rate, 50% LTV, 358 payments remaining).
I don't make any extra principal payments on the mortgage.
Instead, I save 60% of my gross income by contributing towards a pension and maxing out a 403b, 457b, and Traditional IRA.
These contributions reduce my taxable income to $39,000, just within the 12% federal income tax bracket (no portion of my income is taxed at a rate of 22%, the next bracket up).
I anticipate being in the 12% income tax bracket (or equivalent) in retirement, even with my mortgage and the health insurance premiums I will need to pay.
Are you sure you will be in the 12% tax bracket in retirement with pension and maxed 403b/457b/IRA?
Yes I'm sure. I could definitely live off of ~$50k gross per year (today's dollars). The only real change would be the increased cost of health insurance. I've spent hours studying quotes on Healthcare.gov to get a rough idea of what that cost might be.
"Learn from the past, live in the present, plan for the future"
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Watty
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Re: Go from 12% to 22% federal income tax rate to pay off mortgage?

Post by Watty »

There is not enough information to give good suggestions.
mesaverde wrote: Mon Dec 21, 2020 8:51 am Hello! I'm 47, have an emergency fund, and no debt other than my mortgage (3% fixed rate, 50% LTV, 358 payments remaining).
You are dancing around the numbers and it makes a huge difference if you are dealing with an $80K loan on a house in the midwest or a $800K loan on an identical house in California.
mesaverde wrote: Mon Dec 21, 2020 8:51 am Instead, I save 60% of my gross income by contributing towards a pension and maxing out a 403b, 457b, and Traditional IRA.
These contributions reduce my taxable income to $39,000,
OK, it sounds like you are single and have a gross income of over $120K, possibly higher depending on how much you contribute to the pension plan.

We also don't have a clue how much you have in your retirement accounts or when your pension will start.

There is a guide with a suggested format for asking questions like that which will provide a lot of the information that is needed to get better suggestions. You don't need to follow that exactly but that would help. You can edit your post or create a new post.

viewtopic.php?f=1&t=6212
Big Dog
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Re: Go from 12% to 22% federal income tax rate to pay off mortgage?

Post by Big Dog »

mesaverde wrote: Mon Dec 21, 2020 7:34 pm
MathIsMyWayr wrote: Mon Dec 21, 2020 7:13 pm
mesaverde wrote: Mon Dec 21, 2020 8:51 am Hello! I'm 47, have an emergency fund, and no debt other than my mortgage (3% fixed rate, 50% LTV, 358 payments remaining).
I don't make any extra principal payments on the mortgage.
Instead, I save 60% of my gross income by contributing towards a pension and maxing out a 403b, 457b, and Traditional IRA.
These contributions reduce my taxable income to $39,000, just within the 12% federal income tax bracket (no portion of my income is taxed at a rate of 22%, the next bracket up).
I anticipate being in the 12% income tax bracket (or equivalent) in retirement, even with my mortgage and the health insurance premiums I will need to pay.
Are you sure you will be in the 12% tax bracket in retirement with pension and maxed 403b/457b/IRA?
Yes I'm sure. I could definitely live off of ~$50k gross per year (today's dollars). The only real change would be the increased cost of health insurance. I've spent hours studying quotes on Healthcare.gov to get a rough idea of what that cost might be.
Don;t forget, once you hit 72, you will have Required Distributions from those tax-deferred accounts. Just bcos you only need $50k to live on matters not if you are Required to take out $80k/yr in RMD's as it will be the latter that becomes taxable income.
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Re: Go from 12% to 22% federal income tax rate to pay off mortgage?

Post by Iridium »

A few things to keep in mind:

1. Current law is that the tax structure will revert in 2025 to what it was a couple of years ago. The odds of congress extending the current tax rates when they are about to expire is a banned topic on this forum. Hypothetically, forum rules tell us we are supposed to give advice based current law, which would put you in the 15% tax bracket, I suspect.

2. Definitely double-check how much money you will have in tax deferred accounts and see how much RMDs they will throw off by the time you are in your 80s. Your tax bracket assumption seems aggressive, though that might be because you are planning on retiring early?

3. You are paying 3% / year of interest on principal, whereas your assumption is that you will have a one-time cost of 10% to pay down the loan. In the simplistic model you are applying, it seems rather clear that pay down is favored for a loan you intend to keep at least 4 years.

4. Ultimately, the simplistic model isn't the proper way to evaluate the decision. There is a lot that goes into it and it depends on what you would do with the money otherwise (to maintain consistent leverage, the most proper thing to do is to only use funds that would go into bonds in order to pay of mortgages, but few meet this mathematical ideal). Boiling it down to a one-time cost (which doesn't make a huge difference as it would originally seem over close to 30 years in an low interest rate environment) and an interest rate is too simple.
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Re: Go from 12% to 22% federal income tax rate to pay off mortgage?

Post by sapphire96 »

willthrill81 wrote: Mon Dec 21, 2020 7:08 pm A person with enough motivation to come to this site no longer has much, if any, need for DR's advice.
Agreed. Dave Ramsey is good for debt and for those just getting their feet wet with finance. For investing and maximizing your finances, the Money Guy Show has excellent content in alignment with Bogleheads.
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Re: Go from 12% to 22% federal income tax rate to pay off mortgage?

Post by cshell2 »

mesaverde wrote: Mon Dec 21, 2020 6:43 pm
smitcat wrote: Mon Dec 21, 2020 8:54 am
mesaverde wrote: Mon Dec 21, 2020 8:51 am Hello! I'm 47, have an emergency fund, and have no debt other than my mortgage (3% fixed rate, 50% LTV, 358 payments remaining).
I don't make any extra principal payments on the mortgage.
Instead, I save 60% of my gross income by contributing towards a pension and maxing out a 403b, 457b, and Traditional IRA.
These contributions reduce my taxable income to $39,000, just within the 12% federal income tax bracket (no portion of my income is taxed at a rate of 22%, the next bracket up).
I anticipate being in the 12% income tax bracket (or equivalent) in retirement, even with my mortgage and the health insurance premiums I will need to pay.

I know Dave Ramsey and other debt-averse people would advise me to contribute less towards retirement accounts and raise the federal income tax rate on that portion of my income from 12% to 22% in order to pay off my mortgage. Why?
I get a risk free return of 10% (in income tax savings) plus investment return/tax deferred growth on top of that risk free return.
"I know Dave Ramsey and other debt-averse people would advise me to contribute less towards retirement accounts and raise the federal income tax rate on that portion of my income from 12% to 22% in order to pay off my mortgage. Why?"
Because that is the 'product' that they sell.
Indeed. I like Ramsey, but it's so odd... practically every day he says that you should save precisely 15% of your income in retirement accounts, as if that's some kind of magic number. At the same time, he goes on and on about keys to building wealth and what "everyday millionaires" do.
I know for a fact that if I called in and asked if I should pay off my mortgage his automatic answer would be yes.
If you're following his plan to the t, you wouldn't take out a loan greater in length than 15 years with 20% down. His idea is if you keep retirement to 15% most pay off their mortgage in under 7 years and then can funnel all the money they were paying towards the mortgage to retirement. It's a plan for people whose eyes glaze over when you start talking taxes. He's more about addressing the psychological aspect of personal finances and spending and there are a lot of people out there that need cut and dry steps.

I'm insanely debt adverse and have been paying extra on my mortgage, but I wouldn't cut back retirement to do that. In my situation right now it would be crazy.
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Re: Go from 12% to 22% federal income tax rate to pay off mortgage?

Post by abuss368 »

sapphire96 wrote: Mon Dec 21, 2020 8:01 pm
willthrill81 wrote: Mon Dec 21, 2020 7:08 pm A person with enough motivation to come to this site no longer has much, if any, need for DR's advice.
Agreed. Dave Ramsey is good for debt and for those just getting their feet wet with finance. For investing and maximizing your finances, the Money Guy Show has excellent content in alignment with Bogleheads.
I would agree. Dave Ramsey is very anti-debt. I have family who enjoy his recommendations about paying things down and off.

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Re: Go from 12% to 22% federal income tax rate to pay off mortgage?

Post by Havoner »

mesaverde wrote: Mon Dec 21, 2020 8:51 am Hello! I'm 47, have an emergency fund, and no debt other than my mortgage (3% fixed rate, 50% LTV, $210k balance, 358 payments remaining).
I don't make any extra principal payments on the mortgage.
Instead, I save 60% of my gross income by contributing towards a pension and maxing out a 403b, 457b, and Traditional IRA (I use the 3 fund portfolio).
These contributions reduce my taxable income to $39,000, just within the 12% federal income tax bracket (no portion of my income is taxed at a rate of 22%, the next bracket up).
I'm single and anticipate being in the 12% income tax bracket (or equivalent) in retirement, even with my mortgage and the health insurance premiums I will need to pay. I live in Virginia and pay state income tax of 5.75%. There's a good chance I will return to my home state of Tennessee in retirement (In TN there's no state income tax, so potentially another 5.75% in savings). In Tennessee I could buy a home outright with the equity I have in my current home.

I know Dave Ramsey and other debt-averse people would advise me to contribute less towards retirement accounts and raise the federal income tax rate on that portion of my income from 12% to 22% in order to pay off my mortgage. Why?
I get a risk free return of 10% (in income tax savings) plus investment return/tax deferred growth on top of that risk free return.
I think you are making the right call if you plan on retiring in your early 60s. From my projections you would probably be withdrawing a 70k-80k off of a 2 million dollar portfolio or so if this was all equities not knowing the split between them and the amount in the pension. This might put you in the 22% bracket at that point in time but you don't have to withdraw it at that point unless you need it to live off of. I guess one question I would ask is you are sacrificing a lot with saving 60% of your salary which is a really cool thing but is your overall goal just to get enough saved for an early retirement in your late fifties or early sixties or do you have someone you want to give this money too? If you plan on working until 65 or 70 I would actually say to gently ease off the gas and spend a reasonable amount of money on something you might enjoy be that a paid off house or a nice vacation. You only live once and just don't want you getting burned out with hyper focusing on getting out of the race. Best of luck man you are rocking it with that savings rate!
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Re: Go from 12% to 22% federal income tax rate to pay off mortgage?

Post by gch »

mesaverde wrote: Mon Dec 21, 2020 7:34 pm
MathIsMyWayr wrote: Mon Dec 21, 2020 7:13 pm
mesaverde wrote: Mon Dec 21, 2020 8:51 am Hello! I'm 47, have an emergency fund, and no debt other than my mortgage (3% fixed rate, 50% LTV, 358 payments remaining).
I don't make any extra principal payments on the mortgage.
Instead, I save 60% of my gross income by contributing towards a pension and maxing out a 403b, 457b, and Traditional IRA.
These contributions reduce my taxable income to $39,000, just within the 12% federal income tax bracket (no portion of my income is taxed at a rate of 22%, the next bracket up).
I anticipate being in the 12% income tax bracket (or equivalent) in retirement, even with my mortgage and the health insurance premiums I will need to pay.
Are you sure you will be in the 12% tax bracket in retirement with pension and maxed 403b/457b/IRA?
Yes I'm sure. I could definitely live off of ~$50k gross per year (today's dollars). The only real change would be the increased cost of health insurance. I've spent hours studying quotes on Healthcare.gov to get a rough idea of what that cost might be.
Assuming you’re maxing out all these accounts for a number of years and your pension is a normal ~2% per year you work, Once you hit RMD’s + pension + SS (if you paid into it) you will be above the current 12% bracket. If you die before then, your heirs will probably be above the 12% bracket it in the ten years they have to withdraw it. The only likely way this money will be withdrawn below the 12% bracket will be if you donate it to charity.
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mesaverde
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Re: Go from 12% to 22% federal income tax rate to pay off mortgage?

Post by mesaverde »

gch wrote: Mon Dec 21, 2020 10:55 pm
mesaverde wrote: Mon Dec 21, 2020 7:34 pm
MathIsMyWayr wrote: Mon Dec 21, 2020 7:13 pm
mesaverde wrote: Mon Dec 21, 2020 8:51 am Hello! I'm 47, have an emergency fund, and no debt other than my mortgage (3% fixed rate, 50% LTV, 358 payments remaining).
I don't make any extra principal payments on the mortgage.
Instead, I save 60% of my gross income by contributing towards a pension and maxing out a 403b, 457b, and Traditional IRA.
These contributions reduce my taxable income to $39,000, just within the 12% federal income tax bracket (no portion of my income is taxed at a rate of 22%, the next bracket up).
I anticipate being in the 12% income tax bracket (or equivalent) in retirement, even with my mortgage and the health insurance premiums I will need to pay.
Are you sure you will be in the 12% tax bracket in retirement with pension and maxed 403b/457b/IRA?
Yes I'm sure. I could definitely live off of ~$50k gross per year (today's dollars). The only real change would be the increased cost of health insurance. I've spent hours studying quotes on Healthcare.gov to get a rough idea of what that cost might be.
Assuming you’re maxing out all these accounts for a number of years and your pension is a normal ~2% per year you work, Once you hit RMD’s + pension + SS (if you paid into it) you will be above the current 12% bracket. If you die before then, your heirs will probably be above the 12% bracket it in the ten years they have to withdraw it. The only likely way this money will be withdrawn below the 12% bracket will be if you donate it to charity.
Thank you for the tip. I just added to my original post that I plan to use the bulk of the 403b/457b/IRA money as a stream of income between age~55 and 65. A "bridge" to make it to age 65, when I'll start pension payments. So as soon as I have enough to form that bridge I'll retire. That's the idea.
"Learn from the past, live in the present, plan for the future"
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mesaverde
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Re: Go from 12% to 22% federal income tax rate to pay off mortgage?

Post by mesaverde »

Havoner wrote: Mon Dec 21, 2020 10:45 pm
mesaverde wrote: Mon Dec 21, 2020 8:51 am Hello! I'm 47, have an emergency fund, and no debt other than my mortgage (3% fixed rate, 50% LTV, $210k balance, 358 payments remaining).
I don't make any extra principal payments on the mortgage.
Instead, I save 60% of my gross income by contributing towards a pension and maxing out a 403b, 457b, and Traditional IRA (I use the 3 fund portfolio).
These contributions reduce my taxable income to $39,000, just within the 12% federal income tax bracket (no portion of my income is taxed at a rate of 22%, the next bracket up).
I'm single and anticipate being in the 12% income tax bracket (or equivalent) in retirement, even with my mortgage and the health insurance premiums I will need to pay. I live in Virginia and pay state income tax of 5.75%. There's a good chance I will return to my home state of Tennessee in retirement (In TN there's no state income tax, so potentially another 5.75% in savings). In Tennessee I could buy a home outright with the equity I have in my current home.

I know Dave Ramsey and other debt-averse people would advise me to contribute less towards retirement accounts and raise the federal income tax rate on that portion of my income from 12% to 22% in order to pay off my mortgage. Why?
I get a risk free return of 10% (in income tax savings) plus investment return/tax deferred growth on top of that risk free return.
I think you are making the right call if you plan on retiring in your early 60s. From my projections you would probably be withdrawing a 70k-80k off of a 2 million dollar portfolio or so if this was all equities not knowing the split between them and the amount in the pension. This might put you in the 22% bracket at that point in time but you don't have to withdraw it at that point unless you need it to live off of. I guess one question I would ask is you are sacrificing a lot with saving 60% of your salary which is a really cool thing but is your overall goal just to get enough saved for an early retirement in your late fifties or early sixties or do you have someone you want to give this money too? If you plan on working until 65 or 70 I would actually say to gently ease off the gas and spend a reasonable amount of money on something you might enjoy be that a paid off house or a nice vacation. You only live once and just don't want you getting burned out with hyper focusing on getting out of the race. Best of luck man you are rocking it with that savings rate!
Thank you for the note. As a teacher I have ~3 months off a year. I travel for at least 2 months of that time. What I do is low cost (backpacking and running).
"Learn from the past, live in the present, plan for the future"
Jeff Albertson
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Joined: Sat Apr 06, 2013 7:11 pm
Location: Springfield

Re: Go from 12% to 22% federal income tax rate to pay off mortgage?

Post by Jeff Albertson »

mesaverde wrote: Mon Dec 21, 2020 8:51 am I know Dave Ramsey and other debt-averse people would advise me ...
You're taking advice from this guy?
https://www.nbcnews.com/news/us-news/ca ... t-n1251204
https://religionnews.com/2020/12/11/dav ... mas-party/
Topic Author
mesaverde
Posts: 491
Joined: Wed May 02, 2007 4:14 pm

Re: Go from 12% to 22% federal income tax rate to pay off mortgage?

Post by mesaverde »

Jeff Albertson wrote: Tue Dec 22, 2020 7:46 pm
mesaverde wrote: Mon Dec 21, 2020 8:51 am I know Dave Ramsey and other debt-averse people would advise me ...
You're taking advice from this guy?
https://www.nbcnews.com/news/us-news/ca ... t-n1251204
https://religionnews.com/2020/12/11/dav ... mas-party/
This comment of his stood out (2nd article):
“we’re not going to have someone pay $10,000 for a ticket to have some $8 an hour twerp at Marriott giving them a hard time about wearing a mask.”
"Learn from the past, live in the present, plan for the future"
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