Investment showdown -- beyond the Roth, SDP, & TSP

[nsplayr]

At those interest rates I'd probably pay them off although it's a close call.

IMHO, the way you should look at it is maximizing your expected return.  Paying off the student loans, you're guaranteed a return of 4% or 5.88% respectively.  Investing in the market you may or may not do better than that depending on the performance of your investments.  If you think you'll do better in the market, invest.  If you want to lock in that 4-6% return, pay off the loans.

Another factor is how you feel about it, i.e. would you get additional value by gaining the "peace of mind" of having the loans paid off, etc.  People aren't robots and you should do whatever brings you the most value, rather that's purely on paper or rather it helps you sleep at night.  Cash flow may also be something to think about, although if you're talking about investing as much as you are, it doesn't sound like you guys are hurting for monthly cash flow.

Good luck!

[MilitaryToFinance]

On 8/12/2016 at 0:03 PM, spaceman said:

1.  Does this plan make any sense?  I know I should pay off the student loans ASAP, but I feel like I have some catching up to do retirement savings wise, so maybe it would be worth it to at least max out a Roth IRA for the year and then put more towards the loan after that.

2.  Is there a rule of thumb or method for deciding if it's worth it to convert a 401k into a Roth IRA?  I know I'd have to pay taxes on the $23k I have to convert, but with my deployment I don't think my taxable income will ever be much lower than it'll be this year.

2b.  Traditional to Roth rollovers don't count towards your annual Roth contribution limit, right?  So I could roll over my whole $23k plus put in another $11k to max out mine and my wife's contribution for this year, if I understand the rules correctly.

 

First, yes your plan makes sense. Given where the market is these days and interest rates I think paying down the debt is a smart thing to do. A guaranteed after-tax return of almost 6% is pretty good right now. I would look to max your Roth IRA first though. You don't get to make up for missed years so even if the returns aren't stellar right now you want to take full advantage of any tax breaks available.

For #2, you should do the conversion. That $23k will be counted as taxable income for the year like it was an extra paycheck with $0 withheld. You are correct though that given your deployment your taxable income will be so low that the trade-off is worth it. Look at our politicians these days, do you really believe there is any chance taxes go anywhere but up over the next 20 years? Take the hit today when your income is low. Also I would consult a tax attorney to see if doing the rollover while you're deployed will count that as tax free income. Probably not but worth investigating.

And you are correct, roll-overs do not count as a contribution so you can contribute the full $11,000 on top of the roll over. 

[11F...]

On August 12, 2016 at 11:03 AM, spaceman said:

Anyhow, my questions are:

 

 

1.  Does this plan make any sense?  I know I should pay off the student loans ASAP, but I feel like I have some catching up to do retirement savings wise, so maybe it would be worth it to at least max out a Roth IRA for the year and then put more towards the loan after that.

 

2.  Is there a rule of thumb or method for deciding if it's worth it to convert a 401k into a Roth IRA?  I know I'd have to pay taxes on the $23k I have to convert, but with my deployment I don't think my taxable income will ever be much lower than it'll be this year.

 

2b.  Traditional to Roth rollovers don't count towards your annual Roth contribution limit, right?  So I could roll over my whole $23k plus put in another $11k to max out mine and my wife's contribution for this year, if I understand the rules correctly.

 

Thanks guys for all this info; this has been one of the most educational BODN threads ever!

 

 

ETA: I realize I'm asking for financial tips from a bunch of pilots but many of you guys are obviously way smarter on this stuff than I am so I'll take any free advice I can get

Spaceman, 

First of all, we're pilots so there's no shame in asking us anything.  Just like yourself, we pride ourselves in knowing everything, even if we don't know shit!

More importantly, I think the answers you've been given already have been awesome and spot on.  mcbush, and nsplayr nailed it on the loan vs. invest questions.  Rate vs what's the better return, vs what's better peace of mind for you?   And I wholeheartedly agree with MtF on the decision to convert.  I did this a few years ago for my wife, the second we PCSd and she had her 401K sitting there.  We chose to pay a very small tax on it now (even better for you given your situation) and then that thing grows tax free for 30 years.  No brainer in my opinion to convert.  

I would add a few extra things to think about.  I'm no CPA, but I think student loan interest is tax-deductible up to a point ($2500 maybe).  I'm too lazy to look it up, but 5 seconds of googling will tell you how much interest you can deduct and what the max income threshold is.  With your levels of $$, you'll almost surely be able to deduct it all.  $30K at 5-ish% interest is $1500 a year or so in interest, and if you can deduct that full amount, then you're really only paying maybe overall 4% or so instead of the 5%.  So that would factor into my "what's the better return" question.  Even in today's market and with that deduction, I'd personally still opt for paying off the debt first, then invest (with a small caveat, explained below). 

Also, this goes without saying, but pay off the higher interest loan first if you can.  Once it's at 0 balance, then pay off the lower one.  Even if it's within one account, you can still call and ask if you can apply the payment towards 1 vs the other. I suppose all they can do is say no?

I also agree with MtF about not losing out on your 2016 Roth contributions if you can't pay the student loan off in full first, which you can't at $3K a month.    But you have until April 17th of 2017 to make contributions toward 2016 IRAs.  Basically you've got until the filing deadline.  So I personally would pay off my student loans (higher interest first, if at all possible) aggressively until the point where you need cash flow going to your Roth.   With 3 to 3.5K left over each month, I'd pay down student loans until around Jan of next year, then start maxing out the 3-3.5K into my 2016 Roth, to ensure it gets to the fully funded $11K by the April filing deadline, then immediately going back to fully paying down student loans until it's gone, then you'd still have until mid April 2018 to contribute to your 2017 Roth, if for any reason you guys got into a cash flow crunch.   My opinion only.   And nice work doing this as an O-2.   Keep this up and you'll be set sooner than later.   

 

[spaceman]

You guys make some good points. Thanks for all the great info! Wife and I are feeling a lot more optimistic now that we have an actual plan coming together!

[Kenny Powers]

Don't listen to any of this nonsense, go spend that money on booze/strippers/fast cars. You'll be too old to have any fun with all that money once you retire...

Sent from my SM-G920V using Tapatalk

[WTFAF]

Don't listen to any of this nonsense, go spend that money on booze/strippers/fast cars. You'll be too old to have any fun with all that money once you retire...

Sent from my SM-G920V using Tapatalk

+1 and don't forget the blow.

[11F]

I have a boy who's interested in going to USAFA. I'd like to use his Coverdell ESA to cover the costs of getting his private pilot license.

While ESAs can be used for elementary/middle/high school costs (unlike 529s), I haven't found the loophole that allows the use of these funds for civilian flight school.

Lil' help?

[di1630]

I own about 69 shares of a company that went bankrupt...can I write this off on my taxes?

[nunya]

2 minutes ago, di1630 said:

I own about 69 shares of a company that went bankrupt...can I write this off on my taxes?

Page 38 here: Worthless Securities

In Spanglish: https://www.bankrate.com/finance/taxes/writing-off-a-worthless-stock.aspx

[panchbarnes]

pre-market down 600-750 points, what are you buying/shorting?

[SCardinals]

47 minutes ago, panchbarnes said:

pre-market down 600-750 points, what are you buying/shorting?

Everything that gets hammered...Amazon, Apple, FB. Everything will get hammered.

[Seriously]

I've been waiting for this moment... Get ready for the good deals!

[RASH]

Crickets...


Sent from my iPad using Baseops Network Forums

[panchbarnes]

market was almost even by the opening.  yuuuugggeee disappointment. 

still expecting the feds to raise interest rate next month, the amateur investor in me thinks that will drive some sort of stock market correction/irrational panic selloff.

i'm thinking with trump in office we will see more pro-real estate investment measures.

[SCardinals]

Dow closed at another all time high. Tech looking pretty attractive. 

Edited November 12, 2016 by SCardinals

[waveshaper]

7 hours ago, SCardinals said:

Dow closed at another all time high. Tech looking pretty attractive. 

Yep, I did a wee bit of profit taking on Fridays close.

[nsplayr]

Good on them for trying to own it. Hope the gains continue and administration ownership of the economy continues regardless of the outcome.

FYI the DJIA under Obama: +148.2%

That's an average of a 0.35625% gain per week over the course of 416 weeks in Obama's 8 years in the seat.

President Trump is above that average so far closing in on Week 1 in office (+0.78% and counting), and honestly, good luck to him.  I would like to see those overall economic gains delivered to mainstreet as well as wall street (i.e. job growth, wage growth, etc.).

https://www.marketwatch.com/story/the-dows-biggest-surge-came-under-this-president-2017-01-23

Not that any President really has much control over the stock market, but if you're gonna bear the blame might as well take the credit too right?

[nsplayr]

On-topic, has anyone taken out a CAP loan from AAFMAA? $4K, 1.5% interest, no other fees.  Seems like that's a ripe opportunity to take the loan, invest the $4K, and reap the benefits since all of my current investments are doing much better than 1.5%.  Hell, even the TSP G-fund (i.e. almost completely safe) has returned higher than 1.5% recently.

Only available to O-3 and below on the O-side, NCOs only on the E-side.  Any downside I'm not seeing?

[Guest LumberjackAxe]

1 hour ago, nsplayr said:

On-topic, has anyone taken out a CAP loan from AAFMAA? $4K, 1.5% interest, no other fees.  Seems like that's a ripe opportunity to take the loan, invest the $4K, and reap the benefits since all of my current investments are doing much better than 1.5%.  Hell, even the TSP G-fund (i.e. almost completely safe) has returned higher than 1.5% recently.

Only available to O-3 and below on the O-side, NCOs only on the E-side.  Any downside I'm not seeing?

That's a pretty damn fine deal, but I noticed this little gotcha here:

- Must be AAFMAA member with $250,000 of Term or $50,000 of Value-Added Whole Life insurance

Any words on how much that costs? Because now we're talking $4,000 + your super sweet investment - interest - those premiums. I could see that quickly becoming a minimally good deal after it's all said and done, unless you already have one of those policies with them.

[nsplayr]

Yep, good point to make.  I already have life insurance with them so not a factor for me personally, but definitely something to keep in mind if you don't.

Adding in that insurance premium to your payment makes the effective interest rate 8.3% on the loan, although obviously the insurance is worth more than nothing if that's something you need more of.  Their term 1 is cheaper than SGLI FWIW and can also be had in addition to SGLI.

Edited January 26, 2017 by nsplayr

[Termy]

Don't borrow money to invest money. At any interest rate. Ever. The exposure you put yourself in greatly outweighs any gains. 

[nsplayr]

1 hour ago, Termy said:

Don't borrow money to invest money. At any interest rate. Ever. The exposure you put yourself in greatly outweighs any gains. 

Why do you say this? Given that I could invest in the 99.9% safe TSP G-fund and come out ahead, it seems like this particular deal makes a lot of sense. On top of that, $4K isn't really a life-threatening chunk of change to risk even if I thought there was much risk. 

Also businesses regularly borrow to invest. Landlords borrow to purchase rental properties, hell, regular homeowners borrow in part to live and for many people in part to also invest in real estate.

BL: Can you expand your thinking beyond the platitude level? Genuinely curious. 

[MilitaryToFinance]

Businesses generally only pay interest on their loans (sometimes the principal will amortize) and landlords generate monthly income from their properties. Taking out a loan where you are repaying the principal and interest on a monthly basis to invest in the market you won't be able to match the cashflow as well as those other two. That said, if you're in a position where you can make the monthly payments and your cash flow is low risk (both should be true on a $4k loan and military employment) then it really isn't a bad idea. It's the same reason lots of people with high paying jobs and 6 digit investment accounts only make the minimum payments on their student loans. No matter what Dave Ramsey is selling you in his books, a little leverage isn't a bad thing.

[nsplayr]

16 hours ago, MilitaryToFinance said:

No matter what Dave Ramsey is selling you in his books, a little leverage isn't a bad thing.

Exactly.  Debt is not bad so long as your downside is covered and the expected upside is higher than the known costs, factoring in your risk tolerance.

[nunya]

17 hours ago, MilitaryToFinance said:

 No matter what Dave Ramsey is selling you in his books, a little leverage isn't a bad thing.

In fairness to Dave, his target audience doesn't know what leverage is, and certainly doesn't know how to properly use it without getting burned.