So $7.5k/year in Roth IRA until retirement?

And max out the Traditional IRA simultaneously too?

Invest in the covered call ETFs just in the Roth? Currently, he’s only invested in a 2-fund portfolio of VT & BNDW (Boglehead philosophy) since our investment knowledge is zilch.

At 5.85% for 30 years you will pay $1.12 in interest over the course of the loan for every $1 borrowed. Of course that is only one of the numbers needed figure out if you should pay cash or not. The other numbers needed include the amount of any tax savings and the amount of any interest or investment income earned on the money over the same time period if you don't pay cash as well as the cost of any additional taxes on the earnings. It is far from a simple math problem when the numbers are close like they are with OP's situation. It is a no brainer with a 3% mortgage to take the loan and with a 10% mortgage to pay cash, OP is near the break even point so their exact personal financial situation could tip it either way.

And on a 30 year mortgage, after putting down 30%, how much would their interest actually be on a 5.85%?

Have fun

Yes, it is 750k in loan not 750k in house. That was a stupid mistake on my part, I totally phrased it wrong.

Slight correction - it's deductible for the first 750k of indebtedness, not home value: https://www.irs.gov/publications/p936

>You are not utilizing the framework of what qualifies answering OP’s question.

I see nothing in my comment that conflicts when OP's initial question. Yes I used 5% instead of 5.85% but that actually shifts the bar lower for how big a mortgage has to be to be able to benefit from the interest deduction on your taxes.

>They are asking about all cash or 30% down.

Correct.

>In either of these, the mortgage deduction wouldn’t apply since it would not reach that threshold.

>Again, it just doesn’t apply mathematically.

OP's initial post included a hypothetical interest rate of 5.85%. At that interest rate a single person would clear the standard deduction with a mortgage amount above $221,367 and a married couple would clear the standard deduction with a mortgage amount in excess of $442,735. Assuming a 30% down payment that means a house price of 287k if single or 575k is married. And that is with no other itemizable expenses. When you buy a house you always have additional itemizable expenses like property taxes and assuming you work or spend money you are paying state/local taxes. So an average priced house with OP's interest rate and down payment would be large enough to benefit from the standard deduction if OP is single and a slightly above average priced house would qualify for mortgage interest deductions if OP is married.

If you disagree with my assessment please let me know where my math is incorrect. When interest rates were lower and houses were cheaper way back in 2020 the vast majority of people couldn't benefit from mortgage deductions. But with higher house prices and higher interest rates, lots of people buying today can.

Have him open up and max out a Roth IRA asap. There are no RMDs in a Roth IRA. Invest in covered call ETFs like XYLD and REITs like O for its monthly dividends and reinvest them while he can still work. Later he can roll over his 401 K into his trad IRA. Then he can slowly convert his trad IRA into the Roth IRA.

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You are not utilizing the framework of what qualifies answering OP’s question.

They are asking about all cash or 30% down.

In either of these, the mortgage deduction wouldn’t apply since it would not reach that threshold.

Again, it just doesn’t apply mathematically.

I don't know how much gains you have, but you're potentially looking at a big tax hit if you sell everything. I personally like cash on hand for emergencies or future home renos, so I'd keep a lot of the investments. A third option would be to pay extra through time (like double or triple the mortgage; or an extra $25k a year or something). That would give you more flexibility and split the difference.

>the only people mathematically eligible have an ultra jumbo loan (+$1M)

Well that's verifiably false since the limit on the deduction is the first $750k in home purchase.

Here's some actual numbers:

The median home price is currently $428,700 in the US.

Standard deduction for a single person is $12,950 for 2023. If your mortgage rate is 5% you would need to borrow at least $259k to hit $12,950 in interest. But if you are itemizing you also get to add in other stuff like state and local taxes. So an average home bought today would be enough for a single person to come out ahead itemizing simply due to interest rates no longer being like 3%.

For a married couple the standard deduction is doubled so a 5% mortgage would need to be over $518k to clear that hurdle. But again a cheaper house would qualify after taking into account the other itemizable deductions. So a slightly above average house purchase would probably make itemizing the correct choice for a married couple.

Also, 5% is a low rate right now, lots of people are getting 6 or 7 or more making the home loan needed to come out ahead itemizing much lower.

It is deductible for the first 750k of home value loan amount. But with the larger standard deductions and low interest rates most people haven't been able to take advantage of the tax savings the last few years. With interest rates rising more people are getting some tax savings.

Basically the standard deduction is just shy of $13k for a single person or $26k for a married couple. In order to get any savings you need to itemize which only makes sense if your itemized deductions are more than the standard deduction.

edit: mixed up home value and loan amount

Take the house out of the equation. Would you borrow money at a 5.85 rate to make ~7-10% returns?

At that income, Roth as others have pointed out. That's because your tax rate is very low at that income. You pay low taxes now to not pay taxes when you withdraw. In the traditional, you would not pay taxes now, but pay taxes when you withdraw, presumably at a significantly higher rate than what you're paying now.

Just note that your match will probably go in the "traditional" pre-tax bucket in your 401k. That's fine.

> Mortgage interest is also tax deductible

not for your primary residence, afaik?

edit: my bad, am canadian and wasn't paying attention to what subreddit i was in.

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The mortgage interest only applies if it is larger than the standard deduction.

These days, the only people mathematically eligible have an ultra jumbo loan (+$1M)

I’m taking a wild guess that OP does not fall into that category.

At 5.85% you could go either way, but personally I’d take a mortgage. The 7% number you hear is inflation adjusted, the actual historical returns of the S&P500 have been 10.8% so that’s the number you’d want to compare. Mortgage interest is also tax deductible

5.85 percent tax free vs 7 percent before tax.

Depending on the taxes you would owe liquidating investments, paying cash seems better to me.

Mortgage or invest: https://reddit.com/r/personalfinance/comments/zssug0/_/j1ddljd/?context=1

There's virtually no way this is for your benefit and them asking is illegal in quite a few states.

Anything you throw into a Roth is taxed upfront. So when you collect 40 years diwn the road you get it all. You are limited to how much you can put in a Roth IRA. SPREAD IT OUT. FIRST 10 YEARS WHEN YOU ARE YOUNG MAKES THE BIGGEST DIFFERENCE. TIME IS ON YOUR SIDE. DONT WAIT!!! YOU WILL WAKE UP 50 YEARS OLD ONE DAY SAYING I SHOULD HAVE STARTED WHEN I WAS 20. DONT LOSE THE FIRST 10 YEARS. WE ARE TALKING POSSIBLY MILLIONS IF YOU KEEP STASHING IT AWAY EVERY WEEK EVERY MONTH EVERY YEAR. YOU ARE SO SMART STARTING SO EARLY. YOU CAN DO IT!!!!

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