Roth IRA used for prepayment of mort.?

[Guest lstolty]

Should I use a Roth as an option to pay off my mortgage.

I just refinanced to a 15 yr. fixed mortgage (6.25%). I now have an extra $200 per month. Instead of prepaying the mortgage and getting a 6.25% return I was thinking about putting the extra $200 towards a Roth IRA (maybe and Index Fund).

My reasoning is this:

The $200 per month grows tax free

Lets say after 10 years, I take out the principle ($24,000) and pay off the mortgage. The $24,000 is not taxed because it is the original contribution amount and now the gains/interest can be left until I retire.

Is this sound investing or should I:

1) Put the $200 towards the principle and be happy with 6.25%

2) Put the $200 in an Index Fund, pay the taxes as it grows, and pay off the mortgage when the fund = the outstanding loan amount.

3) Forget about paying off the mortgage early and invest for the long haul.

Thanks,

[John G]

IMO.....

Why does anyone want to pay off a mortgage early when the interest rate is super low? Money is on sale right now. Don't you ussually buy more when the price drops? Well the price of money is as low as it has been in a couple of decades.

Sure you can set up a spreadsheet and work the math making lots of assumptions about investment returns, taxes, deductability, real estate appreciation, etc. The simple answer is when money is extremely cheap to borrow, take advantage of it. Borrow and pay back very slowly. You have indicated that you have the discipline to invest the difference, a plan with which I concur. {same logic applies to below market college loans which should be paid back slowly.... just the opposite is true of high interest rate credit card debt which if not avoided at least paid back quickly}

Use your Roth as a Roth. It is a great tax shelter and wealth builder. I would seek to max out Roth contributions for any year that you and your spouse qualify. Then any extra into an index fund or equivalent investment.

Note: if you invest in an index fund, your year to year tax liability will be relatively low or zero (example Schwab 1000 a tax managed index fund, 9 years of zero tax liability) and when you eventually sell you will have long term capital gains.