Downsizing and Investment Options After Paying Off Mortgage

Kathy can wisely invest her mortgage payoff surplus in a brokerage account after maximizing tax-advantaged options.

### Smart Financial Moves After Paying Off Your Mortgage
* 🏡  Kathy has successfully paid off her mortgage and is now **debt-free**, which is a significant achievement that allows her to consider downsizing and purchasing a smaller home with **cash from the sale of her current house**.
* 💰  With the potential for excess funds from the sale, Kathy is exploring her options for investing this money, but has been informed about **limitations regarding Roth mutual funds**.
* 📚  It's important to clarify that a Roth is an account type where various investments, including **mutual funds**, can be held, while the mutual fund itself is the **investment product**.
* 💵  Kathy can benefit from the capital gains exclusion on her primary residence, which allows her to **exclude up to $500,000 in gains from taxes**, provided she meets the residency requirements.
* 📈  Given her situation, Kathy should consider investing the excess funds in a brokerage account, where she can still purchase **index funds**, albeit with **different tax implications** compared to a Roth IRA.
* 🔍  As Kathy navigates this financial transition, it's crucial for her to review her financial priorities, ensuring she has **maximized contributions to her Roth IRA, HSA, and employer-sponsored retirement plans** before making new investments.
* 📝  The financial order of operations can serve as a valuable guide for Kathy to **deploy her funds wisely**, especially during significant life changes or capital transactions like **selling her home**.
* 🌟  Overall, Kathy's proactive approach to managing her finances after paying off her mortgage positions her for **future growth and security**.

[Music] Kathy has a question. She says, We paid off our mortgage in January. Nice, that's awesome. We are debt-free. It's got to feel good. We want to downsize and pay cash for a smaller home, but I am told we cannot invest the balance into a Roth mutual fund. So, what can we do with it if this is their plan? What do you think? Okay, well, let me explain a bunch of different things. Let me do a little bit of a vocabulary explanation here to kind of level set. You said, I was told I cannot invest into a Roth mutual fund. You kind of combine two different ideas there. Roth is a type of account. It is an account that exists that you can then hold investments in. Inside of your Roth, you can hold stocks or mutual funds or ETFs or cash, but the Roth is just an account type, an account structure. A mutual fund is the actual investment that you're buying inside of the account that you choose to use. That's just like some quick vocabulary 101, so your

question is, Hey, I paid off the house, paid off the mortgage in January. We're now going to downsize, and I'm going to have more money from the sale of my current house than it's going to require to go buy the new house. So what do I do with the excess? Where can I put it? What are my options? Uh, I think one of the great things, uh, if let's assume that you, this house that you paid off, that you're going to sell, let's assume that you and your spouse bought this house, and it's gone up in value, and so long as it's not gone up more than $500,000 in total value from the time you bought it plus any improvements until today. One of the beautiful things about this issue that you have is there's not going to be a tax bill associated. You get to exclude the first $500,000 of gain on your primary residence, assuming you lived there for two out of the last five years. So you don't have to worry about paying the tax man. So

literally, this is going to be like free cash flow to you. What should Kathy consider doing to give Kathy a huge compliment? That you know one of the things we talk about on the show is that housing is a use asset. Because it's a use asset that you can't basically eat your house in retirement. We tell people we value at a very conservative, you know, of the Cost Plus improvements. Because I think so many people have kind of boosted their net worth or their comfort with their financial situation off of just the equity in their house. And we always like, well, you can. It's hard to turn that equity into cash. Kathy's actually done it. If she, when she does this, when she downsizes, she will actually be able to take some of those gains and use that money above and beyond what it's going to take for these smaller homes. So she's, I think that kudos to you for having excess housing funds now. I love that this extra margin or this extra money she actually wants.

to invest it sure so I'm all about how she's done that. Now, the problem is the government, 'cause we all know Roth. It's awesome. It's awesome tax-free. You know that money grows compounding growth. Kathy gets it. But the problem is it's so good the government restricts how much you can put in every year. It restricts how much you can put in or you convert from if it was traditional. This is after-tax money that's coming to you, so you're probably just going to want to invest it into some type of brokerage account. And the good news is you can still buy index funds just like you can in a Roth IRA. You can buy index funds in that after-tax joint brokerage account and put that money to work, and it's still going to be tax-favored. It's just not going to be tax-free like the Roth growth is. It's going to be taxed at ordinary, you know, your ordinary income on the bonds. You'll pay at ordinary income tax rates. The dividends will pay at that preferred

lower tax rate for dividends and capital gains. If you hold them long enough, they'll be preferred as well. Now, what is interesting is Kathy didn't say, I don't think, she said that she was retired. She just said she paid off the house, and they're thinking about downsizing. So, a great thing to do whenever you have a capital inflow flow into your life is you ought to check where you are in the food bra. Will you hold up the financial order of operations for me? Oh gosh, this is a nine-step tried and true process to tell you what to do with your next dollar. Well, when you sell this house and you have a lot of next dollars coming your way, this might be a great time to assess, Okay, if I'm still working, have I maxed out my Roth IRA? Have I maxed out my HSA? Is my emergency fund fully funded? Do I need to go back and max out my 401k, 403b, an employer-sponsored plan? And so long as I've checked all those boxes.

Then I agree completely. The XS can roll right into that after-tax account anytime you have a major life change or a large capital transaction like this. Revisiting the food, revisiting the financial order of operations is a great step to make sure that you're deploying your dollars as wisely as you can.

What Are the Best Uses for the Extra Cash After Downsizing Our Home?

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Options for Investing After Paying Off a Mortgage

Kathy has paid off her mortgage and plans to downsize, resulting in excess money from the home sale.

The Roth is an account type, while a mutual fund is an investment held within that account.

Kathy can exclude the first $500,000 of gain from the sale of her primary residence from taxes, providing her with a tax-free opportunity to invest the excess funds.

Kathy's Financial Strategy: Downsizing and Investing

Kathy is set to downsize her home, allowing her to take advantage of excess housing funds for investment.

The government's restrictions on Roth IRA contributions may lead her to consider a brokerage account for after-tax investing.

Despite the difference in tax treatment, she can still invest in index funds through the brokerage account, providing a tax-favored opportunity for her money.

Financial Order of Operations for Capital Inflows

Lower tax rates for dividends and capital gains make them preferable when held long enough.

It's important to assess your financial situation and goals when experiencing a capital inflow, such as from selling a house.

The nine-step financial order of operations includes maximizing contributions to a Roth IRA, HSA, and employer-sponsored plans, as well as ensuring a fully funded emergency fund.

Smart Financial Moves After Major Life Changes

The XS can be directed into an after-tax account during significant life changes or large capital transactions.

It's important to revisit financial priorities and operations to ensure wise dollar deployment.

Making thoughtful financial decisions during these transitions can lead to better long-term outcomes.