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Mortgage or IRA?
THE MOTLEY FOOL
Ask the Fool
Published: July 26, 2022
Q. Does it make sense to pay off my mortgage with money from my traditional IRA? Should I? -- M.B., Bixby, Oklahoma
A. Think the decision through carefully. If you're younger than 59 1/2, withdrawals from a traditional IRA will be taxed at your ordinary income tax rate -- and you may also face a 10% early withdrawal penalty. Also, the sum you withdraw will increase your taxable income, which might bump you into a higher tax bracket. Meanwhile, wiping out your mortgage debt means you'll lose mortgage interest tax deductions you might have claimed.
Compare your mortgage interest rate to the growth rate you expect for your IRA holdings. Paying any of your mortgage off early saves you from paying interest on that sum for the remaining years. If your mortgage is charging you, say, 4% interest, and you're hoping for a return of 6% or 8% or more on your IRA investments, you could lose ground. Cashing out your IRA also means that money won't be able to grow for you over time. That's a big deal, as most of us need to be saving for retirement.
You might consider keeping your IRA and making extra payments on your mortgage whenever you can. A few extra payments each year could shave years off of the loan and save you thousands of dollars in interest payments.
Q. Can I have my entire stock portfolio transferred from one brokerage to another without having to sell the stocks and avoiding generating any taxable gains? -- P.C., Cheyenne, Wyoming
A. You sure can. Your new brokerage should be able to guide you through the process. If the stock is in a tax-advantaged account, read up on the tax rules first.
Fool's School
Is Your Retirement Endangered?
If you're doing only a little saving and investing for retirement while hoping for the best, you're likely endangering your future financial security. See if you're making any of these mistakes:
-- Not saving enough. Some suggest saving 10% of your income, but that may be far from enough -- especially if you haven't been saving and investing all along. See if you can sock away 15% or even 20% -- or more. Remember that your earliest invested dollars will have the most time in which to grow for you. They can be your most powerful investments.
-- Not investing effectively. Bank accounts, money market accounts and government bonds may be safe, but until interest rates get much higher, your money won't grow well in them. Look to the stock market for building long-term wealth. If you're decades away from retiring, consider keeping most or all of your dollars in stocks. Give strong consideration to simple, low-fee index funds, too, such as funds that track the S&P 500.
-- Borrowing from or cashing out retirement accounts such as 401(k)s and IRAs. If you're changing jobs and your 401(k) doesn't have much in it, consider rolling it into an IRA or into your new employer's plan. Let that money keep growing for you.
-- Not having a plan. Take some time to read up on investing and retirement issues (in books, at Fool.com and elsewhere), and come up with a plan. Figure out how much money you should amass before retiring -- and how you'll make it. Try to determine when you should retire; doing so too early can deplete your funds too quickly. Come up with a withdrawal plan to help your money last as long as it may need to. Fixed annuities are worth considering for the reliable income they can provide.
-- Not seeking help. An online search for "retirement calculators" can turn up some handy tools. Also consider consulting a fee-only financial adviser; you can find some at NAPFA.org.
My Dumbest Investment
Flying the Co-op
My dumbest investment was in real estate, not stocks.
After purchasing a co-op in Hawaii for just under $1 million in 2013 and spending almost $500,000 on renovations, it proved hard to sell. While in a prime location, it didn't come with a parking space, and while the building itself was oceanfront, my particular unit was not. To top it all off, the co-op voted to do a massive whole-building pipe renovation. Even though I'd already had pipes replaced in my unit, the co-op demanded that I pay my full share of this project. The whole thing cost me some $180,000.
While I did ultimately sell the unit, between the pipe project cost, the interest on my home equity line of credit and management fees, I realized a loss of around $300,000 -- or almost 20% -- on a property I held for some eight years. Surely there must have been a better place to put my money.
So this has been a learning experience, for sure! I learned that liquidity -- the ability to turn an investment back into cash -- is important. And so is considering all the drawbacks of a property, even if they don't bother you. And be careful with co-ops, as they may be able to impose unexpected expenses on you. -- C.S., online
The Fool responds: Those are excellent lessons -- thanks for sharing them!
Foolish Trivia
Name That Company
I trace my roots back to 1731, when my founder registered me and created one of the world's oldest brands. From 1851 to 1915, I won many prizes and medals at world's fairs. Today, based in Germany, I'm a respected name in cooking and household knives, cookware, scissors, kitchen tools and beauty tools, with brands such as Staub, Ballarini, Miyabi, Demeyere, BSF and Fontignac. I rake in almost a billion euros annually, and my logo features twins. Since 1970, I've been a part of the Werhahn Group. You might say I'm on the cutting edge of cutting. Who am I?
Last Week's Trivia Answer
Back in 1870, I was the first to sell whiskey in sealed glass bottles. In 1890, my founder partnered with his accountant and friend, giving me my hyphenated name. I bottled whiskey for "medicinal purposes" during Prohibition. Now, with a market value recently near $34 billion and about 4,700 employees, I'm a major global spirits company; my brands include Jack Daniel's, Gentleman Jack, Woodford Reserve, Old Forester, Coopers' Craft, The GlenDronach, Benriach, Glenglassaugh, Slane, Herradura, el Jimador, Korbel, SonomaCutrer, Finlandia, Chambord and Fords Gin. For a while, I owned the Lenox china and Hartmann luggage businesses. Who am I? (Answer: Brown-Forman)
The Motley Fool Take
High Security
In recent years, cloud computing has made traditional network security solutions all but obsolete. Sensitive data and applications now live in the cloud, so it's nonsensical to route traffic through a private data center for threat inspection, then forward that traffic on to the internet. Instead, it makes much more sense -- and it's more effective -- to enforce security policies on the internet itself. That's what Zscaler (Nasdaq: ZS) does.
Zscaler is the gold standard in network security, operating the largest security cloud platform in the world. Its platform, which delivers security service edge (SSE), leans on artificial intelligence to inspect network traffic, block threats and safely connect employees with corporate resources and the open internet. The company also offers cloud workload protection and digital experience monitoring.
Zscaler handles 240 billion requests and stops 150 million threats on a daily basis. Financially, the company is growing at a brisk pace. In its last quarter, revenue soared 63% year over year to $287 million, while calculated billings grew 54%.
The ongoing adoption of cloud services should be a continuous tailwind for Zscaler, helping it maintain or even accelerate its momentum. Long-term investors should take a closer look at Zscaler. (The Motley Fool owns shares of and has recommended Zscaler.)
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