Homeownership just got 5% cheaper as mortgage rates fall off a cliff
U.S. mortgage rates fell sharply and for the second straight week as monetary policies meant to slow the economy take hold of the housing market.
The rate on the popular 30-year fixed mortgage hasn’t fallen this much since December 2008, a new report shows.
Though rates have been rising for most of this year, the recent dips provide a sliver of hope for buyers.
Purchasing a home is now about 5% more affordable than it was a week ago, says Nadia Evangelou, senior economist for the National Association of Realtors.
That translates to savings of about $100 on a typical monthly mortgage payment.
30-year fixed-rate mortgages
The average rate on a 30-year fixed mortgage fell to 5.30% this week, down from 5.70% a week ago, mortgage finance giant Freddie Mac reported on Thursday. A year ago, the 30-year rate was averaging 2.90%.
“Over the last two weeks, the 30-year fixed-rate mortgage dropped by half a percent, as concerns about a potential recession continue to rise,” says Sam Khater, Freddie Mac’s chief economist.
The Federal Reserve, which is trying to lower inflation by cooling the economy, hiked its benchmark interest rate three-quarters of a percentage point in June.
The central bank is likely to make another hike of the same magnitude when it meets again later this month, according to the minutes from last month’s Fed meeting.
15-year fixed-rate mortgages
The 15-year fixed-rate mortgage averaged 4.45% this week, down from 4.83% last week, Freddie Mac says. Last year at this time, the 15-year rate averaged 2.20%.
Higher borrowing costs have been tempering demand for homes, and the market is recalibrating.
“Home price growth has started to soften and price cuts are becoming more common, as sellers are finally being challenged and begin to reconsider their expectations,” Matthew Speakman, senior economist with Zillow, said in a recent interview.
Indeed, homeowners are being forced to shift their mindsets.
While many new listings are still selling within days, multiple-offer situations are fewer and farther between, says Corey Burr, a Washington D.C. real estate agent.
A seller should be prepared to make adjustments if a property doesn’t go under contract within two weeks of being listed.
“In these cases, we are seeing more broker commission incentives, more seller offers to help pay for buyer closing costs and outright list price reductions,” says Burr, senior vice president at TTR Sotheby’s International Realty.
5-year adjustable-rate mortgages
The five-year adjustable-rate mortgage (ARM) averaged 4.19% this week, down from 4.50% last week. The 5-year ARM was averaging 2.52% a year ago.
ARMs, which fluctuate depending on the prime rate, start off with lower interest costs. They can surge, however, once the initial fixed-rate period expires.
Despite the recent dips in rates, fewer Americans are taking on new mortgages.
Applications fell 5.4% according the Mortgage Brokers Association’s (MBA) latest weekly survey.
“Rates are still significantly higher than they were a year ago, which is why applications for home purchases and refinances remain depressed,” says Joel Kan, the MBA’s associate vice president of economic and industry forecasting.
When will home prices start to fall?
The median price of a home hit a record $450,000 in June, 17% higher than last year, according to Realtor.com.
That’s leaving little room for buyers on budgets.
While prices are expected to soften, they have yet to make any appreciable moves, according to researchers at Florida Atlantic University (FAU) and Florida International University.
Average prices still are rising in nearly all of the 100 largest housing markets, they found. Evidence, however, suggests the market may be nearing its peak.
“There are plenty of reports that mortgage applications and home showings are falling as interest rates rise,” Ken Johnson, an economist in FAU’s College of Business, says in a new report.
“We expect prices eventually will level off as well, particularly if a recession occurs and lending rates remain high.”
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American Weed Stocks Are Cheap. They’re About to Get a Sales Bump.
However bad the year has been for most stocks, it has been especially harsh for state-licensed cannabis sellers.
In just the past month, the
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How Do Mega Backdoor Roths Work?
A mega backdoor Roth is a unique 401(k) rollover strategy that’s designed for people whose incomes would ordinarily keep them from saving in a Roth Individual Retirement Account. The advantage of using a Roth IRA to save for retirement is being able to make tax-free qualified withdrawals. But not everyone can contribute to these accounts; higher-income earners are excluded. That’s where the mega backdoor Roth comes into play. If you have a 401(k) you’d like to roll over, you could use this strategy to enjoy the tax benefits of a Roth IRA without having income be an obstacle.
Make sure you’re taking advantage of every opportunity to maximize your retirement assets by working with a financial advisor.
Roth Account Basics
Before diving into the specifics of a mega backdoor Roth, there are a few things to know about Roth accounts, including Roth IRAs and Roth 401(k)s.
First, these accounts are both funded with after-tax dollars. That means when you make qualified withdrawals later, you won’t pay income tax on the money since you already paid it upfront. This is the key characteristic of Roth accounts and what makes them so appealing to investors who anticipate being in a higher tax bracket at retirement.
Next, your ability to contribute to a Roth 401(k) is not restricted by your income. But it is for a Roth IRA. For the 2021 tax year, you must be within these modified adjusted gross income limits to make a full Roth IRA contribution:
Single filers: MAGI of $125,000 or less
Married filing jointly: MAGI of $198,000 or less
Head of household: MAGI of $125,000 or less
You can make partial contributions above those income limits. But your ability to contribute phases out completely once your MAGI hits $140,000 (if you file single or head of household) or $208,000 if you’re married and file a joint return. For 2021, the full contribution allowed is $6,000 with a $1,000 catch-up contribution for savers aged 50 and older.
Finally, Roth 401(k) accounts are subject to required minimum distribution rules just like traditional 401(k) accounts. This rule requires you to begin taking money from your 401(k) starting at age 72. A Roth IRA, on the other hand, is not subject to RMD rules.
What Is a Backdoor Roth?
A backdoor Roth offers a work-around for people whose incomes are above the limits set by the IRS. When you execute a backdoor Roth, you roll money over from a traditional IRA to a Roth account. This way, you won’t have to pay taxes on your retirement savings in the Roth IRA when it’s time to make withdrawals. And you’re not subject to required minimum distribution rules either.
But there is a catch. You have to pay income tax on the money you roll over to a Roth account. So while you could save money on taxes in retirement, you’re not escaping the tax liability of a traditional IRA altogether.
How a Mega Backdoor Roth Works
A mega backdoor Roth is a backdoor Roth that’s designed specifically for people who have a 401(k) plan at work. This type of backdoor Roth allows you to contribute up to $38,500 to a Roth IRA or a Roth 401(k) in 2021. This is in addition to the regular annual contribution limits the IRS allows for these types of accounts. To execute a mega backdoor Roth, two conditions have to be met. Your 401(k) plan needs to allow the following:
You can ask your plan administrator whether your 401(k) meets these criteria. And if your plan doesn’t allow for in-service withdrawals or distributions, you could still attempt a mega backdoor Roth if you plan to leave your job in the near future.
If your plan meets the criteria, then you can take the next steps to execute a mega backdoor Roth. This is typically a two-step process that involves maxing out after-tax 401(k) contributions, then withdrawing the after-tax portion of your account to a Roth IRA.
Again, whether you can follow through on the second step depends on whether your plan allows in-service withdrawals. If it doesn’t, you’ll have to wait until you separate from your employer to roll over any after-tax money in your 401(k) into a Roth IRA.
You also need to watch out for the pro rata rule. This IRS rule says you can’t only withdraw pre- or post-tax contributions from a traditional 401(k). So if you’re completing a mega backdoor Roth, you couldn’t just withdraw post-tax contributions if your account holds both pre- and post-tax funds. In that case, you may have to roll over the entire balance to a Roth IRA.
Benefits of a Mega Backdoor Roth
There are three key benefits associated with executing a mega backdoor Roth. First, you can contribute significantly more to a Roth IRA upfront this way. For 2021, the contribution limit is $38,500 on top of the regular annual contribution limit and any catch-up contribution limits that may apply.
You’ll need to know the maximum amount you’re allowed to contribute to the after-tax portion of your 401(k). So for 2021, the IRS allows a maximum contribution of $58,000 or $64,500 if you’re 50 or older. You’d subtract your 401(k) contributions and anything your employer adds in matching contributions to figure out how much you could add to the after-tax portion.
Next, you can enjoy tax-free withdrawals in retirement. This is a benefit you may otherwise not being able to get if your income is too high to contribute to a Roth IRA. By reducing your tax liability in retirement, you can help your investment dollars go further. And you may have a larger legacy of wealth to pass on to future generations.
Finally, a mega backdoor Roth IRA would allow you to sidestep required minimum distribution rules. This means that you could retain control over when you choose to take distributions from a Roth IRA.
So who is a mega backdoor Roth right for? You may consider this move if you:
Have an eligible 401(k) plan at work
Have maxed out traditional 401(k) contributions
Are not eligible to contribute to a Roth IRA because of your income
Have additional money that you want to invest for retirement
Want to leverage the higher Roth IRA contribution limits allowed by a mega backdoor rollover
Talking to your financial advisor can help you decide if a mega backdoor Roth makes sense. And your 401(k) plan administrator should be able to tell you if it’s possible, based on your plan’s guidelines.
Mega Backdoor Roth Alternatives
If you can’t execute a mega backdoor Roth because your plan doesn’t allow it, there are other ways to increase your retirement savings. For example, you could try a regular backdoor Roth instead. This might be something to consider if you still want to enjoy the tax benefits of a Roth IRA but your plan doesn’t fit the criteria for a mega rollover. You could also elect to make Roth 401(k) contributions to your retirement plan at work. This way, you still get the benefit of contributing after-tax dollars and making tax-free withdrawals. You’d be subject to the regular contribution limits and you’d still have to take the required minimum distribution. But that may outweigh the value of tax savings in retirement.
Investing in a Health Savings Account (HSA) is another option. While these accounts are not specifically designed for retirement, they can yield multiple tax benefits. Contributions are tax-deductible and grow tax-deferred. Withdrawals are tax-free when used for eligible healthcare expenses. And at 65, you can take money out of an HSA for any reason without a tax penalty. You’ll just owe ordinary income tax on any withdrawals that are not used for healthcare expenses.
Finally, you could open a taxable brokerage account to invest. This doesn’t necessarily save you money on taxes since you’ll owe capital gains tax when you sell investments at a profit. But it could help you to diversify your investments and there are no limits on how much you can invest in a brokerage account annually.
A mega backdoor Roth strategy could work well for higher-income earners who want to take advantage of Roth account benefits. There are certain rules that need to be followed to make it work, however, so you may want to talk to your plan administrator or a tax professional before going ahead. Keep in mind also that even if you can’t complete a mega backdoor Roth rollover, you still have other options for growing retirement savings.
Tips for Retirement Planning
If you’re saving for retirement in a 401(k) or IRA, pay attention to the fees you’re paying. For instance, check the expense ratios for each fund you’re invested in to understand how much you pay to own that fund on an annual basis. You can then compare that to the fund’s performance to determine whether the fees are justified. Also, consider any administrative fees you might be paying and how those affect your net returns.
Consider talking to your financial advisor about a mega backdoor Roth and whether it could be right for you. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors in your local area. You can get your personalized recommendations in minutes just by answering a few simple questions. If you’re ready, get started now.
Photo credit: ©iStock.com/designer491
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