Author Topic: Reader Case Study - Minimizing Taxable Income & Part Time Employment?  (Read 3071 times)

fidgiegirl

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So scared!  Be gentle!  :)  Thanks in advance for any ideas.

My husband and I are each teachers and have an eight month old son.  We live in a high cost urban area.  I am interested in trying to work part time next year.

Income:
Jointly, gross from full time jobs is 12,000/mo. I earn a few thou more than him but basically it’s a 50/50 split.

We also have a rental business.  Bare bones details:  It’s one home, we owe about $60K on it (pmt. $577/mo. @ 4.375%) and it’s worth about $180-200K.  It gets $1285 in rent per month and we pay the taxes ($3000/yr.) and insurance ($1200/yr.) separately.  We have kickass tenants who are in until May 2016.

Current fixed monthly expenses:

Pre-tax:
- My 457 contribution: $1458/mo (max of 17500/year)
- DH’s 457 contribution:  $833/mo (planning to up it)
- Health insurance: $300/mo
- Childcare FLEX contribution: $416/mo

After tax:
- Each contributing $100/mo. to a Roth IRA with TIAA-CREF
- Mortgage (including insurance and property taxes, no PMI): $1500/mo
- HELOC (current payment, looking to increase and eradicate): $200/mo
- Phones: $120/mo (a complicated family plan that we "own" and we can extricate ourselves, but not without a lot of work and general family ickiness - prefer to focus efforts elsewhere right now)
- Childcare $1200/mo.

November’s variable expenses:
I do not track closely, but want to start again.  Here’s one month’s expenses, pulled as best I can from debit card/credit card statements.

Internet $39.95
Electric/Gas $140.59
Water $80.81
Groceries $478.15
Gas $135.90
Car Repairs $6.45
Health $145.00
Charitable   $80.00
Restaurants $114.13
Clothing $29.73
Fun Money $94.53
Gifts $12.45
Cash $43.00
Amazon $130.00

A lot of leaky spots, especially Amazon, cash, and fun money categories.  Not really sure what those are on.

Assets:
- Home, value approx. $350K
- 2005 Pontiac Vibe, 120K miles
- 2007 Honda Accord, 50K miles
- My retirement funds total about $100K (Roth IRA and 457)
- DH’s retirement funds about $150K (Roth IRA, several 403(b) plans and 457 plan)
- We have $12K in our high yield checking (LOL - 2% or something like that), which we use as an EF.  I’m lobbying to send $8K to the HELOC, but DH gets nervous with a “low” checking balance.  I think $4K makes him nervous.  I noted that if we had a true emergency we could draw on the HELOC again.
- 130 shares of Medtronic stock which must be sold in 2015.  Value approx. $7K. See below.

Liabilities:
- Mortgage on primary residence:  $220K balance at 3.25%, 30 year note
- HELOC:  $27K at 4.99%.  Ugh.

Specific Question(s):

1. Retirement/reducing taxable income:  I know we need to up DH’s contribution to his 457 plan, and I’d like us to max our Roths.  But it starts to feel kind of tight at that point . . . not really based on data, but emotions - like the “low” checking balance referenced above.  We are now earning in a range we never dreamed of 5 or 10 years ago . . . how can we maximize the reduction of our taxable income?

2. Medtronic stock:  Medtronic is merging or selling or whatever they are doing so stock has to be sold off in 2015.  I think I will have to pay cap gains, not sure, anyway, what to do with the proceeds?  This was a college graduation gift and I have always mentally treated it as my “retirement contribution” for the few years after college that I went abroad and earned a pittance and wasn’t making any retirement savings even though I knew I needed to be.  So I don’t want to plunk it on the HELOC or something like that.  I want to put it in a long-term savings kind of vehicle.  I was thinking of selling it between Jan and April so I could fully fund my Roth from this year and put a chunk toward next year.  But I’m open to other ideas!

3. Preparing for part-time employment:  For my sanity I’d like to go down to 80%, perhaps as low as 50%.  I think I still want to work, just not full time.  Not sure if it’s possible within my organization, but starting to plan.  How do I even go about calculating the financial impact of this?  I mean, straight up income/expenses are easy.  I mean the opportunity cost - on potential retirement contributions, on increased cost of benefits, on opportunity cost for pension credits, etc.

Whew! A novel, and that’s pared down!  Thanks for help you can offer.
« Last Edit: December 12, 2014, 08:42:29 PM by fidgiegirl »

MDM

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Re: Reader Case Study - Minimizing Taxable Income & Part Time Employment?
« Reply #1 on: December 12, 2014, 09:41:36 PM »
fidgiegirl, it appears the two of you are doing well - keep up the good work!

To your questions:
Quote
1. Retirement/reducing taxable income:  I know we need to up DH’s contribution to his 457 plan, and I’d like us to max our Roths.  But it starts to feel kind of tight at that point . . . not really based on data, but emotions - like the “low” checking balance referenced above.  We are now earning in a range we never dreamed of 5 or 10 years ago . . . how can we maximize the reduction of our taxable income?
Yes, maximum 457s.  And it appears you can still contribute some to traditional IRAs - maybe ~1/2 traditional, 1/2 Roth.
Note: if those are 457(b) plans you can do even more pre-tax.  See http://www.irs.gov/Retirement-Plans/How-Much-Salary-Can-You-Defer-if-You%E2%80%99re-Eligible-for-More-than-One-Retirement-Plan%3F

Quote
2. Medtronic stock:  Medtronic is merging or selling or whatever they are doing so stock has to be sold off in 2015.  I think I will have to pay cap gains, not sure, anyway, what to do with the proceeds?  This was a college graduation gift and I have always mentally treated it as my “retirement contribution” for the few years after college that I went abroad and earned a pittance and wasn’t making any retirement savings even though I knew I needed to be.  So I don’t want to plunk it on the HELOC or something like that.  I want to put it in a long-term savings kind of vehicle.  I was thinking of selling it between Jan and April so I could fully fund my Roth from this year and put a chunk toward next year.  But I’m open to other ideas!
It's money, same as any other.  Simply invest it the same as you would any other available money.  Paying off the HELOC appears a fine use.

Quote
3. Preparing for part-time employment:  For my sanity I’d like to go down to 80%, perhaps as low as 50%.  I think I still want to work, just not full time.  Not sure if it’s possible within my organization, but starting to plan.  How do I even go about calculating the financial impact of this?  I mean, straight up income/expenses are easy.  I mean the opportunity cost - on potential retirement contributions, on increased cost of benefits, on opportunity cost for pension credits, etc.
One way is www.cfiresim.com.  You can also do some quick calculations with the spreadsheet that generated the table below.  Numbers in there are mostly from your OP, but with extra added to retirement savings and loan payoffs as suggested above. 

You could download your own copy and do "what if?" for any number of things.  E.g., reduced spending, reduced income, reduced spending and reduced income, etc.

Good luck!


CategoryMonthly amt.CommentsAnnual
Salary/Wages$12,000$144,000
Pretax Health Ins.$300$3,600
Daycare FSA$417At maximum$5,000
FICA base salary/wages$11,283$135,400
Traditional IRA$458Room to increase?$5,500
401(k) / 403(b) / 457(b) / TSP /etc.$2,917At maximum$35,000
Income subject to IRS tax$7,908$94,900
Paycheck income before tax$7,908$94,900
Rental income$1,285$15,420
Rental real expenses$977Assumed $50/mo misc.$11,724
Rental depreciation expense$303$3,636
Rental taxable income$5$60
Federal Adj. Gross Inc.$7,913$94,960
Federal tax$6832014 rates, item. ded., 3 exemptions$8,194
State/City tax$435Guess, using 5.50% * Fed. AGI$5,223
Soc. Sec.$700Assumes 2 earners paying$8,395
Medicare$164$1,963
Total income taxes$1,981$23,772
Add Daycare reimb.$417$5,000
Income before other expenses  $6,652$79,824
Monthly Expenses:
Mortgage$1,197$14,362
Property Tax$200Guesses to match$2,400
Home/Rent Insurance$103$1500 "mortgage" in OP$1,236
Car Maintenance, Registration, etc.$6$77
Charitable contributions$80$960
Childcare$1,200$14,400
Clothing/Shoes$30$360
Computer (paper/software/etc.)$130Amazon$1,560
Dining (Pizza, Restaurant, etc.)$114$1,368
Donations/Gifts$12$149
Entertainment$95$1,140
Fuel/Public Transport$136$1,632
Gas/Oil for heating$141Includes electric$1,692
Groceries$478$5,736
Internet$40$480
Miscellaneous$43$516
Phone (cell)$120$1,440
Sports/Recreation$145$1,740
Water/Sewer$81$972
Non-mortgage total$3,155$37,859
Loans:
HELOC$200$2,405
Other tax-advantaged investments:
Roth IRA$458$5,500
Total Expense$5,010$60,125
Total to invest$1,642$19,699
Additional Mortgage Principal$1,000$12,000
Additional Loan payments$200$2,400
Available for taxable investment:$442$5,299
Summary:
"Gross" income$12,308$147,696
Income taxes$1,981$23,772
After-tax income$10,327$123,924
IRA+401k+ESPP+529/other$3,833$46,000
Living expenses$4,652$55,821
Non-mortgage loans$200$2,405
After-tax investable$1,642$19,699
Time to FIRE?:
Time to FIRE11years
Safe Withdrawal Rate4.00%percent
Real return on tax-deferred investments5.00%percent
Real, after tax, return on taxable investments3.75%percent
Expected retirement total tax rate20.00%
Current Savings
Taxable$19,000
Tax-deferred (e.g. trad. IRA/401k)$125,000
Roth$125,000
Projected Savings at Retirement
Taxable$99,027
Tax-deferred (e.g. trad. IRA/401k)$789,167
Roth$291,930
Total projected stash$1,180,124
Projected Expenses in Retirement
Non-loan, non-work expenses$37,859
Income taxes$9,465
Total$47,324
Stash needed for retirement @4.0% SWR$1,183,088
Need $2,963 more.$
« Last Edit: December 12, 2014, 10:12:59 PM by MDM »

fidgiegirl

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Re: Reader Case Study - Minimizing Taxable Income & Part Time Employment?
« Reply #2 on: December 13, 2014, 03:14:56 PM »
This is amazing!  Thank you!!  Looking forward to more ideas, and to playing with the calculator.  I feel we ARE doing quite well, and that's why I wanted to get some more advice here from the brain trust - IRL, others don't have much new info to offer us, plus I can't be this frank about money with anyone IRL.  Thank you!!

Catbert

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Re: Reader Case Study - Minimizing Taxable Income & Part Time Employment?
« Reply #3 on: December 13, 2014, 03:32:26 PM »
I don't know what Medtronic is - I assume a stock.  If so you may not be forced to sell if it merges with another company.  Generally with mergers you just get stock in the new company.  If you are forced or chose to sell you will owe capital gains on the difference between the value of the stock when it was purchased for you.*  If you're in the 25% or higher marginal tax rate then your cap gains tax will be 15% on the gain.  If you're in the 15% marginal bracket then you will owe zero if you have 7K room left in the 15% income bracket.

If you do leave your job DON'T convert that 457 to an IRA.  The 457 has more flexibility for withdrawing money than an IRA does.

*If someone gifted you stock that they had owned for awhile then your basis is what they paid for the stock originally. 

Cassie

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Re: Reader Case Study - Minimizing Taxable Income & Part Time Employment?
« Reply #4 on: December 13, 2014, 03:45:08 PM »
I  think that if you go to 50% until your child is in school that you will never regret it. Even if all the calculations show your pension is smaller, etc it will be worth it for your sanity & the enjoyment of your child. 40 years I was a SAHM until the youngest of my 3 went to school & I never regretted it.  We were frugal before it was popular & so were most of my friends.  Yes now that I am 60 & retired my pension is smaller then it would have been but the time with the kids was priceless.  I think p.t. is the perfect solution & you will be much less tired, stressed, much less rushing around, etc.  I did not have a career at the time so p.t. wasn't really an option for me.  I went to college later so that also put me behind in terms of $.  I am still fine with that.  When kids are small the time passes quickly & you can never get it back-you can always work.  Also you can try it for a year & see if you like it & if not it seems like you could again find a f.t. position.  I bet you will see that you love it.   Hugs:))

fidgiegirl

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Re: Reader Case Study - Minimizing Taxable Income & Part Time Employment?
« Reply #5 on: December 13, 2014, 05:15:42 PM »
Thank you, mary w and Cassie.  mary, yes, Medtronic is a company, I haven't done a ton of investigating on if I truly have to sell it but everything I've heard says yes - they are becoming a new company and will be based out of Ireland.

Cassie - so true.  I hadn't really thought about just doing it for a year.  I tend to do that - think that a decision is forever.  But of course, if PT is awful, then I can go back to FT.  In my license areas I will never have trouble getting a FT job.  Now whether or not it is one I want to be doing or not, that is another question.  But they are always there as I have licenses in harder-to-staff areas.

Cassie

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Re: Reader Case Study - Minimizing Taxable Income & Part Time Employment?
« Reply #6 on: December 13, 2014, 09:22:33 PM »
A year is fast-just take it one at a time.