Author Topic: Reader Case Study: Recently married, what would you do?  (Read 3207 times)

cincystache

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Reader Case Study: Recently married, what would you do?
« on: November 30, 2014, 02:00:37 PM »
Hi Everyone! I love reading the forums and appreciate all of your advice. We need some help deciding what to focus on financially as a newly married couple. (28 years old)

Monthly Take Home Income:

My day job: 4,000 (scientist)
My side gig: 400
Wife's day job: 1,000

TOTAL MONTHLY INCOME: 5,400

Monthly Expenses:

Fixed:
Tithe - 500
Rent - 450
Groceries - 300
Gas - 200
Insurance (car, renters) - 100
Cell Phones - 105
Gym - 60
Utilities - 100
Student Loans - 230

We usually end up spending between 2,500 and 3,500 based on tracking this for the last 6 months so I conservatively estimate about 3,000 per month on average.

TOTAL EXPENSES: ~3,000


Assets: 113,000
60,000 in 401k (80% US and international stock 20% bond) no company match but good index funds available
47,000 in Roth IRAs (80%stock/20%bond)
1,000 in taxable accounts (60%bond/40% stock)
4,000 cash

Liabilities:
25,500 student loans @ 4.875%

Question:
What would you do in our situation? We'd like to have kids in the next couple of years which would take away her income. I'm not sure if we should pay off the student loans, max out retirement accounts, save a bigger emergency fund, save for a downpayment on a house etc. I want to continue maxing our roth IRA since we are in a low tax bracket. I also like the idea of saving in a taxable account since dividends will be taxed at zero given our low income. I'm considering stopping my 401k contributions and investing it in a target risk fund (60% stock/40% bonds).

Thanks for the advice!

Catbert

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Re: Reader Case Study: Recently married, what would you do?
« Reply #1 on: November 30, 2014, 02:45:58 PM »
I agree with prioritizing Roths since you're in the 15% bracket. 

Is there more than one student loan?  Are they all at the same interest rate or is that the average rate?  What about your salary - is it likely to grow at more than the rate of inflation?

4.875% on SLs to me is in the grey area for paying off.  Sub 4% it's a low priority to pay off.  5%+ and it starts making sense to pay off quicker.

I might split the remaining money between SL pay-off and saving in a brokerage account.  If there are multiple SLs pick the highest rate or that you hate the most and  work on paying it off for cash flow purposes.

 Since no match, I'd probably go with brokerage rather than 401k.  You can harvest capital gains to fill your 15% income tax bracket at 0%.  When your income is firmly in the 25% bracket switch to 401k - or sooner if there is a match.  This assumes you are someone who can leave the money alone.

MDM

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Re: Reader Case Study: Recently married, what would you do?
« Reply #2 on: November 30, 2014, 05:13:12 PM »
cincystache, welcome to the forums.

Do you have the option of Roth 401k?  Even if someday you go above the 15% bracket, all your income from the Roth 401k would be tax free.  And you can withdraw contributions at any time with no penalty.

From a quick look at expenses there is ~$1,000/mo unaccounted for - that's a lot of Miscellaneous.  Might be room for improvement in that spending...?

Good luck!

Seņora Savings

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Re: Reader Case Study: Recently married, what would you do?
« Reply #3 on: November 30, 2014, 05:46:31 PM »
Since no match, I'd probably go with brokerage rather than 401k.  You can harvest capital gains to fill your 15% income tax bracket at 0%.  When your income is firmly in the 25% bracket switch to 401k - or sooner if there is a match.  This assumes you are someone who can leave the money alone.

These are important considerations.  On the flip side:

Retirement accounts have a fair amount of legal protection.  They are protected from bankruptcy, lawsuits and frequently consideration in financial aid.  Some of this may change, but in general Uncle Sam wants to reward you for having money in that account. 

If you have low income when the money is withdrawn (particularly applicable if you're considering early retirement) you can get taxed at a crazy low rate.

Harvesting capital gains will take more than one fund and some attention.  You look like a low key investor.

I'm in a similar situation (same tax bracket, want house, want kids); my choice is to max out the Roth options, then split evenly between taxable and pretax accounts.

catccc

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Re: Reader Case Study: Recently married, what would you do?
« Reply #4 on: November 30, 2014, 06:50:58 PM »
Personally I'd want those loans gone ASAP.  It was one of the first financial moves DH and I made as a married couple- knocked out his student loans.  It was only $12K, but it felt really good to be rid of it. 

So if you go taxable, yes, the gains will be taxed at 0% when you harvest them... but what will the tax be on the gains?  Probably not close to what you are putting in.  As such, I would consider putting more into the 401K.  Yeah, it's only 15% you are paying, but why not pay nothing?  Also, this lowers your AGI, and if you can get it below $60K, you qualify for the Credit for Qualified Retirement Savings Contribution. (Form 8880)  It's not huge, but it's still fun to get tax credits.

Let's say you have an amazing 20% return on your taxable investment.  You put $1K in a taxable account, paying $150 in taxes on that income.  You have a nice year and end up with $200 in capital gains.  You harvest those gains of $200, basically getting away with not paying taxes on $200, a savings of $30.  But you paid taxes on $1,000 for that privilege.  Had you put the $1K in the 401K, you would have saved the $150 in taxes.  Seems like the 401K is the way to go over taxable.

I would still prioritize the Roths over the 401K.  It's just a great, flexible investment vehicle, with no taxes on the gains ever, not just while you stay in a low tax bracket.  Then max out the 401K.  After that, you can cry and say "I have so much money... I have to use taxable accounts!"

Congrats on getting married!



Spudd

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Re: Reader Case Study: Recently married, what would you do?
« Reply #5 on: November 30, 2014, 06:59:06 PM »
Is your wife working only part time? 12k a year is a very low salary. Is there any opportunities for her to increase her hours or find a better paying job? I know in the future she will want to stay home with the kid(s) but since there aren't any kids yet, it seems to me she should try and make a few more bucks until that time comes.

cincystache

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Re: Reader Case Study: Recently married, what would you do?
« Reply #6 on: November 30, 2014, 08:18:55 PM »
Thank you all for the responses, some more info is below.

I agree with prioritizing Roths since you're in the 15% bracket. 

Is there more than one student loan?  Are they all at the same interest rate or is that the average rate?  What about your salary - is it likely to grow at more than the rate of inflation?

4.875% on SLs to me is in the grey area for paying off.  Sub 4% it's a low priority to pay off.  5%+ and it starts making sense to pay off quicker.

I might split the remaining money between SL pay-off and saving in a brokerage account.  If there are multiple SLs pick the highest rate or that you hate the most and  work on paying it off for cash flow purposes.

 Since no match, I'd probably go with brokerage rather than 401k.  You can harvest capital gains to fill your 15% income tax bracket at 0%.  When your income is firmly in the 25% bracket switch to 401k - or sooner if there is a match.  This assumes you are someone who can leave the money alone.

Thanks Mary, I like the idea of splitting the extra cash between SL and brokerage account. The SL are all the same rate and there are three loans total.

My salary will likely grow at about 2-3% per year barring any good or bad surprises.

Is your wife working only part time? 12k a year is a very low salary. Is there any opportunities for her to increase her hours or find a better paying job? I know in the future she will want to stay home with the kid(s) but since there aren't any kids yet, it seems to me she should try and make a few more bucks until that time comes.

Yes, she is working part time right now and is trying her best to bring in some more money but I like to plan for the worst and hope for the best. good point.


Personally I'd want those loans gone ASAP.  It was one of the first financial moves DH and I made as a married couple- knocked out his student loans.  It was only $12K, but it felt really good to be rid of it. 

So if you go taxable, yes, the gains will be taxed at 0% when you harvest them... but what will the tax be on the gains?  Probably not close to what you are putting in.  As such, I would consider putting more into the 401K.  Yeah, it's only 15% you are paying, but why not pay nothing?  Also, this lowers your AGI, and if you can get it below $60K, you qualify for the Credit for Qualified Retirement Savings Contribution. (Form 8880)  It's not huge, but it's still fun to get tax credits.

Let's say you have an amazing 20% return on your taxable investment.  You put $1K in a taxable account, paying $150 in taxes on that income.  You have a nice year and end up with $200 in capital gains.  You harvest those gains of $200, basically getting away with not paying taxes on $200, a savings of $30.  But you paid taxes on $1,000 for that privilege.  Had you put the $1K in the 401K, you would have saved the $150 in taxes.  Seems like the 401K is the way to go over taxable.

I would still prioritize the Roths over the 401K.  It's just a great, flexible investment vehicle, with no taxes on the gains ever, not just while you stay in a low tax bracket.  Then max out the 401K.  After that, you can cry and say "I have so much money... I have to use taxable accounts!"

Congrats on getting married!


Thanks catccc! I didn't know about the form 8880 but I will definitely check it out. It might be a good option to do a little of both and contribute enough to the 401k to get the credit and put the rest in taxable/SL payoff. I will definitely think about that one. I'm realizing I can't pay off all the loans, max out all my retirement accounts and save for emergency/house at the same time :)


cincystache, welcome to the forums.

Do you have the option of Roth 401k?  Even if someday you go above the 15% bracket, all your income from the Roth 401k would be tax free.  And you can withdraw contributions at any time with no penalty.

From a quick look at expenses there is ~$1,000/mo unaccounted for - that's a lot of Miscellaneous.  Might be room for improvement in that spending...?

Good luck!


Thanks MDM! I do not have the option of a roth 401k unfortunately. I agree that is a lot of miscellaneous, hopefully in the new year we will get more stable.


If you have low income when the money is withdrawn (particularly applicable if you're considering early retirement) you can get taxed at a crazy low rate.

Harvesting capital gains will take more than one fund and some attention.  You look like a low key investor.

I'm in a similar situation (same tax bracket, want house, want kids); my choice is to max out the Roth options, then split evenly between taxable and pretax accounts.


Thanks Senora, I am planning on my retirement income to be about 30k per year. I am definitely a low key investor (index funds, asset allocate and stay the course). I like your strategy and it sounds like I'll split between taxable, student loans, pre-tax (after the Roth's are maxed out)