Case Study - What to do with excess cash?

[ChasingStache]

Hello all,
I've been lurking around for a bit and really starting to get moving on FI and maybe someday RE too.

Life Situation: DINKs - 34/33, MFJ, 0 Kids, Reside in Colorado. I work for an employee owned company and am a stockholder. As such, I receive no 401k match. My wife works for the State of CO. Her retirement account is a Direct Contribution account which I believe is a form of a 401a. Insurance through my company does not qualify as a HDHP. We paid off around $100k in student loans 2 years ago thanks to my job taking me internationally and a huge (temporary) increase in my earnings. Since then, we traveled on a number of trips that cost a combined total of ~$40k paid in cash. We have also been sitting on an account that has now grown to ~$75k in cash. We were considering buying a house, but have decided against in this local market so it is now time to get this money working for us.

Financials (round numbers):

Category	Monthly	Comments	Annual
Salary/Wages for earner #1	$6,800		$81,600
Salary/Wages for earner #2	$6,700		$80,400
Pretax Health Ins.	$450		$5,400
FICA base salary/wages	$13,050		$156,600
401(k) / 403(b) / TSP / etc.	$1,025	Room to increase?	$12,300
Employer Match	$697		$8,364
Income subject to IRS tax	$12,025		$144,300
Federal Total Income	$12,025		$144,300
Total income taxes	$3,394		$40,728
Income before other expenses	$8,631		$103,572
Monthly Average Expenses:
Rent	$1,800		$21,600
All Other Expenses	$4030		$48360
Total Expense	$5,830		$69,960
Total to invest	$2,801		$33,612
Available for taxable investment:	$2,736		$32,832
Summary:
"Gross" income	$13,500		$162,000
Income taxes	$3,394		$40,728
After-tax income	$10,106		$121,272
IRA+401k/403b/TSP/457 (Savers' credit)	$1,025		$12,300
Living expenses	$6,280		$75,360
After-tax investable	$2,801		$33,612
Net Worth (from Mint)	$330k

We really have no physical assets and no liabilities to speak of but are planning on purchasing a vehicle in the near future.

Now to the help. Of the $75k in cash, we plan on the following:

Cash-On-Hand	$5k
Emergency Fund	$15k
Misc. Planned Expenses	$5.5k
New Car	$20k (shooting for much lower)

This leaves ~$29.5k remaining to do something with. I'll also be getting a return of ~$4.5k this year (don't ask) for a total of $34k available.

Here are my questions:

• Should I fully fund a rIRA for each of us for 2016 and 2017 from this money? If so, what to do with the remaining $12k?
• Is a rIRA the right thing? From what I understand a tIRA doesn't do much for us at this point since we earn too much.
• We have been shorting ourselves on our retirement accounts at work and want to get this changed. I am struggling to decide if I should continue contributing to my 401k since I don't receive a match any longer.
  The funds available are not great (avg expenses of 0.35%) and would like to move it all into VTI/VTSAX/equivalent. I do have the ability to open a self-directed brokerage account within my 401k. It is $50/year plus $35/trade for V funds. I have ~$130k in this account and was going to move it all immediately. Just not sure what to do after that.
  Does using the 401k in the cheapest growth fund and sweeping it once per year make sense or should I be looking at a tIRA? I have no plans to leave my job to roll this over somewhere.
  Or should we contribute my share on my wife's side for the short term? She will be leaving her job sometime late this year but she has the ability (I think) to contribute $54k/year to her 401a.
• Going forward, I expect if we each max out retirement accounts at 401k levels ($15k/yr/ea), cut back some expenses (not too difficult to do), that we will have around $30k additional end of 2017 and similar levels in following years. Should this go into taxable accounts or somewhere else?

Thanks in advance for the advice. I'm excited when I start doing the math on what our earnings can provide for us in the future.

[ltt]

$1800 a month for rent? This seems very high.

[ChasingStache]

It isn't that high in Denver especially for what it is and the proximity to work (less than 3 miles for both of us). At some point we will bring that down but that is the market right now. Like I said, we know we have room to improve our expenses, that isn't the focus of this post right now though.

[trashmanz]

$1800 a month for rent? This seems very high.

Thats half the price of Silicon Valley. 

[zolotiyeruki]

With your income, you need to be focusing on your tax-deferred accounts ( 401k, 403b, TSP etc) to get closer to the top of the magical 15% tax bracket, or at least below $99k, so you can then max out your tIRA contributions/deductions.

I'd go ahead with your plan for the self-directed brokerage account for your 401k.  And then max out your 401k contributions.  BTW, the max is $18k, not $15k :)  There's really not much of a difference between a tIRA and a 401k, except that you'll need to roll over the 401k if/when you leave, but that's no big deal.

You're in a good situation, really.  Being able to put away $60k/year (plus employer matching) is pretty awesome.

[ChasingStache]

Thanks zolotiyeruki for the comments. We feel thankful to be in such a good position, we just really want to maximize it.

I think I fat fingered the 15/18. Oops!

So I am understanding correctly: if we make about the same in 2017 as 2016, we should be shooting to get our AGI down to $99k to take additional deduction on funding two tIRA with $5500 each?

Something like this:

Income (assume 3% raise)	$161k
Fully Fund 401k	<$18k>
403a Contribution	<$18k>
Standard Deduction & Exemption	<$20.7k>
AGI	$104.3k
Remaining to deduct	$5.3k

So, how does it work at this point? If I contribute the $11k to tIRAs, does that bring me to $93.3k AGI or do I need to find a way to deduct the $5.3k to get to $99k AGI then I can take the full deduction for the tIRAs? Can I send that $5.3k to my wife's 401a? At minimum it looks like I can get to a partial deduction pretty easily.

Also, if I was to go this route, I would not want to fund a rIRA for 2017 since the contribution limit for all IRAs is $5500, correct? If that is the case, I would have about $23k of cash-on-hand available immediately to do something with. Is a taxable account about my only option at this point after maxing out my tax-advantaged accounts, ie: Vanguard taxable account?

Thanks again. These forums are awesome!

ChasingStash

[dandarc]

You'd have to ask about sending additional money to the 401a.  Florida doesn't allow it, for example.

HOWEVER - a lot of governments have other plans you can contribute to.  The gold standard (assuming roughly equal fund choices) is a 457B.  This is a plan that gives you an additional $18K of tax deferred space - some government employers will have a 401K (or a 403B in public schools / university) - your wife could max both (total of $36K) if both are offered.  But the 457B is particularly awesome for the early retiree - you can withdraw penalty free upon separating from service.  No age 59.5 requirement.

Looks like Colorado may have a plan called PERA which offers both a 401K and a 457B, but it is not clear to me if state-government offers it.  So your wife should talk to HR to get the details.

[dandarc]

https://www.copera.org/sites/default/files/documents/5-5.pdf

Specifically the "voluntary" plans 401K / 457B.

You're in a great situation if your wife is eligible for both of these - $18K * 3 = $54K of tax-deferred retirement between you, plus whatever is withheld from wife's check into the 401a.  Plus you'll be able to do at least some tIRA money instead of Roth - 54K + the health insurance puts you in the phase-out range for IRA deduction from the stated salaries.

[dandarc]

Something like this:

Income (assume 3% raise)	$161k
Fully Fund 401k	<$18k>
457b Contribution	<$18k>
Standard Deduction & Exemption	<$20.7k>
AGI	$125
Remaining to deduct	$5.3k

Standard Deduction & Exemption happens after AGI.  See above post about the fact your wife may well have access to both a 457B and a 401K though - any money put into those would come out before getting to AGI.

[zolotiyeruki]

So I am understanding correctly: if we make about the same in 2017 as 2016, we should be shooting to get our AGI down to $99k to take additional deduction on funding two tIRA with $5500 each?

Yes (with a couple minor clarifications):
1) With your living expenses well under the top of the 15% tax bracket, you want to minimize your taxable income, regardless of whether you want to contribute to a tIRA.
2) it's your MAGI, not your AGI, that you want to minimize in order to unlock tIRA contribution deductions
3) the $99k is the bottom of the tIRA deduction phase-out.  Below a MAGI of $99k, you can deduct the full $5500.  Above $119k, you can't deduct any.  In between, it phases out.

Do you have access to an HSA?  HSA contributions also come out of MAGI, so if you hit your contribution limits on 401(k) / 403(b) / TSP/etc and still need to reduce MAGI, there's another option.

[ChasingStache]

You'd have to ask about sending additional money to the 401a.  Florida doesn't allow it, for example.
....
Looks like Colorado may have a plan called PERA which offers both a 401K and a 457B, but it is not clear to me if state-government offers it.  So your wife should talk to HR to get the details.

Right after I posted, she sent me a bunch of info she received from her benefits department. Turns out she can't contribute to the 401a anymore than her 8% + the state 10.5% contribution. She is eligible for both the 401k AND 457 though!

Standard Deduction & Exemption happens after AGI.  See above post about the fact your wife may well have access to both a 457B and a 401K though - any money put into those would come out before getting to AGI.

Got it. That makes sense.

2) it's your MAGI, not your AGI, that you want to minimize in order to unlock tIRA contribution deductions

MAGI = AGI for me this year. Probably not next year.

Do you have access to an HSA?  HSA contributions also come out of MAGI, so if you hit your contribution limits on 401(k) / 403(b) / TSP/etc and still need to reduce MAGI, there's another option.

Unfortunately not. Our health plan is not considered HDHP. ($1000 each/$2000 family)

Thanks for all your thoughts. You guys are rockstars! Time to breakout the spreadsheets!

ChasingStash

[dandarc]

On the health insurance, your company vs. her state government?  Have you run the numbers on that?  Bet the state offers at least an FSA, and possibly you could switch to a HDHP and have an HSA as well.

[ChasingStache]

On the health insurance, your company vs. her state government?  Have you run the numbers on that?  Bet the state offers at least an FSA, and possibly you could switch to a HDHP and have an HSA as well.

dandarc,
We looked at it a couple years ago, although in a different context at the time. She had some pretty high recurring prescription costs that ended just last month (thank god!). My insurance was significantly better for that. We didn't do the HSA plan offered because of the way the prescription costs were realized against the deductible, it just didn't make sense at the time. We both have an FSA. Mine is at $2550 and her's I believe was around $1400. Her's resets in June.

The other factor on the insurance is she will likely be leaving her job late this year. She doesn't know if she will move to a different state organization or in to the private sector (she's an attorney). Now that our recurring costs have changed, this is something we will definitely consider during the next open enrollment period though. I'd love to start dumping some cash into a HSA.

ChasingStash