Author Topic: Case Study 4+ year update (T401k to Roth conv/refi investment property question)  (Read 646 times)

MMM4life

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Life Situation: 33.5 years old, FIRE’d myself March 2018 for the second time (to be fair I got offered a 6 figure job to pay me to move to Hawaii). Girlfriend is in military and had to move back to MD in June so I quit when they wanted my work load to drastically increase and I was not going to work 10x harder while counting my last days down in Hawaii.

For those curious, this is a 4 year update to my original post – see post https://forum.mrmoneymustache.com/ask-a-mustachian/reader-case-study-need-mustachians-critique-of-financial-picture/msg384882/#msg384882

Gross Salary/Wages: Gross salary for 2018 for 3 months was $42,000, no plans on working the rest of the year

Pre-tax deductions:
401k - $2121
HSA – Will contribute max $3450
 
Other Ordinary Income:
House 1 – Rent 1625 – All bills 1167 = 458
Market Value 225,000 - Outstanding balance 150,000 = Equity 75,000, LTV = 66.5%

House 2 – Rent 2950 – All bills 2377 = 573
Market Value 475,000 - Outstanding balance 327,000 = Equity 148,000, LTV = 68.4%

House 3 – Rent 1650 – All bills 1085 = 565
Market Value 225,000 - Outstanding balance 121,000 = Equity 104,000, LTV = 51.9%

House 4 – Rent 1650 – All bills 1077 = 573
Market Value 225,000 - Outstanding balance 110,000 = Equity 115,000, LTV = 46.8%

House 5 – Rent 1650 – All bills 1171 = 479
Market Value 225,000 - Outstanding balance 143,000 = Equity 82,000, LTV = 63.7%

Umbrella policy = $-39
Rental property take home = $2648
   Equity = $524,000
   VA disability = $417
   Total take home = $3065

Portfolio:
   Traditional 401k - $180,000
      Total invested - $160,000, Total earned - $20,000
   Roth 401k - $20,000
   Taxable account - $256,000
   Total = $456,000

Expenses –
   Granted these have changed significant since moving from Hawaii to move back stateside (MD) but for simplistic sake, I appear to be spending no more than $3,000 a month since my checking account appear to be staying steady at a constant $20,000 (which I like to keep as a buffer). I do have an extremely detailed breakdown of my expenses but don’t think it’s relevant to the questions I’m about to pose to the group.

Adjusted Gross Income:
Based on take home – expenses = basically zero, I am perfectly ok with that since I have about $1500 (Portfolio standing at $450,000+ / 300 using 4% rule = $1500 of rainy day fund). It’s been 6 months since I FIRE’d myself and have yet to make a single withdraw

Specific Question(s):
1)   Thinking either part of this year and next year (depending on once my tax accountant and I figure out what my AGI is) OR only next year (if I continue to stay FIRE’d), is there any reason I shouldn’t do a Tradtional 401k to Roth 401k conversion? I read once I do it, I have to wait 5 years (be around 39 years old) and then I will be able to withdraw from it tax/penalty free? Is all that correct?

2)   Looking at house #4, my LTV is somewhere around 46.8%. Should I look into doing a refinance and pulling out some of that equity to “make me whole” and buying another investment property? I’ve read a few places they usually do a 70% LTV. What I’m unsure of is it typically 70% the new appraisal (probably somewhere around $225k) or the 70% of the original loan amount (Purchase price $160k, put 25% down so loan is for $120k, outstanding balance of $110k, loan started Oct 2013 so I know I hit the 6 month waiting period). Knowing the details of this will then allow me to run the numbers against house #3

3)   Is there something I am drastically missing or screwing up on? I don’t need to be hand held, just need to be told about keywords and I can do the research but I won’t turn down solid, free advice :)

Any additional details I can easily provide.
« Last Edit: October 03, 2018, 02:05:51 PM by MMM4life »

MDM

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1)   Thinking either part of this year and next year (depending on once my tax accountant and I figure out what my AGI is) OR only next year (if I continue to stay FIRE’d), is there any reason I shouldn’t do a Tradtional 401k to Roth 401k conversion?
It could interfere with getting a saver's credit.  You'd have to check your specific tax situation.
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I read once I do it, I have to wait 5 years (be around 39 years old) and then I will be able to withdraw from it tax/penalty free? Is all that correct?
You will be able to withdraw the amount converted tax/penalty free.  To withdraw growth that occurs in the Roth account tax/penalty free, you'll have to wait until age 59.5.

MMM4life

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1)   Thinking either part of this year and next year (depending on once my tax accountant and I figure out what my AGI is) OR only next year (if I continue to stay FIRE’d), is there any reason I shouldn’t do a Tradtional 401k to Roth 401k conversion?
It could interfere with getting a saver's credit.  You'd have to check your specific tax situation.

Quote
I read once I do it, I have to wait 5 years (be around 39 years old) and then I will be able to withdraw from it tax/penalty free? Is all that correct?
You will be able to withdraw the amount converted tax/penalty free.  To withdraw growth that occurs in the Roth account tax/penalty free, you'll have to wait until age 59.5.

Interesting, never even thought about that. Figured I had too many assets to claim this deduction. Will definitely have to see if I can structure myself to ensure I qualify.

Granted I have no reason to withdraw money from the 401k since my spending appears to be on par/below my take from home from rentals, but would be nice to be able to withdraw from an account with no fees. Definitely need to look into this more. Thanks again!!!

ItsALongStory

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Just curious, do these bills include maintenance to those properties?

Might be a big problem if 3 roofs need to be replaced in the same quarter otherwise.

Definitely admire how you've gotten everything sorted out so early in life where the 'passive' income takes care of your monthly expenses.

MMM4life

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Just curious, do these bills include maintenance to those properties?

Might be a big problem if 3 roofs need to be replaced in the same quarter otherwise.

Definitely admire how you've gotten everything sorted out so early in life where the 'passive' income takes care of your monthly expenses.

So those numbers don't but 3 out of 5 houses are condos and the other 2 are a SFH and town home that will need to be replaced in probably another 10 yrs or so. Even knowing that, I have home warranties on several of the properties, do most of the maintenance myself, but also factor in the costs associated with maintenance like that and still live below those numbers without touching my investments.  I feel pretty confident about my cost of living and income from rentals.

Granted it's been a journey for about a decade, working basically 3 jobs at a time but definitely paying off dividends now. But I'm sure you know, in this "mindset", you should never stop learning. Just want to make sure I'm taking advantage of all the different programs out there and not missing out.