Case Study: Where to invest early in the year plus spending feedback

[ruraljuror]

I'm brand new to the forums and would like to thank you in advance for reading this case study and providing your insight.

Between January and April I will have extra cash from 2014 savings yet to be invested and extra payments (bonus, tax return,  extra paycheck, additional savings) totaling $14,300.  We have a 457(b) (govt. job) at work and will likely be adding a 401a early in 2015. I will have a say in the type of account we add to complement the 457, so your thoughts on this are appreciated. The Agency pays $10,000 in deferred comp. each July.  In 2014, it was deposited into the 457 and I maxed out the account with $7,500.  In 2015, I can ask the agency to apply the $10k to the 457 or complementary account (I believe).  Our retirement accounts are managed by Nationwide, which charges a fee between .7 and .9 percent on top of fees associated with the index or fund being purchased (currently in an S&P 500 Index).  I also max out Roth IRAs for myself and my wife (SAHM).  I plan to convert hers to a traditional IRA to reduce income taxes. 

My primary question is should I use the cash I will be receiving to defer more of my income to the 457 and 401a (which I believe has a $52k annual max) or invest the money with Vanguard in my taxable account or Fidelity Roth/traditional IRAs (Roth for me and trad/roth for my spouse)?  Perhaps a mix of all of the above?

Income and expense particulars - I appreciate your feedback.
Married with three kids – Ages 8, 4, 9 months
Gross Annual Salary - $123,600
Monthly net - $6232 (not including two extra paychecks of $3,116 each)

Monthly expenses:
Church Contribution   $150
Mortgage+Taxes+Insurance   $1,700
Water   $115
Pre-k   $120
Cable and Internet   $75
Cellphones   $95
Gas/Power   $300
Gym   $61
Insurance (vehicle+life)   $120
Student Loans   $520
Doctor Visits    $40
Prescriptions   $65
Auto (Gas & Maintenance)   $200
Groceries   $600
Entertainment (Movies, Etc.)   $100
Toiletries/Haircare/Diapers   $50
Clothes/Dry Cleaning   $150
Eating out   $75
Travel   $100
Miscellaneous   $150
Home Improvement/supplies   $100
Gifts & Special Events   $100
Total Expenditures   $4,986

Additional info:
House - $166,000 15-year mortgage on a $250,000 home.  3.5% Interest Rate.  2,700 s.f. with really old HVAC.  Plus a pool.
Student Loans - $85k at interest rates between 2.75 and 3%
Vehicles – One Honda minivan paid off.  Other vehicle provided by employer.  Live 4 miles from office.
Investments and cash - $256,000 saved in various retirement accounts (457s, Roth IRA, other) and Vanguard taxable.  $27k emergency fund.

[MDM]

My primary question is should I use the cash I will be receiving to defer more of my income to the 457 and 401a (which I believe has a $52k annual max) or invest the money with Vanguard in my taxable account or Fidelity Roth/traditional IRAs (Roth for me and trad/roth for my spouse)?  Perhaps a mix of all of the above?

ruraljuror, welcome to the forums.

Why would you not use tax-advantaged accounts?  Especially a 457 which has much looser withdrawal rules than a 401 or IRA.  What about putting every penny you can into the 457, then max'ing the 401 and IRAs (in whichever order you prefer).  Would that leave you enough cash for expenses?

You can check your cash flow with your own system, or use the spreadsheet in the How To Write a Case Study thread, to help you decide, look at time to FI, etc.

Good luck!

[ruraljuror]

Thanks for the response MDM. I could have done a better job of laying everything out.  Over the course of the year, I would definitely max out the 457 given its general awesomeness. Therefore, I guess my real questions are, do I front-load it in the first half of the year and after it's maxed out should I put my remaining investment funds in the 401a (assuming that's the type of account we open)?  Or do I spread my remaining investment dollars between the Roth IRA, traditional IRA, taxable account and 401a? After maxing out the 457, I should have about $26,000 to invest throughout the rest of the year (not all at once).

[MDM]

I would definitely max out the 457 given its general awesomeness.

Good!

Therefore, I guess my real questions are, do I front-load it in the first half of the year

Yes, see http://www.schwab.com/public/schwab/nn/articles/Does-Market-Timing-Work.

and after it's maxed out should I put my remaining investment funds in the 401a (assuming that's the type of account we open)?

That appears good if you will still be in the 25% bracket - given your deductions/exemptions you should check that.

Or do I spread my remaining investment dollars between the Roth IRA, traditional IRA, taxable account and 401a? After maxing out the 457, I should have about $26,000 to invest throughout the rest of the year (not all at once).

Crossed out the one that doesn't seem to belong.  As you said in the OP (emphasis added), "I plan to convert hers to a traditional IRA to reduce income taxes."  That seems the best strategy - again, as long as you are in the 25% bracket.  If you drop to 15%, Roth is worth considering.

Do you have your own spreadsheet for doing "what if?" calculations?

[ruraljuror]

Thanks again MDM. I just found the spreadsheet you provided in the "How to write a case study" thread. I've never done much tax planning, so I definitely think I will benefit from creating numerous "what if" strategies with your spreadsheet.

[DrF]

This should be mandatory reading for every new poster on the MMM forums.

http://www.madfientist.com/retire-even-earlier/

follow that up with this

http://www.madfientist.com/front-loading/

then read this

http://www.gocurrycracker.com/never-pay-taxes-again/

Enjoy!

[wtjbatman]

I'm having trouble figuring out your MAGI after your contributions to tax advantaged accounts. Keep in mind the MAGI limit of $96,000 for full IRA deductions.

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/2014-IRA-Contribution-and-Deduction-Limits-Effect-of-Modified-AGI-on-Deductible-Contributions-If-You-ARE-Covered-by-a-Retirement-Plan-at-Work

[ruraljuror]

Based on the output of MDM's spreadsheet, it appears my AGI will be $110,000 after we recharacterize my wife's Roth IRA.  She does not have a work provided retirement plan, as she is not employed - does that mean we will be able to take the full deduction?

My new plan for 2015 will be to front load my wife's Traditional IRA with our available cash, max out the 457b with my contributions including ($10k by April then additional $8k by October), have employer make $10k contribution to 401a.  Depending on savings rate each month I will accelerate the 457 deposits and get the 401a as high as possible.  I had been investing monthly savings in a Vanguard taxable account.  Given the extremely high limits of the 401a (as I understand it), I will unlikely add to the vanguard account in 2015.

Thanks for the resources DrFunk - I will fine tune the above plan after reading everything you've provided.

[DrF]

IRA deduction stuff.

http://taxes.about.com/od/deductionscredits/qt/traditional_ira.htm

If you get your MAGI down, you could both have traditional IRAs that would be fully deductible.

Get your match > max the 457 > max traditional IRAs > max 401a > taxable account.

[Cheddar Stacker]

She does not have a work provided retirement plan, as she is not employed - does that mean we will be able to take the full deduction?

Full deduction for her as long as AGI is < $181,000 (2014).

And I'm a huge fan of 30 Rock so I have to leave these here in honor of your username:

https://www.youtube.com/watch?v=QFxVN9HmKfE
https://www.youtube.com/watch?v=6YDyjOimInA

[ruraljuror]

Thanks for the clear direction DrFunk as well as the additional link.

Cheddar - I appreciate the clarification and the links.  We are all so blessed by 30 Rock.

[wtjbatman]

She does not have a work provided retirement plan, as she is not employed - does that mean we will be able to take the full deduction?

Full deduction for her as long as AGI is < $181,000 (2014).

I don't believe that's correct, Cheddar. As long as they are married and filing jointly, and at least one spouse is covered by a retirement plan at work, then you follow the lower MAGI limit of $96,000.

http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

Notice the IRA website specifically says "Your deduction may be limited if you (or your spouse) are covered by a retirement plan at work", and that "Your deduction is allowed in full if your (and your spouse if you're married) aren't covered by a retirement plan at work". He is covered by a retirement plan, so the limit applies to her as well.

Update: Now I think I'm the one who is wrong :) See Bogleheads Wiki: http://www.bogleheads.org/wiki/Traditional_IRA#Contribution_Eligibility_and_Limits

Looks like she can deduct her tIRA contribution, but you wouldn't be able to (unless you get your MAGI low enough of course).

[Cheddar Stacker]

wtjbatman, Check out the link I provided over here:

http://forum.mrmoneymustache.com/welcome-to-the-forum/2015-retirement-plan-limitationstax-resources/msg432673/#msg432673

This is my bible when people ask these questions, here on the forum and in my practice. I'm pretty certain what I said is correct. Check the chart, page 2, then circle back if you still disagree.

[wtjbatman]

Yeah I updated my post while you were responding, I was definitely wrong on that one. Surprising considering the extremely clear instructions from the IRS ;)

Thanks for getting it cleared up.

[Cheddar Stacker]

Yeah I updated my post while you were responding, I was definitely wrong on that one. Surprising considering the extremely clear instructions from the IRS ;)

Thanks for getting it cleared up.

Glad we're on the same page. Confusing. Hopefully that linked resource will help someone. It keeps me sane when thinking through all this complex shit.

[ruraljuror]

Thanks to both of your for the clarification and additional resource.  A follow-up question that I've been wondering about is whether or not you can roll a 401a from a previous employer into a 457b provided by current provider? 

[dandarc]

Thanks to both of your for the clarification and additional resource.  A follow-up question that I've been wondering about is whether or not you can roll a 401a from a previous employer into a 457b provided by current provider?

I think that it may be possible depending on the plan, but the money doesn't get the usual 457b benefits - so likely not better than rolling to IRA.

Think this falls under "Qualified plan" to "457 b" in the chart below - note it must be to a separate account, which I believe is so that there is an easy way to know if it falls under early withdrawal penalties or not.

http://www.irs.gov/pub/irs-tege/rollover_chart.pdf

[Cheddar Stacker]

One more resource for you ruraljuror. 457 + 401 can be a powerful arsenal.

http://rootofgood.com/make-six-figure-income-pay-no-tax/