Author Topic: Reader Case Study – How are we doing? Tax-advantaged accounts, babies, student l  (Read 3482 times)

spicykissa

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Hello!  a long-time lurker, first time poster. Thank you so much for reading all this and any feedback you have! I'll try to clarify any questions too.

Life Situation: Married filed jointly in HCOL area (outside Baltimore); I'm 27 and my husband is 29; no kids (yet), no pets, live in the cheapest 1 bedroom apartment we could find. I'm a nurse, and he is in the tech industry, both full-time. My commute is 20-30min into the city depending on traffic. His is 10min.

Gross Salary/Wages:
Me: $50,000 base salary (does not including night/weekend shift differential or overtime; I'll likely make $5000-10000 more over the course of the year, depending on scheduling vagaries). I also work a very part-time side gig for an extra ~$3000/year. This is my first year full-time as a nurse, so my numbers are not totally firm, and last year's gross was a LOT lower since I only worked the last 3 months of the year.

Him: $69,000 base salary, but gross wages were $113,000 last year, via various other 'perks' such as $34,000 in restricted stock units, $9000 in bonuses, and $2000 in daily catered lunches (my jealously may be showing through here! I am so proud of him, though).

Pre-tax deductions:
Me: ~$2000/year
HDHP = $85/month
Dental = $12/month
Parking = $64/month (GAH!!! This sucks, seeing it in writing.)
HSA = $4/month (I don't know why I bothered with such a tiny amount. . .)

Him: ~$1200/year
HDHP = $35/month
Dental = $3/month
Company-paid HSA seed = $750/year

And . . . that's it. My husband has access to a 401(k) with a 3.5% match, but doesn't want to “lock up the money” if we need it, and doesn't like the fund options. (We've fought about this! I'm about to give up on changing his mind.) My hospital will automatically start contributing an amount equal to 4% of my wages to a 401(a) next month. I will also have access to a 403b, but no match. 

Other Ordinary Income: None. 

Qualified Dividends & Long Term Capital Gains: No realized gains last year or qualified dividends last year, as far I as remember; my husband has all the dividends set to automatically reinvest.

Adjusted Gross Income: $165,000-ish? I mean, we have basically no deductions up there.

Taxes:
Me: ~$15500/year total (extrapolating here)
Federal $6000/year
State: $2750/year
Local: $1850/year
Medicare: $900/year
SS: $4000/year

Him: ~$36500/year total
Federal: $19000
State: $5600
Local: $3500
Medicare: $1600
SS: $7000

Current expenses: Below is essentially my monthly 'goal' budget (I track every penny month to month!). This is the goal; we often go over on restaurants, which is awful, considering it's already a lot of $$. (We are bad cooks, work a lot, insert whiny bits here). The “other” category is probably too vague: it includes things like movie tickets, video games, car maintenance, gifts, clothing, car/renter's insurance (we pay yearly), etc. Some months we are under and some way over. We always have somewhere between $500-$1500 left over at the end of every month, though.
 
Rent: 1107.00
Water/Gas: 50.00
Electricity: 100.00
Netflix: 8.00
Groceries: 300.00
His Cell Phone: 80.00
My Cell Phone: 70.00
His Gas: 100.00
My Gas: 100.00
His Restaurants: 300.00
My Restaurants: 100.00
Student Loans: 3000.00
Other: 400.00

Total Expenses: 5770.00

His Take-Home: 3500.00
My Take-Home: 3000.00
My Side-Gig: 270.00

Total Net Income: 1000.00

Net Profit: 1000.00

We have separate checking accounts but can see each other's transactions. He pays all the bills except my student loans, gas, and cell phone; if we're eating together he always pays. I feel like a freeloader; he says this way makes sense and just to focus on paying off the loans.

Assets: ~$200,000 total?

My car: 2000 Plymouth Neon, ~170,000 miles, worth scrap. I hate this beater of a car, but it continues to run, so I continue to drive it. It was a gift to my husband in high school.

His car: 2010 Volkwagen Jetta, ~60,000 miles, worth $7000 or so. Hail damaged body, but otherwise in great condition and very reliable so far; bought used in 2012.

His brokerage account:
~$40,000 in company stock (He participates in an employee stock purchase plan with 15% of his after-tax income)
~$50,000 in a bond fund
~$70,000 in other single stocks (some names I hear are Wells Fargo, Coca-Cola, Johnson & Johnson—he likes big companies with good dividends and fundamentals).

His saving account:
~$10000 (I do not have access to this or the brokerage account, so no idea exactly how much or what's in there)

His checking account:
$7000 (every once in a while when it gets too big, he buys a chunk of stock)

My checking account:
$2000 (buffer/emergency car repair fund)

I also have $3300 in an old 401(a) from when my part-time gig was my full-time job; that company does still contribute an amount equal to 8% ($30/month?) of my part-time wages to it, but I have no control over how they invest it.

Liabilities:
Only my hated student loans, about $50,000 total. All interest rates are fixed. The starred loans are left over from my first (ill-advised, unemployable) degree; I've paid off ~$22,000 in principle+interest for that degree from 2010-2014. Paying minimums only on those now.
   
I graduated with my nursing degree in July of 2014; starting aggressively paying on private loan #2 at the beginning of 2015 (It is down from $33,000! Go me!). That 8% interest rate is awful, but I focused on paying the old degree's high-interest rate loans first because I had family cosigners.

Private:                
*#1: $1764.20 @ 1.75%
#2: $15674.52 @ 7.94%

Federal:       
*#1: $4452.79    @ 5.75%     
*#2: $4940.17    @ 5.35%   
#3:   $5342.46    @ 3.61%     
#4:   $6799.50    @ 3.61%     
#5:  $11656.28   @ 3.61%   

Continuing on the current path will have these completely paid off by March 2017.
                                                                        
Specific Question(s):
1. How much should I push my husband about 401k, IRA, HSA, etc contributions? With my income (finally) going up, I know our taxes are going to be crazy. We made FAR less money in years past (my husband has tripled his income in the past four years since we married young and poor), and we were able to deduct my tuition before. Suggestions for how to get him to see how reducing taxable income is a better bet than throwing money into the brokerage account?

2a. What should I do on this front? Anything I contribute to my HSA, upcoming 403(b), etc will reduce the amount I can pay on my loans.

2b. I want to have a baby in the next 3 years. My husband (and me, when I'm not ogling other people's babies) thinks all debt should be paid off first. We would need to move (rent would go up to ~$1800 for a two-bedroom apartment) to have space for a baby. Our current place is a 3rd floor walk-up shoe-box. We'd also need part-time daycare, although my work schedule is very flexible. Should I stay the course with my current payoff plan? Decelerate and contribute? What's the best way to make this baby thing happen?

3. Should I try to be more involved in the stock stuff? My husband gets “twitchy” when I get too interested. I think he should be in index funds instead of single stocks, and that he should not be holding all that company tech stock, but I'm not the high earner around here. (I have no skin in that game, so to speak.)

4. Any budget suggestions/facepunches are welcome. I know we could tighten up (we certainly have in the past), but my husband easily covers everything and feels like we're already frugal. I grew up truly poor, and still sometimes feel like I can't possibly be making/spending this much money! We both love our jobs, and have no plans to retire early right now, but that could change. We also both love the idea of FU money/financial independence!

Lucky Girl

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I have not read the Two Income Trap but am adding it to my list.  Serpentstooth is giving you good advice.

Max your 403(a).  Convince your husband to max the 401(k).  If you need more ammunition on why it makes sense, see the Mad Fientists posts (http://www.madfientist.com/guinea-pig-experiment/) on tax optimization. 

The company stock is indeed a bad idea.  My DH gets the same deal, and we tend to sell about once every 1-2 years (we have a limit on how often we can sell).  Then the money goes straight to Vanguard.  Ever seen a story about Enron?  This is why employees should never hold company stock.

My DH is the high earner.  We make all investment decisions in concert.  All our accounts are joint, with the exception of IRAs and work-managed plans.  It is important that you both talk through your goals and how to get there, even if you don't have the same investment philosophies.  At least if your DH understands your philosophy, he may move closer toward it.  Just because he makes more money does not mean he knows how to invest!
« Last Edit: August 26, 2015, 01:22:28 PM by Lucky Girl »

MDM

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Specific Question(s):
1. How much should I push my husband about 401k, IRA, HSA, etc contributions?
Very much.

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With my income (finally) going up, I know our taxes are going to be crazy. We made FAR less money in years past (my husband has tripled his income in the past four years since we married young and poor), and we were able to deduct my tuition before. Suggestions for how to get him to see how reducing taxable income is a better bet than throwing money into the brokerage account?
Run the numbers.

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2a. What should I do on this front? Anything I contribute to my HSA, upcoming 403(b), etc will reduce the amount I can pay on my loans.
This is as good a place as any to bring this up: when he proposed to you did he say "marry me but I'm not going to help with loan repayment", or did you propose to him and say "marry me but not my loans"?  Otherwise, you two are in this together and "the amount that can be paid on the loans" should be independent of your 403b contributions.

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2b. I want to have a baby in the next 3 years. My husband (and me, when I'm not ogling other people's babies) thinks all debt should be paid off first. We would need to move (rent would go up to ~$1800 for a two-bedroom apartment) to have space for a baby. Our current place is a 3rd floor walk-up shoe-box. We'd also need part-time daycare, although my work schedule is very flexible. Should I stay the course with my current payoff plan? Decelerate and contribute? What's the best way to make this baby thing happen?
Deal with other issues first.  You have time if and when a baby come along.

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3. Should I try to be more involved in the stock stuff? My husband gets “twitchy” when I get too interested. I think he should be in index funds instead of single stocks, and that he should not be holding all that company tech stock, but I'm not the high earner around here. (I have no skin in that game, so to speak.)
Again, you should have as much skin in the game as he does.

Quote
4. Any budget suggestions/facepunches are welcome. I know we could tighten up (we certainly have in the past), but my husband easily covers everything and feels like we're already frugal. I grew up truly poor, and still sometimes feel like I can't possibly be making/spending this much money! We both love our jobs, and have no plans to retire early right now, but that could change. We also both love the idea of FU money/financial independence!
Calculate your 2015 taxes now, then do some "what if?" analysis.  E.g., if your state/local taxes really are as high as you list in the OP (i.e., that is your real tax rate, not merely what you are having withheld) then you'll be saving ~37% on most of your 401k/403b contributions up to the $36K limit.  You will "only" save ~32% for the first ~$10K because you can deduct the state/local taxes as itemized deductions.  Numbers here are based on a quick pass at your OP through the MMM case study spreadsheet.  Taxcaster, as mentioned above, is another good tool.  See http://forum.mrmoneymustache.com/ask-a-mustachian/turbo-tax-vs-cpa/ for more on this topic.

ETA: And just to be clear, "your 2015 taxes" should be read as "your 2105 taxes Married Filing Jointly (unless Married Filing Separately happens to give you lower taxes)"
« Last Edit: August 26, 2015, 02:06:54 PM by MDM »

Valetta

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It almost seems like you are living in this weird limbo between joint and separate finances. Did you talk about this before you got married? I feel pretty strongly that married couples should have joint finances but I know there are couples that this doesn't work for.

I think the answers to many of your questions actually lead back to the issue of the combination of your finances. I think you have to resolve that fundamental issue first before you can answer anything else. If you are going to keep separate finances, I would think that things have to be a lot clearer about who pays what, how much, how are joint household bills covered, etc.

Even though all our stuff is joint, I am the primary money manager (DH did it for the first 4 years of marriage, I took over 2 years ago - not because he was doing a bad job at all, just because I wanted to feel more in the know about it). While we chat about finances very regularly because it's a topic of interest for us both, we sit down and talk about it in a more formal way once a month after I run an update on our net worth. This really helps keep us on the same page. I'm getting the vibe that you two just aren't on the same page.

cincystache

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Hey Spicy,

Welcome to the forums. I pretty much agree with everything said thus far.

1/2a. Push very hard. You guys are in a very high tax bracket, the higher your tax bracket, the more you benefit from pre-tax contributions. All of these accounts should be maxed out.

2b. I'd pay off the loans >5% ASAP (after maxing out all tax-deferred accounts) and then see what your budget is like paying the minimums on the lower interest loans. You guys are smart enough/earn enough money to handle a child. Keep an emergency fund big enough to make you comfortable, max out your pre-tax accounts and then put any excess into a brokerage acct.

3. This is the only question I find a little concerning. You need to learn to function as a team. You both have "skin in the game", you are married and your husband needs to get over being "twitchy" about you being interested in your family's investments, it's great that you are interested and willing to provide input. I'm not against having separate accounts if it makes things easier but you should both know exactly where your money is being invested and come to an agreement going forward. You could always compromise and put all your combined retirement account money in boring index funds and then put anything left over into dividend growth stocks.

There is no "your" money/debt and then his "money/debt". You are one family with one combined income and combined student loans.

4. I think your budget is fine, I wouln't count a student loan payment as an "expense" except the portion going to interest. If you factor that in, you are spending around 3k per month and saving well over 50% of your income. That is awesome! keep it up.

spicykissa

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1. Read The Two Income Trap. It's relevant to your situation.

2. You can totally have a baby in a little 1 bedroom. I have a four month old and a 2 bedroom. The baby sleeps with us. In fact, she refuses to sleep anywhere else. In fact, the AAP says the safest place for a baby to sleep is in a separate crib in their parents' bedroom. You won't need more space for a little while yet.

3. If you max your HSA, that's a great option. You can reimburse yourself for medical expenses at any time, so you can basically use it as an emergency fund, which should make your husband more comfortable about "locking up" money in long term tax advantaged retirement funds. Push hard on maxing out those tax advantaged accounts. We're at a similar income level and our taxes are our biggest annual expense. Effective tax management makes WAY more of a difference to our bottom line than scrimping on groceries. That's a huge win right there. This is quick and dirty, but I put your income into Turbotax's taxcaster. ($60k income for you, $113k income for him, ignored all other deductions.) If you don't max your retirement accounts, you pay $29,000 in federal income tax. Max both 401ks and the HSA and two tIRAs and you pay $16,000 in federal income tax. I am sure you can find better things to do with that $13,000. There are probably more savings in state/local taxes too. =D

4. Can your husband put you on his HDHP to save money? What about dental?

5. That company stock position is huge and rather risky. If we had an ESPP, we'd buy at a 15% discount and sell immediately to realize the gains and then use the money to buy an index fund, which is less risky. Would he consider this?

6. You need to stop with the "I'm not the high earner" stuff. And I'm in the same position as you and our income numbers are similar. You tied yourself to his man for the rest of your natural lives. If you have a child with him, you will never be able to full extricate yourselves from each other's lives. If you are building a financial future together, you need to be on the same page and working together toward common goals, regardless of who is bringing home the  money.

Wow, thanks for all the good advice!
1. I will check out the book.
2. I suppose you're right about the baby/space issue--we could definitely wait longer to move.
3. The TurboTax caster thing is perfect; my husband thinks in big round numbers like that. I'll bring it up again, with corroborating data this time!
4. I was on his HDHP until I started working full-time; when I signed up for mine, the price difference wasn't nearly so big (mine went up, his went down). I should definitely switch back next open enrollment.
5. The ESPP is discounted, on top of having a 6 month lookback period where you get the stock for the lowest price in the last six months. It is pretty much guaranteed to be profitable, ASSUMING you lock it in! That was the plan when he started participating. Of course, then it was doing well, and my husband didn't want to sell/got busy and didn't realize how much it was/etc, etc.
6. Duly noted. Funnily enough, we were much more 'on the same page' when we had way less money! Stocks were a little side project/hobby for him (that have grown), and now he feels a lot of ownership there, whereas I was completely clueless, and frankly not that interested early on in our marriage. Now we have this weird dynamic that I'm not sure how to fix, but we need to for all the reasons you mentioned.

Full_Beard

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I'll add to one point. I'd reconsider paying $3K on student loan payments. Personally, for the student loans that are 3.6% and below, I'd pay the minimum and invest the difference between the min. and $3K.

spicykissa

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This is as good a place as any to bring this up: when he proposed to you did he say "marry me but I'm not going to help with loan repayment", or did you propose to him and say "marry me but not my loans"?  Otherwise, you two are in this together and "the amount that can be paid on the loans" should be independent of your 403b contributions.

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It almost seems like you are living in this weird limbo between joint and separate finances. Did you talk about this before you got married? I feel pretty strongly that married couples should have joint finances but I know there are couples that this doesn't work for.

I think the answers to many of your questions actually lead back to the issue of the combination of your finances. I think you have to resolve that fundamental issue first before you can answer anything else. If you are going to keep separate finances, I would think that things have to be a lot clearer about who pays what, how much, how are joint household bills covered, etc.

So true! I hate this limbo we've ended up in. It wasn't always like this. We talked some about money before we got married, but we didn't have any, so it was mostly theoretical! In fact, my husband worked really hard to pay off some credit card debt I got into in college the first time around when we got engaged ($4000 or so, mostly for books I couldn't manage with my part-time job), as sort of a show of solidarity, joint finances, etc. Unfortunately, when we had some rocky bits early on in our marriage, that become ammunition when we disagreed ("I paid these off; the least you could do is some laundry." "I can't believe you spent money on THAT" etc etc). Of course he apologized, and he's very aware of trying not to do that anymore, but I guess I felt burned. When I decided to go back to school before our first anniversary and take out more loans to do so, I felt like it would be better for me to pay them off myself, so we worked out our current agreement. It's not ideal, and I think we could do much better as a full-fledged team if we got over our hang-ups. 

spicykissa

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Oops, screwed up the quote feature there.