Author Topic: Question on tax advantaged accts  (Read 1930 times)

MrsCtank

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Question on tax advantaged accts
« on: October 20, 2016, 06:22:10 PM »
Hi!

I wanted to run my situation by yall - looking for advice on how to make our money worth the hardest in the sense of where it goes and tax savings. DH is an engineer making about 100k. I'm a veterinarian currently doing commission work but am struggling to find enough work, maybe 10-20k/yr (with self employment taxes on that). Last year I was full time and we were at 180-190k and 28%, this year I worked half the year so maybe 150-160, just on the verge of 28%.

Debts: 230k mortgage at 3.125%, 15 yr (10 left)
Student loans from my mom 90k at 0% - looking to pay over 10 years
30k emergency fund (DH wont go lower)
5500 in traditional IRA (not from this year for me)
Me: 12k old 401k in S&P index
DH: 35k 401k in S&P index (10% witholding Roth + 7% match)

We have some extra money a month however not nearly what id like if I can find stable employment, maybe 500-1000/month. DH is in favor of paying down the house but I want to at least take advantage of tax savings first and I tend to allocate everything. Also mortgage interest deduction. His 401k is not maxing this year and that's my current priority. But should it be since its Roth? Should we both fund IRAs to save on taxes? I think they'd have to be traditional with conversion later? He will be HSA eligible next year, should I fully fund that? Which of these should be priority #1? What do I need to do before april to get advantages for this year? We're both 28 but are behind due to advanced degrees/loans I feel. He has a masters.

MrsCtank

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Re: Question on tax advantaged accts
« Reply #1 on: October 20, 2016, 07:06:14 PM »
So I just came across this in another post and it's perfect - exactly what I was looking for! A few follow-up questions though.

0. Establish an emergency fund to your satisfaction   30k is DH's set number
1. Contribute to 401k up to any company match   Done.
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.   Only one above the yield is the house, 3.125%
3. Max HSA    Will do next year.
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level   By this we should do traditional at 28% but DH is adamant that roth is better, I'm working on this but not sure if I'll convince him. Would there be benefit in doing half pretax and half post tax? Is there a problem with doing 100% s&p vs 100% whole market? I've wanted to diversify but stay aggressive at 95/5 or 100% stock but DH insists that if the s&p tanks we've got bigger problems.
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)   
6. Fund mega backdoor Roth if applicable   I'm not sure I understand the backdoor roth concept, is there a cliffnotes version?
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.   
8. Invest in a taxable account with any extra.[/b][/b]   
I'll have to research if IRA or 401k cost ratio is different, his 401k is through fidelity and is decent I believe.

MDM

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Re: Question on tax advantaged accts
« Reply #2 on: October 20, 2016, 08:45:51 PM »
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.   Only one above the yield is the house, 3.125%
Note the words in blue.

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4. Max Traditional IRA or Roth (or backdoor Roth) based on income level   By this we should do traditional at 28% but DH is adamant that roth is better, I'm working on this but not sure if I'll convince him.
See https://www.bogleheads.org/wiki/Traditional_versus_Roth, particularly the part about "commutative property of multiplication," then have DH explain his math.  If you really are guaranteed to have a huge (e.g., bigger than now) income in retirement then DH could be right.

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Would there be benefit in doing half pretax and half post tax?
You'd be half right? ;)

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Is there a problem with doing 100% s&p vs 100% whole market?
Not really - they are very highly correlated.

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6. Fund mega backdoor Roth if applicable   I'm not sure I understand the backdoor roth concept, is there a cliffnotes version?
See Backdoor Roth IRA - Bogleheads and links therein.

See the case study spreadsheet for more.

zolotiyeruki

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Re: Question on tax advantaged accts
« Reply #3 on: October 21, 2016, 11:59:33 AM »
Yeah, your husband is wrong about the Roth.  You'd be significantly better off with a traditional IRA with your current income.

Dezrah

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Re: Question on tax advantaged accts
« Reply #4 on: October 21, 2016, 01:53:01 PM »
Is your husband by chance a Dave Ramsey fan?  Sounds like heís following DR to a tee.  If you search around here, youíll find the consensus that DRís advice isnít so much Bad as it is Sub-optimal, very sub-optimal.

Which of these better describes you and your husband:

Couple A
We save some but usually completely spend whatever is left.
We want to continue working in our high income careers as long as possible even if we donít really need the money.
If we were totally debt free, we would probably spend a windfall on stuff.
We donít really think about taxes very often.  (Bonus if you usually get a hefty refund.)
Taking the long-view of money is really hard and we really just need quick and simple guidelines to follow.

Couple B
We only spend on our needs and carefully considered wants each month regardless of how much income is available.
We intend to retire with little to know income from our jobs.  We will live off our appreciated investments.
We would use a windfall to shore up our retirement accounts.
We are very mindful about the amounts we pay in taxes and want to optimize as much as possible.  (Bonus if you write a small check to the government at tax time.)
We are willing to constantly educate ourselves through the years about which long-term money strategies are best for us.

If youíre closer to couple A, just stick with DR and youíll be fine, less optimum, but fine.  If youíre closer to couple B, you can do so much better with the help youíll find here. 

boarder42

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Re: Question on tax advantaged accts
« Reply #5 on: October 21, 2016, 02:00:55 PM »
you're in the 28% bracket.  highly unlikely you can contribute to a Trad IRA.

MDM

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Re: Question on tax advantaged accts
« Reply #6 on: October 21, 2016, 03:26:29 PM »
you're in the 28% bracket.  highly unlikely you can contribute to a Trad IRA.
For anyone Covered by an Employer's Retirement Plan that's correct.  E.g., (and this doesn't even include deductions and exemptions)
tIRA phaseout28% bracket start
Single$71,000$91,150
MFJ$118,000$151,900

Given projected 2016 and 2017 numbers in the OP, and the possibility that the veterinarian is not covered by an employer's retirement plan, however, there is a good chance that at least $5500/yr (and maybe the full $11K) would be eligible for a deductible tIRA.  If both are covered by a 401k (or similar) plan, contributing the full $36K/yr (plus HSA) would help drop the MAGI and might allow an otherwise unallowable tIRA deduction.

MrsCtank

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Re: Question on tax advantaged accts
« Reply #7 on: October 21, 2016, 06:53:41 PM »
No access to retirement plans for me and highly unlikely there will be in the future. Most clinics in this area are small and you're lucky to get health insurance. He may not be able. He has read DR in the past but takes most of his advice from a coworker who honestly seems mustachian but I haven't brought it up. Extremely frugal, engineer, logically plans everything. Cheap house, rental property etc etc. I had a discussion with him yesterday about all this though and his response is that I have extremely little risk adversion due to our high debt to income ratio. Not sure I understand this seeing as our debt is at low interest rates. He is in favor of just paying off the house asap.