Author Topic: Split Between Tax Def & Taxable  (Read 1625 times)

COlady

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Split Between Tax Def & Taxable
« on: January 02, 2018, 10:33:12 AM »
My husband and I have been having discussions regarding what our split should be between tax deferred and taxable. Here's our situation and approximate current breakdown - what are your opinions? We are thinking about dropping my 401k contribution from the max because I don't net much after nanny expenses and max 401k. I'm kind of undecided how we should proceed...but feel like a slacker for not maxing. Not really interested in dropping expenses which are currently about $80k per year, of which close to $30k is childcare. We live in Denver Metro so this is pretty reasonable for our income level. We may have to sell off some of our highly appreciated holdings to continue maxing my 401k but would like your opinions. Once our twins go to school at 6 years old (so three more years) we will get rid of the majority of the childcare expense which will be a huge expense cut.

wife 34, husband 36
wife $76k per year on 75% work schedule
husband $106k per year incl. ESPP discount (can sell immediately - he does maximum purchase amount per year)
3 year old twin boys (we have a nanny that watches boys while I work semi part-time)

husband maxes 401k
husband maxes family HSA
husband maxes dependent care FSA

wife maxes 401k
health insurance through husband - too expensive through employer

Assets:

House FMV $400k
Cars $50k
Retirement Assets $610k (mostly tax deferred, small amount Roth)
Money Market & Other Cash $23k
HSA $10k
Index funds - $80k (highly appreciated - held for years)
Indiv Stocks - $27k (highly appreciated - held for years)
529 plans that grandparents hold for kids - 80k (I include here as this is something everyone asks about)
TOTAL ASSETS $1,280,000

Liabilities

Mortgage - $130k @ 4%
Car Loan - $16k @ 1.59% (only financed because I could get such a low rate!)- 1.5 years remaining on loan
TOTAL LIABILITIES $146,000

NET WORTH AS OF 12.31.17 $1,134,000

I would love to continue maxing but we're running out of cash! We've had to pull funds out of money market several times this year to fund our expenses.












terran

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Re: Split Between Tax Def & Taxable
« Reply #1 on: January 02, 2018, 11:55:26 AM »
Personally I would have no problem living off of taxable funds to continue maxing tax advantaged space (we're planning to do it this year).

Are you sure about that $80k expense figure?  I Threw your numbers in https://smartasset.com/taxes/colorado-tax-calculator and it looks like you should have well above that available, and yet you're pulling money out of your money market to pay expenses. Of course I didn't have your health insurance numbers, so that will reduce take home, but it will also reduce taxes, so you're "only" paying something like 65% of it (after the federal, state, and FICA deductions).

$182,000 income
-$6750 HSA
-$2600 Dependent FSA
-$36000 401k
$136,650 taxable income
-$20440 federal tax$13923 FICA
-$6327 state tax
$95,960 after taxes and deductions.

COlady

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Re: Split Between Tax Def & Taxable
« Reply #2 on: January 02, 2018, 01:15:50 PM »
Good catch Terran. I was self employed for most of 2016 and made a large i401k contribution in March of 2017 for 2016 of about $20,000 to max out my 2016 i401k contributions @ $37,600 for tax year 2016 (remainder was made in 2016 for 2016). I was moving to employee status in 2017 so it was my last chance to do a large contribution.  It was such a large tax savings that I couldn't afford not to do it!!! But his really ate up a chunk of cash.

COlady

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Re: Split Between Tax Def & Taxable
« Reply #3 on: January 02, 2018, 01:22:24 PM »
Yeah our health insurance is about $7,200 per year for the family...stupid expensive employer plan.

Sibley

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Re: Split Between Tax Def & Taxable
« Reply #4 on: January 02, 2018, 01:41:55 PM »
With that large contribution you made, it sounds like that may have been the source of your cash crunch. You don't list expenses in detail. Anything you can trim to help with cash flow? Are there any pmts with very inconvenient timing that you could shift around?

Realistically, there are times where I have plenty of cash coming, but not enough now so I have to pull from savings then replenish when the cash comes in. Part of that for me is I was never able to adjust to getting paid every 2 weeks instead of 2x a month, so would occasionally do dumb budgeting. And part of it is that when you have multiple large periodic payments in a short time frame, there's a cash crunch even though it's fine over a longer period.

Standard, I don't feel right not mentioning - $50k in cars?

COlady

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Re: Split Between Tax Def & Taxable
« Reply #5 on: January 02, 2018, 01:44:27 PM »
I see what you're saying though....on a going forward basis we should be able to cash flow the max 401k contribution. I'm getting into my busy time at work where I'll make more so I should be able to easily cash flow it.

I think my husband would prefer to grow the taxable account rather than tax deferred so that we have a bigger buffer. He's worried about catastrophe. We have about $23k in Roths that we could pull out in an emergency if we exhausted all our other taxable funds. I think he's just worried about locking up the money in tax deferred. I've explained Roth ladder and 72t...there are ways to get it out! That's why I think we should do everything in our power to max 401ks! It's such a big tax savings that I don't see why it wouldn't make sense.

COlady

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Re: Split Between Tax Def & Taxable
« Reply #6 on: January 02, 2018, 01:45:35 PM »
Haha, I knew I'd get face punched for the cars but we plan to maintain them and keep them for the long term...

MDM

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Re: Split Between Tax Def & Taxable
« Reply #7 on: January 02, 2018, 02:09:34 PM »
Personally I would have no problem living off of taxable funds to continue maxing tax advantaged space (we're planning to do it this year).

Are you sure about that $80k expense figure?
+1 to all that.

2018 federal taxes will be ~$10K using the numbers in the OP, according to the case study spreadsheet.  Total spendable amount, after $7200 pre-tax medical insurance, maximum family HSA, two maximum 401ks, $5K daycare FSA, and all taxes would be ~$102K.

COlady

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Re: Split Between Tax Def & Taxable
« Reply #8 on: January 02, 2018, 02:34:37 PM »
But how do I calm my husband's nerves about having the majority of our investments in retirement accounts? What is your tax sheltered versus taxable split?

I could understand if we were saving to buy a new house or something...but if we do buy a new house (which we probably won't...hello Denver RE market)...we would just roll our equity into the new house..no cash outlay required.

He has mentioned saving more in taxable so that we could buy a ski resort rental to rent out on VRBO (and use personally) or a different rental in town to rent out on a long-term lease basis. But I don't think it really makes sense to forego pre-tax savings to save for these other things.....you can always get a loan on a rental...you can't get a loan on your retirement...and you can never get the tax savings back that you've given up.

I'm guessing you all agree?

MDM

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Re: Split Between Tax Def & Taxable
« Reply #9 on: January 02, 2018, 02:56:41 PM »
But how do I calm my husband's nerves about having the majority of our investments in retirement accounts?
Can't help with that one. ;)

Maybe peruse How to Convert your SO to MMM in 50 Awesome Steps?  No experience with this issue because we have generally agreed on things financial.

Quote
What is your tax sheltered versus taxable split?
75/25.

Quote
I'm guessing you all agree?
Perhaps not all, but likely a large majority here would suggest taking advantage of tax-advantaged accounts.

COlady

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Re: Split Between Tax Def & Taxable
« Reply #10 on: January 02, 2018, 03:01:42 PM »
But how do I calm my husband's nerves about having the majority of our investments in retirement accounts?
Can't help with that one. ;)

Maybe peruse How to Convert your SO to MMM in 50 Awesome Steps?  No experience with this issue because we have generally agreed on things financial.

Quote
What is your tax sheltered versus taxable split?
75/25.

Quote
I'm guessing you all agree?
Perhaps not all, but likely a large majority here would suggest taking advantage of tax-advantaged accounts.

Why are you so high on the taxable MDM? Is that because you make so much that you've maxed out your tax deferred and contribute a significant amount to taxable?

Including HSA we are at 15.6%...

bluebelle

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Re: Split Between Tax Def & Taxable
« Reply #11 on: January 02, 2018, 03:06:10 PM »
it sounds like your husband is considering the taxable (or more correctly, the non tax deferred) account as shorter term savings.  In which case that's a much different question.    He's not considering the tabable account to be long term, 'retirement' savings.  So I don't think you can compare the two.  If the plan is to use the money before retirement, I think he's right, it should go in the taxable account.


MDM

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Re: Split Between Tax Def & Taxable
« Reply #12 on: January 02, 2018, 03:10:19 PM »
Why are you so high on the taxable MDM? Is that because you make so much that you've maxed out your tax deferred and contribute a significant amount to taxable?
That's the short version.  But "make so much" also has to be taken in the context that the historical 401k contribution limits were much lower than current for many years.