Amateur Financial Questions

[Papa Mustache]

Hope someone will help me here. I have some very basic financial planning questions.

Direct me to the right track if I'm in the wrong place.

Question: We paid $10K in federal taxes this year. I really haven't given this the kind of attention we should have in the past. We are finally making a good income and we have either 10-15 years of working left. I want to optimize how we manage our savings better. I've had good intentions for a couple years but put it off.

We are not maximizing our 401K investments. Wouldn't that reduce our taxable income and thus our tax liability?

Any other strategies to reduce that tax and put more money in our investments?

I have more basic questions, but I'll stop here for now. We need to find a fiduciary but mostly have only found salespeople who want to sell us financial products. So, I'm turning to the internet. 

[Villanelle]

Hope someone will help me here. I have some very basic financial planning questions.

Direct me to the right track if I'm in the wrong place.

Question: We paid $10K in federal taxes this year. I really haven't given this the kind of attention we should have in the past. We are finally making a good income and we have either 10-15 years of working left. I want to optimize how we manage our savings better. I've had good intentions for a couple years but put it off.

We are not maximizing our 401K investments. Wouldn't that reduce our taxable income and thus our tax liability?

Any other strategies to reduce that tax and put more money in our investments?

I have more basic questions, but I'll stop here for now. We need to find a fiduciary but mostly have only found salespeople who want to sell us financial products. So, I'm turning to the internet.

It's tough to say without a lot more information. But does your company match your 401k, and do you at least contribute up to the max?  Do you have an IRA (Roth or Traditional)? 

What is your total income?  Married Filling Jointly?  (I assume you are married since you say 'we', but perhaps not.)

[HPstache]

Hope someone will help me here. I have some very basic financial planning questions.

Direct me to the right track if I'm in the wrong place.

Question: We paid $10K in federal taxes this year. I really haven't given this the kind of attention we should have in the past. We are finally making a good income and we have either 10-15 years of working left. I want to optimize how we manage our savings better. I've had good intentions for a couple years but put it off.

We are not maximizing our 401K investments. Wouldn't that reduce our taxable income and thus our tax liability?

Any other strategies to reduce that tax and put more money in our investments?

I have more basic questions, but I'll stop here for now. We need to find a fiduciary but mostly have only found salespeople who want to sell us financial products. So, I'm turning to the internet.

Traditional 401K contributions would reduce taxable income.  Does your company offer an HDHP with HSA plan?  If so, contributing to that is another great way to reduce taxable income, the funds can theoretically be invested too.  As a bonus, contributing to an HSA plan also reduces social security tax liability.  Hate to say it... but having a child or more is a really good way to reduce taxes as well.  It's a personal decision that isn't right for every family, but if it is in your life plan just know that each child reduces tax owed by $2,000 (it has been a helluva lot more than that though over the last couple of years or so).  Of course there is a big tradeoff because kids are expensive and can have a big opportunity cost, but if your goal is to pay less taxes... it's a way.  I'm just speaking in layman's terms here, I am sure there are caveats to all of this that other members will point out.

[ixtap]

If you paid $10k total in fed income taxes for 2021, you are just barely into the 24% tax bracket. It would likely be a good idea to contribute more to your 401k to being that down.

However, once you are down into the 22% bracket, it depends more on your whole picture, but someone who is not and has not been maxing their 401k probably isn't in much danger of a higher tax bracket in retirement, unless you have a good pension lined up.

[Papa Mustache]

401K: we have a match but it is pitifully small. DW and I both work here. We contribute $1K a month. We both have pensions. State government. Well funded pension so no state bankruptcy on the horizon. We file jointly. Combined income $130K. We also save some money $2K-$4K each month. Obviously we need to do better but it could be worse.

No debt besides mortgage.

[nereo]

Have a look at the Investment Order.

Come back with questions for anything that’s not clear. Remember, the investment order are just guidelines, but following them will put you on a good path.

[shureShote]

Assuming you have some low cost options in the 401k, I really think increasing the contributions there will be an easy thing that will have a big impact.

What are doing with the $2k-$4k of savings each month?

[Papa Mustache]

Thanks Nereo and shureShote.

We've been building an emergency fund that would see us through a year's expenses. But, I need to find somewhere to put it where I could access it on short notice. That's another question. IRA? Or??? See, that's the amateur part of my questions.

[cool7hand]

Feels like you would benefit from the granularity of a Case Study

[simonsez]

Thanks Nereo and shureShote.

We've been building an emergency fund that would see us through a year's expenses. But, I need to find somewhere to put it where I could access it on short notice. That's another question. IRA? Or??? See, that's the amateur part of my questions.

You mentioned you work for the state government.  Jobs like that are typically stable.  A year's worth of expenses on the EF seems like a lot with two stable incomes/careers but to each their own comfort level.  The key aspect to an EF is you can access it immediately during an emergency - so I wouldn't recommend an IRA for that.  Most EFs are kept in checking or savings accounts (which is why due to the crummy returns often found in those accounts that EF sizes aren't huge) or even strongboxes and/or supplemented by credit cards to buy you some time to weather the emergency (in which you would have a ~month+ to transfer/redeem/sell whatever you needed to pay off the cc bill in full to avoid interest).

Do you have access to a 457 in addition to your 401k?  Many state governments will offer one and that could be a place to reduce your taxable income by 41k (or 54k if 50+ with catch-up contributions) which in the 22% bracket is going to trim off quite a bit of your tax burden in the now (unless you do Roth variants in which case you're saving your retired self the tax burden).

Also check to see if your state has any other programs that you can invest in.  For example, I have some friends who are muni/state employees in Illinois who have access to the IMRF - which is basically they can buy guaranteed 7.25% returns with up to 10% of their income (not tax-deferred but still a great program).  This is on top of their tax-deductible retirement vehicles.
https://www.imrf.org/en/members/original-eco-plan/voluntary-additional-contributions

[MDM]

Thanks Nereo and shureShote.

We've been building an emergency fund that would see us through a year's expenses. But, I need to find somewhere to put it where I could access it on short notice. That's another question. IRA? Or??? See, that's the amateur part of my questions.

The "Getting started" link at the Bogleheads wiki is a good place to start, and doing so should be helpful.

You could jump directly to the Emergency fund article for more on that specific issue.

If you follow nereo's good suggestion to consider the "Investment Order" post, you'll get the most benefit if you also post back here with how you see (or don't see) each of the steps applying to you, and what actions you plan to take (even better: have taken) as a result. 

[Papa Mustache]

Thank you everyone. We do have access to a 457 but until now I wasn't sure of what its benefits were.

I am reading the Bogleheads Wiki. Just read the 401K article. And I'm working my way through the Investment Order articles.

Lots of reading this weekend when I have time.

 

[MrThatsDifferent]

If you’re educating yourself, start with MMM’s articles, learn how this all works. Then create a plan and test it with a case study.