Author Topic: use cash-on-hand in 2018 to max out tax-advantaged accounts?  (Read 816 times)

nereo

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use cash-on-hand in 2018 to max out tax-advantaged accounts?
« on: January 23, 2018, 09:38:22 AM »
Brief Background: Living abroad we've been unable to contribute to tax-advantaged accounts until now.  Starting new job now which will open up 403(b), IRA and HSA opportunities (plus 529).  We have considerable savings but far less in tax-advantaged accounts than we would like.

Question: Is there any reason(s) not to devote 75-80% of our salary towards tax-advantaged accounts, using cash-on-hand to supplement our monthly living expenses?

Relevant info

Status: MFJ + child credit (mid 30s)
Gross Income 2018: ~$50,000
Annual expenses: $26k-28k

Available tax-advantaged accounts (per year)
403(b): $18,000 with 6% match
IRAs: $11,000 (myself + spouse)
HSA: $6,900
529: min $600 to receive $300 state match; up to $14,000 allowed

Assets
Cash: $60k-80k pending sale of current home (conservative estimate)
Investment (taxable): $140k
tIRA: $60k
Roth IRA: $72k

Proposed strategy
Use cash on hand from sale of home to fund monthly living expenses for 2018 & 2019.  Plow majority of paycheck (est 80%) into HSA, 403(b), IRA & 529, in that order.  Within 2 years this will boost our tax-advantaged accounts by ~$70k while reducing the cash-on-hand to 1-3 month's expenses, which is about where we like it.

Concerns:
given our moderate income ($50k) we will rapidly reduce our AIG to a point where we lose most of the immediate tax benefits from contributing (i.e. with HSA and IRA contributions).  Some of this can be modified by contributing to a Roth IRA (up to $11k/year). Any other tax implications I am missing? 
Our income will most likely increase substantially in 2019 or 2020.

Not a concern:

accessing the money in tax-advantaged accounts.  We know and understand the restrictions and strategies for accessing before age 59.5

MDM

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Re: use cash-on-hand in 2018 to max out tax-advantaged accounts?
« Reply #1 on: January 23, 2018, 10:07:03 AM »
Question: Is there any reason(s) not to devote 75-80% of our salary towards tax-advantaged accounts, using cash-on-hand to supplement our monthly living expenses?
No.

Calculate the marginal tax saving rate you would get if using traditional accounts to help guess at which point traditional "isn't worth it" and Roth becomes more beneficial.

nereo

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Re: use cash-on-hand in 2018 to max out tax-advantaged accounts?
« Reply #2 on: January 23, 2018, 12:10:41 PM »
Thanks MDM

This started when we realized that we would soon have a large chunk of cash, and thought we'd just lump-sum invest it.  But then we realized if we used the cash to augment living expenses we stood a chance at maxing out all tax-advantaged accounts.  Seemed like a much better plan, but wanted feedback.


MDM

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Re: use cash-on-hand in 2018 to max out tax-advantaged accounts?
« Reply #3 on: January 23, 2018, 12:16:30 PM »
Thanks MDM

This started when we realized that we would soon have a large chunk of cash, and thought we'd just lump-sum invest it.  But then we realized if we used the cash to augment living expenses we stood a chance at maxing out all tax-advantaged accounts.  Seemed like a much better plan, but wanted feedback.
With the obligatory caveats about past performance, etc., this is essentially what we did a while ago and are very happy with the outcome to date.

Scortius

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Re: use cash-on-hand in 2018 to max out tax-advantaged accounts?
« Reply #4 on: January 23, 2018, 12:18:23 PM »
We saved up a down payment last year and ended up putting less money down than we expected. This year we are doing exactly what you describe: living off the excess cash reserves while plowing money into our tax-advantaged buckets. It's exactly what you should be doing to get yourself back to your targeted allocations.