Author Topic: Case Study Family of five, reduce tax advantaged contributions?  (Read 1013 times)

engineerjourney

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The situation:
DW/DH 36/37, kids 8, 6, 2
DH working full time, DW now working part time (24 hrs/wk), 2 kids in school, 1 in daycare. 
Recently reduced part time hours further and Im evaluating where to put our savings.  We currently have a lot in pre-tax, quite a bit in Roth, and absolutely nothing in taxable (besides slush cash and emergency fund).  Based on the tax brackets we are in now and where I expect to be in retirement the pre-tax is going to be a better deal (assumptions based on current tax code obviously).  And I was planning on doing the Roth pipeline to work with that.  But now I am wondering if I am doing us a disservice by not having money in easier to access areas that would allow us stress less if for example we decided to both go part time while we still have the huge daycare expense.  Im currently still shoveling money into tax advantaged accounts, but with the reduction in salary our margin between take home and expenses is now very tight.  Im not sure if we will get to the full Roth IRA contribution this year because all the savings will be taken out in the paycheck if that makes sense.  Im working on the budget (OMG food) now that I actually have time to think (yay part time) but this is a case study concentrated on where to put our savings. We spend as we go on the HSA so we can save into other tax advantaged accounts but thankfully our out of pocket max has been lower than the HSA limit and we have done well there too.   

Current Account Summary:  (Ignoring 529s and home equity for now)
Cash (checking & emergency) - $34k
DH 401k (all pre-tax) - $390k
DH HSA - $49k
DH Roth IRA - $150k
DW 401k (all pre-tax) - $442k
DW HSA - $16k
DW Roth IRA - $152k

Total Cash - $34k (3%)
Total pre-tax - $832k (67%)
Total HSA - $65k (5%)
Total Roth - $302k (25%)
Total - $1.23M

Our current savings strategy for 2024:
HSA contributions - $8.3k
401k pre-tax contributions - $23k x 2 (plus employer match always pre-tax)
Roth IRA contributions - $4k x 2 executed (hoping to max both at $7k x2 but unsure if we will make it)

We have med/dental/etc deductions, dependent care FSA taken out, plus taxes to get to our take home. 
Gross salary is $209k between the two of us.
Projecting W-2 wages to be about $149k for 2024. 
Projecting take home to be about $114k.

The immediate tax savings of using pre-tax has always appealed to me, it lets me max the account and not feel it as much in the take home pay.  We are firmly in the 22% bracket and I expect to be in a lower bracket in retirement (12% or 15% whatever that level ends up being).  We utilized the mega backdoor Roth option when we had two full time salaries.  Technically we don't need to save a penny more and could just coast for 5-7 more years and get where we want to be.  I have a hard time not locking in the tax savings though and Im wondering if Im going to be handcuffing us into less flexibility.  I am unsure if we could max out both 401k accounts this year if we switched them to Roth Im debating a mix of pre-tax and Roth 401k contributions but once again, the extra taxes to pay now are clouding my judgment.  Cash is vaguely appealing but only because interest rates are ok for right now, I do think I want more in cash before we pull the plug and struggle with when to switch to cash stockpiling.  At one point we had a taxable account of about $20k and we lived off it to get the same amount into the mega backdoor Roth one year.  I cant imagine contributing to a taxable account before maxing out all tax advantaged space but maybe I am missing something because I also struggle with the idea of withdrawing from our Roths if needed for something that goes beyond our cash fund if that makes any sense. 

Id appreciate any of your opinions on continuing with pre-tax, mixing in some Roth 401k, switching fully to Roth 401k, prioritizing the Roth IRA at some point over maxing 401k, getting taxable, more cash, etc.  This is the first year where I feel we cant have it all savings wise and max the HSA, 401k x2, and IRA x2 plus have some extra for cash or mega backdoor Roth.  The margin is way tighter for expenses vs take home after savings/taxes/etc which is fine and what we signed up for, weve moved a little to coasting, time is more important than the money, but I need to get my savings brain on that page. 

ixtap

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Re: Case Study Family of five, reduce tax advantaged contributions?
« Reply #1 on: January 25, 2024, 02:07:41 PM »
As long as you have an emergency fund and a slush fund, I wouldn't cut back on tax sheltered space. Once/if you start eating into those, you can cut back contributions at that time.

MDM

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Re: Case Study Family of five, reduce tax advantaged contributions?
« Reply #2 on: January 29, 2024, 11:20:43 AM »
How do the suggestions in the Investment Order post look to you?

seattlecyclone

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Re: Case Study Family of five, reduce tax advantaged contributions?
« Reply #3 on: January 29, 2024, 02:35:34 PM »
So, the fact that you've previously saved through the mega backdoor Roth means you likely have a very good start on your Roth ladder with basis that could be withdrawn at any time. Though given that you have $302k in Roths and don't expect to be able to save much (if any) of your $114k of take-home pay, that suggests you don't quite have a full five years saved up yet.

I think that it makes a lot of sense to keep saving in some sort of retirement account, but you might want to focus on Roth saving in order to increase the amount of easily accessible cash you'll have once you retire. The 22% you're paying now compares pretty favorably to some of the marginal rates that folks pay during the ACA phase of early retirement.

I also think that you could benefit very much from trimming a bit from the budget. It would make your existing Roth basis represent a higher length of runway for your expected expenses, and it would also give you the opportunity to get closer to maxing out your tax-advantaged savings opportunities.

engineerjourney

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Re: Case Study Family of five, reduce tax advantaged contributions?
« Reply #4 on: January 30, 2024, 07:17:29 AM »
As long as you have an emergency fund and a slush fund, I wouldn't cut back on tax sheltered space. Once/if you start eating into those, you can cut back contributions at that time.

This was pretty close to my initial thoughts

engineerjourney

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Re: Case Study Family of five, reduce tax advantaged contributions?
« Reply #5 on: January 30, 2024, 07:18:49 AM »
How do the suggestions in the Investment Order post look to you?

Well I was going to say that I already follow it but I guess its been a while since I actually read the specific order because we were just throwing money at all the savings at once previously.  So maybe moving the IRA in front of the 401k max will help.  Thanks for this!

engineerjourney

  • Bristles
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Re: Case Study Family of five, reduce tax advantaged contributions?
« Reply #6 on: January 30, 2024, 07:27:24 AM »
So, the fact that you've previously saved through the mega backdoor Roth means you likely have a very good start on your Roth ladder with basis that could be withdrawn at any time. Though given that you have $302k in Roths and don't expect to be able to save much (if any) of your $114k of take-home pay, that suggests you don't quite have a full five years saved up yet.

I think that it makes a lot of sense to keep saving in some sort of retirement account, but you might want to focus on Roth saving in order to increase the amount of easily accessible cash you'll have once you retire. The 22% you're paying now compares pretty favorably to some of the marginal rates that folks pay during the ACA phase of early retirement.

I also think that you could benefit very much from trimming a bit from the budget. It would make your existing Roth basis represent a higher length of runway for your expected expenses, and it would also give you the opportunity to get closer to maxing out your tax-advantaged savings opportunities.

Yes not at five years worth of money in Roth contributions/conversions yet and that is the goal.  Your thoughts echo a lot of mine.  I would love to trim the budget and I'm working on it now that I have some time and I'm out of survival mode (for time).  Daycare of 18k/year goes away in 3 years which will help drastically and isn't part of our projected expenses in retirement.  Mortgage (PITI) is $35k/year but unfortunately about $15k of that is taxes/insurance which doesn't go away.  I do have a car loan for another year at $6k/year but I'm keeping that as long as possible since its 0% interest! So even if I can't get our food budget/shopping down (which I am working on) our budget for retirement compared to today would drop from $114k to about $70k if the house is paid off.  Though the mortgage is 2.8% so I'm not pre-paying that so need a stash to cover that for a bit.  Anyway, sorry for the ramble.  I think your and MDM's comment make it clear I should make sure to max the Roth IRAs before maxing the 401ks and I should run some numbers for some of that 401K being Roth too.  Thanks!!