Increase 403B, Contribute to Roth IRA, or open brokerage account

[Dellainacan]

I've been reading for a while. I am not a badass in anyway. I drive. But we are very smart with our money and don't waste very many opportunities. I'm a public school counselor in NYS and my wife is an accountant. In February we will no longer possess student loan debt!!!!! We don't necessarily need the money to survive and all it will do is sit in a bank account as a monthly excess. 

After student loans our only debt is a mortgage. At $139,000 @3.5% and annual taxes of $4500.

Financially this is what we have accumulated:

20k 403b - I contribute annually 3k

7k 401k -  wife contributes 1500 annually. She will end up leaving this job in the next two years as we are starting a family. I refuse to allow her to work and let us get ripped apart by NYS taxes. She would essentially work for day care. Plus we looked at the numbers and projections. We can survive on one income and still save.

13k fidelity account - older college account with awful annual value. ten year 2% annual return. I plan on moving this to something else.

15k emergency fund.

I also have NYS pension that is not much now but will be valued at approximately 10k per year once vested (3 more years) and 66k per year upon retiring at 55. I'm happy with what I do now and could theoretically see myself doing this for a long time. We are only 29 so a lot in education has changed and will continue to change.

As I stated before we will have a considerable excess after my loans are paid off in February. It will be in the range of 1200-1500 monthly. My wife sees us investing 600 to 800 per month. I have a more aggressive plan of throwing all excess but she is not comfortable with that. Once the loans are gone she will notice that my plan is better.  In what ways I don't know

In your opinion do I:

1) Increase my 403b. This will drop my taxable income which is a positive. However I cannot touch this money without penalty before 55.

2) I want to move my 13k fidelity account to another brokerage account. Probably a vanguard account. Do I take this excess and apply it to a brokerage account. No clear tax advantages. As it would probably increase my taxable income. But the money is available. With my wife not working that is a positive thing to have.  If need be. I hope we don't have to touch this money but you never know.

3) Open a Roth IRA. Max this out and take the excess to my 403b. A little more flexibility in terms of withdrawing contributions. Or even put half of the emergency fund to a Roth IRA? I've read about people doing this.

4) Pay down the mortgage. An extra 800 a month could drop my mortgage 5+ years over the life of the loan.

5) a combination of various different component. There's too many options and I feel like 800(what we are able to do now) is not enough to mix many options with clear advantage.


Thanks for your feedback.

Mike

[teen persuasion]

You do have lots of options.

You mentioned putting it in your 403b to reduce your taxes, but had reservations about it being locked up until age 55.  If you instead put it in your wife's 401k, it would still reduce your taxes.  If she leaves employment as you foresee, she can roll the 401k into a tIRA, which you could convert to a RothIRA at some point if you wish.

Putting the money in your wife's accounts would also build up her retirement balances before she takes time off to be a SAHM.  I was a SAHM for nearly 20 years, and while we view our retirement assets as all "ours", I still wish I had more in my name.  I'm working now, but I don't have access to a 401k, so we max Roths for both of us, and I've convinced DH to max his 401k.

Just a few years ago, DH was just putting enough in his 401k to get the match, then they did away w/ the match and he was tempted to stop altogether, but I instead got him to tweak his withholdings to increase his 401k from 5% to 10% w/ little change in takehome pay.  Little by little I had him increase it to 20%(paid off student loans), then 40% (when we paid off the mortgage), then 50% when I began working part-time, and it's now 52% to max it. 

We've got kids, and our income is relatively low, so we're eligible for EITC, which phases out at a rate of 21%.  NYS matches EITC at 30% of federal.  So every dollar we put in the 401k increases our return by 21% + 6.3% + 4% NYS tax + 10% fed tax = 41.3%!  I turn around and use that refund to fund our Roths.

[wakkowarner]

For further tax credit benefits look at: http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Retirement-Savings-Contributions-Credit-%28Saver%E2%80%99s-Credit%29

If you are at one of the borders, contribute enough to maximize your tax credit (up to $4000 if married filing jointly).  Since this is AGI contributing has the double benefit of lowering which bracket you are in (increasing your %), while also counting towards your total contribution. 

Note also that Roth contributions can be withdrawn without penalty.  Any GAINS in the account will be penalized, but if you contribute $11,000 this year ($5,500 per person, married filing jointly) then you can withdraw $11,000 from those accounts any time in the future (it will need to be 2 separate accounts).  If the accounts go up in value to $13,000, you need to leave the $2,000 gained in the account to avoid penalty.  A Roth account can be just about anything.  If you want, it can be a CD, if you are wanting that to be your emergency fund.  Because you can always withdrawn the initial investment out later, better to designate the money as Roth money than to just have it sit there labeled as "emergency fund" and let those designate Roth dollars expire next April. 

Oh, and if you get the option for an HSA account, those can be a great savings vehicle also.

[Dellainacan]

You do have lots of options.

You mentioned putting it in your 403b to reduce your taxes, but had reservations about it being locked up until age 55.  If you instead put it in your wife's 401k, it would still reduce your taxes.  If she leaves employment as you foresee, she can roll the 401k into a tIRA, which you could convert to a RothIRA at some point if you wish.

Putting the money in your wife's accounts would also build up her retirement balances before she takes time off to be a SAHM.  I was a SAHM for nearly 20 years, and while we view our retirement assets as all "ours", I still wish I had more in my name.  I'm working now, but I don't have access to a 401k, so we max Roths for both of us, and I've convinced DH to max his 401k.

Just a few years ago, DH was just putting enough in his 401k to get the match, then they did away w/ the match and he was tempted to stop altogether, but I instead got him to tweak his withholdings to increase his 401k from 5% to 10% w/ little change in takehome pay.  Little by little I had him increase it to 20%(paid off student loans), then 40% (when we paid off the mortgage), then 50% when I began working part-time, and it's now 52% to max it. 

We've got kids, and our income is relatively low, so we're eligible for EITC, which phases out at a rate of 21%.  NYS matches EITC at 30% of federal.  So every dollar we put in the 401k increases our return by 21% + 6.3% + 4% NYS tax + 10% fed tax = 41.3%!  I turn around and use that refund to fund our Roths.

Thank you for your feedback. So I found out she has a matching 401k from her employer. Could you essentially bleed the company of their matching contribution then transfer this full 401k amount to traditional ira without penalty?  That might be the smartest thing to do for the next few years. As it helps in a few ways. If I am reading that correctly.

[matchewed]

You do have lots of options.

You mentioned putting it in your 403b to reduce your taxes, but had reservations about it being locked up until age 55.  If you instead put it in your wife's 401k, it would still reduce your taxes.  If she leaves employment as you foresee, she can roll the 401k into a tIRA, which you could convert to a RothIRA at some point if you wish.

Putting the money in your wife's accounts would also build up her retirement balances before she takes time off to be a SAHM.  I was a SAHM for nearly 20 years, and while we view our retirement assets as all "ours", I still wish I had more in my name.  I'm working now, but I don't have access to a 401k, so we max Roths for both of us, and I've convinced DH to max his 401k.

Just a few years ago, DH was just putting enough in his 401k to get the match, then they did away w/ the match and he was tempted to stop altogether, but I instead got him to tweak his withholdings to increase his 401k from 5% to 10% w/ little change in takehome pay.  Little by little I had him increase it to 20%(paid off student loans), then 40% (when we paid off the mortgage), then 50% when I began working part-time, and it's now 52% to max it. 

We've got kids, and our income is relatively low, so we're eligible for EITC, which phases out at a rate of 21%.  NYS matches EITC at 30% of federal.  So every dollar we put in the 401k increases our return by 21% + 6.3% + 4% NYS tax + 10% fed tax = 41.3%!  I turn around and use that refund to fund our Roths.

Thank you for your feedback. So I found out she has a matching 401k from her employer. Could you essentially bleed the company of their matching contribution then transfer this full 401k amount to traditional ira without penalty?  That might be the smartest thing to do for the next few years. As it helps in a few ways. If I am reading that correctly.

It is actually advisable that when your wife leaves her employer to roll the 401k over to a traditional IRA. There are no penalties and for the record the matching contribution once made is hers, there is no bleeding off of it, she possesses that match. Please note that I mentioned that this can only happen upon termination of employment, you can't do rollovers like that while the 401k plan is active to my knowledge.

[teen persuasion]

If your wife has a match, definitely contribute enough to her 401k to capture the entire match.  If you have any match, contribute enough to capture that, too.

If you can get by on only one paycheck, why not throw essentially all of your wife's pay at savings of some type: her pre-tax, your pre-tax, Roths for both of you, maybe taxable if there is excess.  It is a good trial for going down to one paycheck, and loading up on savings is never a bad thing. 

I'd try to max out both your Roths for 2013 now, before the window closes 4/15/2014.  Or traditional IRAs if the tax avoidance is worth it.  Play with the numbers to see how much your taxes will decrease based on different scenarios: enough to capture the match in 401ks etc, up to the max in 401ks etc., Roth vs. traditional.  The more tax avoided, the more you have to invest.  If you can meet the retirement savers' AGI levels, you score more tax credits.

[eman resu]

Hi Mike,

Fellow NYer here.  Congrats on the SL debt almost expiring! That's awesome.

My wife works for SUNY and I'm not in the system... so I understand the heap of options (the heap, not the options themselves), and also struggle to figure out where/how to place our retirement savings.

Is your wife fully vested in her 401k?  Any money she put in is hers, but if she is leaving then portions of the employer match might not be depending on the plan terms. I would think the math would still say to contribute to the match, but worth checking if you haven't already.

I found that funding Roth IRAs before putting overflow to my 401k and wife's 403b/457 made the most sense (to me) because there were more options and there were no "plan costs" to consider. I use Vanguard. Full disclosure: I don't yet fully understand the tax ramifications of having an employer plan and contributing to a traditional IRA. There's income limits on deducting the IRA contributions, yada, yada... so I just went with Roth IRAs this year. This might or might not have been the best call. If you ask me next year Ill pretend to know the answer. :)

If you like the idea of mortgage reduction, you could toss your 2%-on-average fidelity money at your 3.5% mortgage.  With 15k emergency fund, are you really concerned about keeping that 13k liquid as well?  Again, math probably says to just find a better account and invest it, but I know I liked paying down my mortgage (was 5.5% rate, though) early rather than investing every extra cent.  Sometimes peace of mind doesn't follow the math...

Alternatively, if you moved the fidelity money into a Roth IRA over 2013/14/15 (assuming account just for you) the contributions would still be accessible for true emergencies -- fidelity acct is not IRA, right? -- but you'd get the tax advantage on earnings. You could then ear mark your 1200-1500 monthly excess to whichever employer plan is most attractive to minimize income, and to a Roth IRA for the Mrs. if she wants to fund that type of account as well. 

Take it easy,
e-   




 

[Dellainacan]

Hi Mike,

Fellow NYer here.  Congrats on the SL debt almost expiring! That's awesome.

My wife works for SUNY and I'm not in the system... so I understand the heap of options (the heap, not the options themselves), and also struggle to figure out where/how to place our retirement savings.

Is your wife fully vested in her 401k?  Any money she put in is hers, but if she is leaving then portions of the employer match might not be depending on the plan terms. I would think the math would still say to contribute to the match, but worth checking if you haven't already.

I found that funding Roth IRAs before putting overflow to my 401k and wife's 403b/457 made the most sense (to me) because there were more options and there were no "plan costs" to consider. I use Vanguard. Full disclosure: I don't yet fully understand the tax ramifications of having an employer plan and contributing to a traditional IRA. There's income limits on deducting the IRA contributions, yada, yada... so I just went with Roth IRAs this year. This might or might not have been the best call. If you ask me next year Ill pretend to know the answer. :)

If you like the idea of mortgage reduction, you could toss your 2%-on-average fidelity money at your 3.5% mortgage.  With 15k emergency fund, are you really concerned about keeping that 13k liquid as well?  Again, math probably says to just find a better account and invest it, but I know I liked paying down my mortgage (was 5.5% rate, though) early rather than investing every extra cent.  Sometimes peace of mind doesn't follow the math...

Alternatively, if you moved the fidelity money into a Roth IRA over 2013/14/15 (assuming account just for you) the contributions would still be accessible for true emergencies -- fidelity acct is not IRA, right? -- but you'd get the tax advantage on earnings. You could then ear mark your 1200-1500 monthly excess to whichever employer plan is most attractive to minimize income, and to a Roth IRA for the Mrs. if she wants to fund that type of account as well. 

Take it easy,
e-

Yes she is vested and I had a chance to look into her plan. 100% of the balance she takes. I struggle with the mortgage. I have not run the math but our mortgage (and real estate taxes) is one of the only things allowing us to claim an itemized deduction for taxes. If it weren't for the interest I would claim a standard deduction. Not having kids right now we do a decent job of accruing write offs to bring down our taxable income. Part of me would prefer to keep this interest as it allows me to claim charitable contributions, work expenses, etc. I am sometimes shocked at what we claim as we do our own taxes.

I guess it could be worse. I could have no options. I am still wrapping my head around what to do.  I think we are going to max her 401k matching contribution for the immediate future and roll this into a traditional IRA once she leaves.  The majority of the remaining money will be filtered into a Roth IRA through I believe Vanguard. Once she leaves employment I will look at closing the Fidelity account and moving it to another brokerage. You are correct it is not a Roth IRA. I would hate for the gains on that account for be taxed at our current rate. And maybe more. It may put us in a different bracket if I take that money out. I wouldn't know the tax impact until I withdraw. This is an account her grandmother started back twenty years ago when she was born.

[eman resu]

Cool, sounds like you have a plan brewing.  Sorry, I missed something on the fidelity acct. I see you noted it as a college account.  Is that 529 Plan? I'm no expert but it seems strange that your only option is to leave it with fidelity or "take it out" and pay tax on earnings all at once.  No rollover option to a better fund while you decide if/when to take tax hit(s) on distributions?  Or to transfer beneficiary status to your kid when he or she comes along for his or her college expenses?

[aj_yooper]

You do have lots of options.

You mentioned putting it in your 403b to reduce your taxes, but had reservations about it being locked up until age 55.  If you instead put it in your wife's 401k, it would still reduce your taxes.  If she leaves employment as you foresee, she can roll the 401k into a tIRA, which you could convert to a RothIRA at some point if you wish.

Putting the money in your wife's accounts would also build up her retirement balances before she takes time off to be a SAHM.  I was a SAHM for nearly 20 years, and while we view our retirement assets as all "ours", I still wish I had more in my name.  I'm working now, but I don't have access to a 401k, so we max Roths for both of us, and I've convinced DH to max his 401k.

Just a few years ago, DH was just putting enough in his 401k to get the match, then they did away w/ the match and he was tempted to stop altogether, but I instead got him to tweak his withholdings to increase his 401k from 5% to 10% w/ little change in takehome pay.  Little by little I had him increase it to 20%(paid off student loans), then 40% (when we paid off the mortgage), then 50% when I began working part-time, and it's now 52% to max it. 

We've got kids, and our income is relatively low, so we're eligible for EITC, which phases out at a rate of 21%.  NYS matches EITC at 30% of federal.  So every dollar we put in the 401k increases our return by 21% + 6.3% + 4% NYS tax + 10% fed tax = 41.3%!  I turn around and use that refund to fund our Roths.

Good thoughts here!  Also, try and balance the amounts for you and DW so that when mandatory withdrawal time occurs, you have more options than if too much was in one account.  Also, I would probably not do a Roth if your current tax bracket is higher than a guesstimated retirement bracket.  You can move money to a Roth when you retire and pay less tax.