Author Topic: Where to put money--403(b), IRAs, HSA, etc  (Read 7660 times)

Hamster

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Where to put money--403(b), IRAs, HSA, etc
« on: March 30, 2013, 02:36:10 PM »
Hi all, I'm looking for advice on optimizing retirement accts, 457, HSA, etc. The questions are at the bottom. The rest is background.

I'm in my late 30s, married, have 2 elementary school-aged kids. I started earning fairly late, because of many years completing professional degrees. I would love to cut down to working 1/2 time in a couple of years, but the stache growth may slow to a crawl at that point. I don't anticipate completely leaving paid employment at any time. I like my job, but would like to do it 10-20 hours a week instead of 60... Mostly I want FI, a hedge against the world of healthcare becoming untenable, and the option of taking a year off here and there to work overseas without financial worries.

Here is where we are at:

Assets:
Retirement plans:  $265k ($80k of that is in Roths) about 85% stock, 15% bonds. This is wife and I combined.
Cash:                   $96k (we had this on hand because we were going to buy another rental property, but now are probably going to put it away instead).
Home:                  $125k equity -  worth $410k (owe $285k)
Duplex #1:            $130k equity - Worth $400k (owe $270k)
Duplex #2:            $80k equity -  1/2 ownership with partner (worth $330k, owe $170k)
HSA:                    $2k!!
Other assets  -  pleasant demeanor and self-deprecating sense of humor.
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Total:                   ~$700k

Liabilities:
Student loans:      $41k total (<3% interest)
Home mortgage:   $285k (2.75% 15 yr left)
Rental #1:            $270k (3.125% 15 yr left)
Rental #2:            $85k (3.125%) - actually owe $170k, but half-owned with partner.
other liabilities--foot odor and occasional gassiness.
===============
Total                    $41k (the amount of the mortgages was already subtracted out in the assets section)

Net Worth about $660k including primary residence

Income
My income is $180-200k annually, working for not-for-profit corporation. After retirement contributions, etc, Box 1 of my W-2 is $175k.
Wife is self-employed in real estate. Last year she earned ~$16k after expenses.
Rentals: about 14k/year cashflow after expenses, which is $0 to the IRS for now because of depreciation.

Retirement savings
403(b) - I max out my $17k. Employer matches about $8k
401(a) - another ~ $8k contributed by my employer
457(b) - I contributed $10k last year to get below the Roth maximum income. I'm leery of this plan (see questions).
Roth - I try to contribute max to a Roth. The last few years have been hit or miss in terms of staying below the income cut off.
Wife's retirement plans - opened an individual 401k last year. Haven't contributed yet for 2012 (see questions below).

Spending
$60k per year expenses/spending. This doesn't include income taxes, principal payments on our mortgage (~$18k), or rental property expenses. It also doesn't include savings/retirement plan.
This is certainly higher than it should be (face punches accepted), but that is a topic for another post and an ongoing discussion/negotiation with my wife. It is lower than it was a couple of years ago...

Finally, my questions:
1) HSA -  We just started a high deductible plan with HSA this year. I have $2k in the HSA now. I figure I should probably go ahead and max out the $6450/year contribution. If I'm fortunate enough to not need it for healthcare expenses, I can add it to the retirement 'stache. By default, it is in a savings acct earning 0.1% (!?!?!?!?). If I put it into an investment acct (TD Ameritrade or Devenir Funds), the HSA Bank charges an additional $3 per month fee which is waived if I keep a daily balance of $5k in the HSA savings acct (NOT including the money in the investment accts). TD Ameritrade apparently doesn't show me their offerings, or expenses until I register for an acct (???WTF??). Devenir charges an additional $24 per year, and their cheapest funds have an ER of 0.7%. Even their S+P 500 index has an ER of 0.9% (!?!?!). I suppose that I need to just suck up the fees. $50 in fees on an investment of $5k is only 1%, and putting the money in even a crappy high expense fund should still get me a t least 1% better in the long-term than the 0.1% they are offering... Am I thinking about this right?
2) 457(b) - I could put up to $17k per year into the 457 plan. I can basically put the money in pre-tax. Whenever I terminate employment, I can elect when to begin taking distributions (or a lump sum), and pay taxes at my future marginal tax rate. I don't have to be retired to collect. I just have to leave my current employer. The rub is that the employer owns the money until I get the distributions, so if they go bankrupt, I'm just a creditor standing in line. That scares me. Even though they are quite solvent now, this is healthcare, and who knows what the future will hold. Do you think it is reasonable to contribute? I could always fill it up and then jump ship if it looks like they are going to tank... I'd be without a job, but that's what ER is all about, right :-)
3) Wife's individual 401k - Held at vanguard. We haven't contributed yet for 2012 (still have 2 weeks), but my inclination is to contribute the full amount of her net earnings of ~16k before April 15. If I put all of it into a (non-Roth) indiv 401k, then I could keep our earnings low enough that we could both contribute fully to our non-employer Roth accts for 2012, too. Any thoughts on this strategy?
4) After we max out the above, we'll still have over $60k in cash. I haven't put anything in "non-retirement" investment accounts, as we've been using most of our non-retirement funds for investment properties. Of course, there's the option of paying down our mortgage sooner. With our current interest rates, it's hard to justify, but would feel really nice. Do people think I'm putting too much into retirement accounts and should save more outside of these accts for ER? We've kind of looked at the rental properties as retirement income, but they aren't very liquid, and it might be nice to diversify our pre 59 1/2 yrs old investments. 

I'd love any and all thoughts on the above. Sorry this is so long. 
« Last Edit: March 30, 2013, 05:19:58 PM by Hamster »

Another Reader

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Re: Where to put money--403(b), IRAs, HSA, etc
« Reply #1 on: March 30, 2013, 02:59:45 PM »
If that 457 is a true deferred compensation plan from which you can take withdrawals after terminating employment without penalty before age 59.5, that's a great ER tool.  As long as the choices are not horrendous, in your shoes I would max that out.  Also the 403 (b).  You could likely use the tax benefits.  You have a lot tied up in rentals that "may" appreciate but don't produce much cash flow.  What's your reasoning behind these acquisitions?  Could you exchange into something better?

What's the plan for your wife's business?  Is she putting away money from her earnings as well?

I'm a huge fan of paying off student loans because of the risk factor associated with them.  Yeah, the interest rate is reasonable but if things were to go south, even temporarily, they could end up being a big drag on your progress.  Seen that happen to more than a few professionals and the consequences can be disastrous.

Hamster

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Re: Where to put money--403(b), IRAs, HSA, etc
« Reply #2 on: March 30, 2013, 05:36:45 PM »
Sorry, the post got sent before it was complete, so I finished it off and re-posted.

The 457 is a true deferred comp plan. It seems very appealing as an ER income source, but I worry about solvency of my employer over a couple of decades given the instability in health care. Unlike my 403b, etc if my employer goes under, I could lose everything I put in the 457.

Duplex 1 is earning about 8400 per year on a total investment of ~$100k. It's a bit of a dog since it decreased in value after we bought it, but still about 8% return not including equity which is now coming quicker with our 15 yr refinance. We lived in one of the units when we first bought it. We moved out when prices where at the bottom and we got a deal on our primary residence. Prices are coming back up so we may choose to sell, but 8% not including the equity we're building still isn't bad for very little work involved. 

Our share of duplex 2 is earning $6000 per year after all expenses on an initial investment of under $60k including extensive remodeling. So, cashflow is over 10% returns. We bought it for $230k and it would sell for about $330k 2 years later. Prices where we bought it are still going up. We'll probably sell in another year or two.

They certainly aren't Vegas style returns (we toyed with the idea of buying in Vegas, but are hesitant to farm out management and buy in an area we don't know and with high vacancy), but we've only had a grand total of 2 months' vacancy out of all 4 units over the time we've owned all of them. They're low maintenance. I think they are reasonable investments.

Another Reader

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Re: Where to put money--403(b), IRAs, HSA, etc
« Reply #3 on: March 30, 2013, 06:05:59 PM »
If things start to look dicey with your employer, you would probably have enough of a heads up to find a new job AND roll the 457 into an IRA or into a 457 plan at your new employer.  If things remain stable, this is your best ER option besides taxable accounts.  Cutting down from 60 hours to 10 or 15, you will likely be pulling money out at a lower tax rate.  In your shoes, I would take on the risks.

I would also contribute the wife's earnings to her 401k for the tax and compound growth reasons.  Since you are starting a little late, more saved now will have more time to grow.  If that gets your income down to the point you can contribute to Roths, so much the better.  Beyond that, I would invest in taxable accounts with a focus on tax efficiency and dividends.

I would need full information about the duplexes to have a supportable opinion on them.  Have you been able to take advantage of any refinance opportunities for the one that is owned by the partnership, or is selling in the near future the intended exit strategy?  If you are looking at rentals as a major source of ER income, paying them off might make sense.  Keeping the tax man at bay is certainly one reason to own rentals if you have a high W-2 income.




Honest Abe

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Re: Where to put money--403(b), IRAs, HSA, etc
« Reply #4 on: March 30, 2013, 08:30:08 PM »
I know that 457s are held in a trust by the employer, but does that mean that it could be tapped by creditors should the organization become insolvent?

Hamster

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Re: Where to put money--403(b), IRAs, HSA, etc
« Reply #5 on: March 30, 2013, 10:32:28 PM »
I know that 457s are held in a trust by the employer, but does that mean that it could be tapped by creditors should the organization become insolvent?

Unfortunately, it does.

From the plan materials:
Quote
For a non-qualified deferred compensation plan such as the 457(b) Savings Plan, the IRS requires that your contributions be considered assets of xxxxx until they are paid to you. That makes them subject to the claims of creditors of xxxxxx. You are relying solely on the unsecured promise of xxxxxxx to pay the benefits when they become due.

If xxxxxx should become insolvent (unable to pay its obligations), you would have the rights of an unsecured creditor. You might or might not receive your benefits under the plan under those circumstances.

Honest Abe

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Re: Where to put money--403(b), IRAs, HSA, etc
« Reply #6 on: March 31, 2013, 05:13:39 AM »
Wow that sucks! I guess the only comfort here is that a public institution such as a school district is "protected" by the fact that it operates on an annual budget and cannot run deficits by law. (Though it can hold debt in the form of bond issuances)

mushroom

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Re: Where to put money--403(b), IRAs, HSA, etc
« Reply #7 on: March 31, 2013, 09:00:23 AM »
Hi Hamster :)

Some random thoughts:

Yes, max out the HSA! The fees are annoying, but pales in comparison to the ~30% you save by removing income from that marginal tax bracket. You should also keep the money in there and save your healthcare receipts - there's no time limit on reimbursement so you could let the money grow tax-deferred and then withdraw whenever you wish years down the road tax-free. And it doesn't even matter whether you're in an HDHP when you withdraw funds. On my first day out to lunch with my boss, I already casually asked him if he had ever thought about offering an HSA...so I'm jealous and you should definitely take advantage of it. Plus I think HDHPs are really nice for healthcare workers (as long as you and your family are healthy) because you have a good idea of when you should really go to the doctor, preventative care is free, and catastrophic coverage is covered and you know how to navigate the system.

You mention skirting around the Roth limits - do you have other traditional deductible IRAs because if not you can always do a backdoor Roth regardless of income (i.e. contribute $5000 to a nondeductible traditional IRA and convert it immediately to a Roth without any extra taxes). Google "backdoor Roth" if you haven't heard of this before. If you can, maxing out your Roths at your income makes a lot of sense.

I can understand being leery of the 457 option, but I think if you think about the numbers in a conservative way (probability of your employer going under, the great tax benefits of that plan, being able to foresee your employer starting to go downhill), I think it still makes sense. It's not like you're putting *all* of your money there, and especially if you're planning to go part-time soon anyway, can you start withdrawing at that point? (sorry, I don't actually know anything about 457 plans). It would seem pretty safe to me to avoid paying the high marginal tax rate now and pay a lower one relatively soon, especially when it seems like your employer is doing very well right now.

MooreBonds

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Re: Where to put money--403(b), IRAs, HSA, etc
« Reply #8 on: March 31, 2013, 09:47:41 AM »
1) HSA -  We just started a high deductible plan with HSA this year. I have $2k in the HSA now. I figure I should probably go ahead and max out the $6450/year contribution. If I'm fortunate enough to not need it for healthcare expenses, I can add it to the retirement 'stache. By default, it is in a savings acct earning 0.1% (!?!?!?!?). If I put it into an investment acct (TD Ameritrade or Devenir Funds), the HSA Bank charges an additional $3 per month fee which is waived if I keep a daily balance of $5k in the HSA savings acct (NOT including the money in the investment accts). TD Ameritrade apparently doesn't show me their offerings, or expenses until I register for an acct (???WTF??). Devenir charges an additional $24 per year, and their cheapest funds have an ER of 0.7%. Even their S+P 500 index has an ER of 0.9% (!?!?!). I suppose that I need to just suck up the fees. $50 in fees on an investment of $5k is only 1%, and putting the money in even a crappy high expense fund should still get me a t least 1% better in the long-term than the 0.1% they are offering... Am I thinking about this right?

I have had an HSA for a few years and love it. I also have it w/ HSA Bank, and have it linked with an investment account with TD Ameritrade.

The TD Ameritrade account is held by their "retirement accounts" division, which handles other companies' 401ks - so just a slightly different expense set-up (regarding individual stock commissions, etc.). It's pretty close to the standard individual TD Ameritrade account set-ups, but just giving you a heads-up. But you do have access to the full range of investment choices - mutual funds, ETFs, stocks, preferred stocks. Haven't looked into options yet. But definitely keep the minimum with HSA Bank to pay those pesky $5.xx/monthly fees for the investment account and bank account, and invest the rest. After a few years, you'll be glad you did. :)

Hamster

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Re: Where to put money--403(b), IRAs, HSA, etc
« Reply #9 on: April 02, 2013, 10:43:11 PM »
Thanks all for your insights.

Yes, max out the HSA! The fees are annoying, but pales in comparison to the ~30% you save by removing income from that marginal tax bracket. You should also keep the money in there and save your healthcare receipts - there's no time limit on reimbursement so you could let the money grow tax-deferred and then withdraw whenever you wish years down the road tax-free.
I will go ahead and max out the HSA for 2013. I think I have a habit of cutting off my nose to spite my face... The fees seem like extortion (you should see the full list of fees for those who aren't minding their p's and q's), so I don't want to play along, but paying some silly fees is still better than the alternative of losing the tax-advantage.

...you can always do a backdoor Roth regardless of income... maxing out your Roths at your income makes a lot of sense.

Yeah. Maybe I'm worrying unnecessarily about getting our MAGI below the Roth income limits, and I should just do the backdoor. I'm still trying to wrap my brain around the pro-rata taxation issue and how it calculates out for us with an old rollover plan my wife has and my old retirement acct as well... I may post another question about this later...
I can understand being leery of the 457 option...if you're planning to go part-time soon anyway, can you start withdrawing at that point? (sorry, I don't actually know anything about 457 plans).
Not until I sever employment. I suppose I could arrange to do per-diem or something to become eligible, but then would lose all my other benefits.

I have had an HSA for a few years and love it. I also have it w/ HSA Bank, and have it linked with an investment account with TD Ameritrade...But definitely keep the minimum with HSA Bank... After a few years, you'll be glad you did. :)
Thanks, it's nice to hear from someone who has worked with this bank and TD Ameritrade.

Nothlit

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Re: Where to put money--403(b), IRAs, HSA, etc
« Reply #10 on: April 03, 2013, 09:12:20 PM »
While I do not currently have an account there, it is my understanding that HSA Bank's investments through TD Ameritrade give you access to 100+ commission-free ETFs, including several very good Vanguard ETFs, whose expense ratios are equivalent to holding Admiral shares. If you are following the Boglehead asset allocation approach, just assign your HSA to hold a portion of your stock or bond allocation and choose something like VTI (Vanguard Total Stock Market ETF), VXUS (Vanguard Total International Stock ETF), or BND (Vanguard Total Bond Market ETF) accordingly. That's what I plan to do once my HSA (still relatively new as well) reaches a balance threshold that makes the fees worthwhile.

Also, I've run the numbers in a spreadsheet, and once I do move my HSA over to HSA Bank, for most scenarios (combination of account balance and expected rate of return on investments) it actually makes sense to put the entire balance into the investment account and just pay the $5.50/month fee, rather than keeping the $3k or $5k cash balances to avoid the fees. (In other words, the opportunity cost of losing out on investment returns on the $3k or $5k cash balance is greater than the cost of the fee.) You may want to run your own numbers to see whether that makes sense for you as well.
« Last Edit: April 03, 2013, 09:23:34 PM by Nothlit »