Author Topic: new job, raise, what to do?  (Read 6595 times)

DK

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new job, raise, what to do?
« on: September 12, 2014, 08:23:41 PM »
So in an interesting turn of events, it looks like I will be ending up with about a 30-40% raise with a new job while drastically cutting down my commute (which is a raise in itself too). I'm a bit thrown off on what to do now that I'm hitting the upper parts of the 25% bracket (well, gross levels). My plan always involved staying in the 15% bracket and now I do not believe I will be able to do that. (yeah i know, tough problem to have).

Any tips on what to do, how to make best use of this?

For some background financial info, here are some numbers:

Bank: 9K
401K: ~105K
Roth: ~70K
Mtg: ~155K @ 4.375%
Stdnt Loan: ~6K @ 1.875%
Car: ~6K @ 2.25%

farmstache

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Re: new job, raise, what to do?
« Reply #1 on: September 12, 2014, 09:58:45 PM »
Well, I'm in another country and thus have no idea, but wanted to say: congrats!!!! This is amazing!

Go you!

bearkat

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Re: new job, raise, what to do?
« Reply #2 on: September 12, 2014, 10:33:09 PM »
Is your main question what to do with your new and hard earned money to expedite FIRE? CONGRATS by the way!!  Or are you mainly looking for ways to lower your tax bill?

So if you're single, sounds like you went from making something in the $60k region to something in the $80k region?

With all those roth assets, looks like you took great advantage of your days in the 15% tax bracket, good work.

For next steps, if it were me, I'd want to get rid of the baby $6k car loan and $6k student loan to clean up accounts and get the associated peace of mind. That said, the balances are small and the interest rates even lower (and your student loan interest may be tax deductible), so you could also bust into the great world of taxable investments!

With this big of a "windfall",  you could always treat  yourself real nice (with something affordable) to celebrate. These size raises don't happen every year (if they do, please share industry and upcoming job openings).

mxt0133

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Re: new job, raise, what to do?
« Reply #3 on: September 13, 2014, 02:48:47 AM »
There are ways to minimize or even stay below the 25% tax bracket.  You can maximize your 401k contributions and if you have access to a HSA that can help you lower your taxable income as well.

DK

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Re: new job, raise, what to do?
« Reply #4 on: September 14, 2014, 10:54:15 AM »
Is your main question what to do with your new and hard earned money to expedite FIRE? CONGRATS by the way!!  Or are you mainly looking for ways to lower your tax bill?

So if you're single, sounds like you went from making something in the $60k region to something in the $80k region?

With all those roth assets, looks like you took great advantage of your days in the 15% tax bracket, good work.

For next steps, if it were me, I'd want to get rid of the baby $6k car loan and $6k student loan to clean up accounts and get the associated peace of mind. That said, the balances are small and the interest rates even lower (and your student loan interest may be tax deductible), so you could also bust into the great world of taxable investments!

With this big of a "windfall",  you could always treat  yourself real nice (with something affordable) to celebrate. These size raises don't happen every year (if they do, please share industry and upcoming job openings).

Thanks. Yeah your numbers are just about right. I guess I am looking for both ways to lower the tax bill, and seeing the best way to expedite FIRE.

I think I agree with knocking out the car loan. The student loan is deductible, and a very low interest rate so would probably keep that I think. Also debated doing a refi on the mortgage at penfed for the 5/5 just to knock down the interest I am paying and help pay it down. With the income increase, that should allow me to pay it off at a much faster rate than anticipated.

The taxable investments is one thing I think I need to start with, "retirement" accounts I have done pretty well with, but I guess I am not sure how much I should push into those as opposed to the other accounts. And how to do it in the best tax advantaged way.

I also think with the higher income I might be losing my tIRA deductions, where I might as well put that into a roth or taxable instead then - does anyone know what that number is?

I am also trying to figure out emergency fund wise what to do. I have roughly a 3 month one now, but I am almost thinking about keeping just 1 month, and if worse comes to worse, I could pull contributions from my roth for roughly another year.

vivophoenix

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Re: new job, raise, what to do?
« Reply #5 on: September 15, 2014, 07:54:57 AM »
you interest rate for you loan is not deductible if you are single and make 80k .


http://www.irs.gov/publications/p970/ch04.html#en_US_2013_publink1000178283


so there is no point in keeping it around

DK

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Re: new job, raise, what to do?
« Reply #6 on: September 15, 2014, 10:07:42 AM »
you interest rate for you loan is not deductible if you are single and make 80k .


http://www.irs.gov/publications/p970/ch04.html#en_US_2013_publink1000178283


so there is no point in keeping it around

Well, it is still low interest that investments should make more than it. But yeah I did not know that student loan interest had a phase out. Thanks!

Looks like both student loan interest deduction and tIRA deduction starts getting phased out at 60K MAGI. ....so even if I contributed the max to my 401k of 17.5, the only way it would work for me is if I only made 77.5K.....or at least partly until it gets phased out at 87.5K.

Learn something new every day.

vivophoenix

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Re: new job, raise, what to do?
« Reply #7 on: September 15, 2014, 10:25:14 AM »
i only know because the same thing happen to me. i got a raise and a bonus check that i tried to squirrel away for tax purposees.

but if you do an HSA ($3300 per year)  you still pay less taxes. you  just lose out on the deductions for student loan and IRA.

and you still get extra money. congrats on the raise.

 also i know its not much, but i do like looking at the fact that pre tax 401k contributions are kinda awesome when in the 25% tax bracket vs what you would net. 

Scandium

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Re: new job, raise, what to do?
« Reply #8 on: September 15, 2014, 10:54:46 AM »
Since your mortgage interest is deductible I see now reason to accelerate payments, especially not when you're in this tax bracket. Keep it as long as possible.

Unfortunately I don't know much else you can so beyond 401k and roth. But you definitely need to open a taxable account.
I don't particularly like the roth as an ER fund. You'd have to factor in list gains on what you take out which could be severe. That being said I do consider my taxable investments part of the emergency fund

Ybserp

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Re: new job, raise, what to do?
« Reply #9 on: September 16, 2014, 01:28:11 PM »
(I'm assuming you are in the US.)

You can contribute up to $17,500/yr to your 401k, and unless your company has a Roth 401k that contribution amount will not be included in your MAGI (modified adjusted gross income) -- meaning you won't be taxed on it.

You can contribute up to $5,500/yr to a Traditional IRA. If your income is as high as it seems, you won't be allowed to contribute to a Roth IRA, but you also won't be allowed to deduct the Traditional IRA. So the thing to do is to drop $5,500 into a nondeductible Traditional IRA and then convert it into a Roth IRA. (Your financial institution will have the forms to help you do this. If you wait to do this, you'll have extra taxes to pay on earnings. So this is a thing to do relatively quickly.)

Do you have kids? Do you anticipate ever having kids? If you don't think you'll ever have kids, do you anticipate wanting to help any other people's kids pay for college? You can create and contribute to a 529 which is a tax deferred savings vehicle designed to pay for educational expenses. You can make yourself the beneficiary for now, and change it later.

You could also open a normal taxable account and start piling up money there. If you need suggestions on what to invest in, you might try the bogleheads forum and wiki.

vivophoenix

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Re: new job, raise, what to do?
« Reply #10 on: September 16, 2014, 02:21:18 PM »
why cant he have a roth?

the upper end of 25% for single filers is about 87k

youre allowed to be under 112k  MAGI per year to have a roth

he just wont get the deduction cause he has a 401k

http://www.bankrate.com/finance/taxes/tax-brackets.aspx

http://en.wikipedia.org/wiki/Roth_IRA#Income_limits



(I'm assuming you are in the US.)

You can contribute up to $17,500/yr to your 401k, and unless your company has a Roth 401k that contribution amount will not be included in your MAGI (modified adjusted gross income) -- meaning you won't be taxed on it.

You can contribute up to $5,500/yr to a Traditional IRA. If your income is as high as it seems, you won't be allowed to contribute to a Roth IRA, but you also won't be allowed to deduct the Traditional IRA. So the thing to do is to drop $5,500 into a nondeductible Traditional IRA and then convert it into a Roth IRA. (Your financial institution will have the forms to help you do this. If you wait to do this, you'll have extra taxes to pay on earnings. So this is a thing to do relatively quickly.)

Do you have kids? Do you anticipate ever having kids? If you don't think you'll ever have kids, do you anticipate wanting to help any other people's kids pay for college? You can create and contribute to a 529 which is a tax deferred savings vehicle designed to pay for educational expenses. You can make yourself the beneficiary for now, and change it later.

You could also open a normal taxable account and start piling up money there. If you need suggestions on what to invest in, you might try the bogleheads forum and wiki.
« Last Edit: September 16, 2014, 02:24:19 PM by vivophoenix »

Ybserp

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Re: new job, raise, what to do?
« Reply #11 on: September 16, 2014, 08:19:53 PM »
Vivophoenix is right. He could just contribute to a Roth IRA directly. I mistook how much the OP was making.

Hotstreak

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Re: new job, raise, what to do?
« Reply #12 on: September 16, 2014, 10:15:53 PM »
Congrats!  That's a huge raise, both in terms of money and in the reduced commute.  Will that translate in to more free time for you, or are you going to be working more hours?

I would recommend you keep maxing out retirement accounts.  That money is not locked away, you can do a roth pipeline, for example, or the less favorable 72t distributions, to draw on a 401k before retirement age.  After that it's time to start putting some money in to a taxable investment account.  Do some reading on ideal asset classes for tax deferred, roth, and taxable investment accounts.  There are some advantages to having bonds in one type, stocks in the others, etc.

Oh yeah, and have fun!  Like you said, you have some really great problems to deal with.

Tyler

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Re: new job, raise, what to do?
« Reply #13 on: September 17, 2014, 11:04:29 AM »
Since your mortgage interest is deductible I see now reason to accelerate payments, especially not when you're in this tax bracket. Keep it as long as possible.

Minor point: Depending on the OPs personal situation, the mortgage interest deduction may be irrelevant for a loan that size.  The standard deduction + personal exemptions are often the better tax deal for many people.

But that doesn't really change my advice.  Knock out the car and student loans.  Max your retirement accounts.  Then start funding a taxable investment account.  And find a simple investment method that you'll be able to touch as little as possible and stick with for a long time. 

« Last Edit: September 17, 2014, 11:08:36 AM by Tyler »

DK

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Re: new job, raise, what to do?
« Reply #14 on: September 17, 2014, 04:34:35 PM »
Congrats!  That's a huge raise, both in terms of money and in the reduced commute.  Will that translate in to more free time for you, or are you going to be working more hours?

I would recommend you keep maxing out retirement accounts.  That money is not locked away, you can do a roth pipeline, for example, or the less favorable 72t distributions, to draw on a 401k before retirement age.  After that it's time to start putting some money in to a taxable investment account.  Do some reading on ideal asset classes for tax deferred, roth, and taxable investment accounts.  There are some advantages to having bonds in one type, stocks in the others, etc.

Oh yeah, and have fun!  Like you said, you have some really great problems to deal with.

Thanks. It should result in a bit more free time, some of my commute time will instead be work time though.

Yeah I'll need to read up a bit more on what to do with taxable accounts. I've always just been pushing things into my roth and 401k.

DK

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Re: new job, raise, what to do?
« Reply #15 on: September 17, 2014, 05:03:28 PM »
Tentative plan now is:

3 months emergency fund
pay off auto loan
max out 401k
contribute to tIRA up to deductible point
roth
taxable investments

Ybserp

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Re: new job, raise, what to do?
« Reply #16 on: September 17, 2014, 05:12:32 PM »
Tentative plan now is:

3 months emergency fund
pay off auto loan
max out 401k
contribute to tIRA up to deductible point
roth
taxable investments

Awesome!