Author Topic: Next steps with our tax advantaged and taxable accounts?  (Read 2813 times)

Dusty Dog Ranch

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Next steps with our tax advantaged and taxable accounts?
« on: May 27, 2016, 10:47:06 PM »
DH and I have built up about 12k worth of savings in the last few months and are puzzling over where would be the best place to stash it. Here's our current set up of accounts:

Me
457: maxed
Trad IRA: maxed

DH
Rollover IRA
Simple IRA at current job: $400/mo + $115\mo employer match (that's as high as the match will go)

Joint, taxable
VTIAX
VTSAX

Everything except the 457 is at Vanguard. Have 40k EF/FU$ in a CD ladder.

Does it make sense for him to open and max a Roth IRA, and to put the rest into our taxable account? Should we then look at increasing his simple IRA contribution? Or just sweep savings into the taxable accounts every few months? Theoretically, he could add to his rollover IRA, but my interwebz research says this isn't the best idea.

He also has a student loan hanging out there at 2.9% with $3200 left to go, which we could nuke, I suppose. It is our last remaining debt.

Together, we gross just over $8000/mo. I think we are in the 15% tax bracket. We are both in our mid-forties, aiming to retire in 7-10 yrs.

Any input as to our best way forward? I am not very savvy on the tax implications, for example, so other perspectives are appreciated!

« Last Edit: May 28, 2016, 09:03:02 AM by Dusty Dog Ranch »

MustacheAndaHalf

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Re: Next steps with our tax advantaged and taxable accounts?
« Reply #1 on: May 28, 2016, 12:39:18 AM »
Does your husband's company only match $4800/year with $1400/year?  If the company match is higher, make sure he's getting all of the company match.  You can use your savings to make up for the reduced income - but company match is the #1 place to max out first.

Also to clarify, I think $96,000/year ($8k/mo) puts you in the 25% Federal tax bracket.  The confusion might come from your long-term capital gains tax rate, which is indeed 15% (also for qualified dividends).  If you buy an S&P 500 fund and don't sell it, you delay paying tax on the rise in value.  But S&P 500 will send you 2% dividends, and you'd pay 15% tax on those (or 1/300th of your holdings: $30,000 in S&P 500 funds means about $100 in tax).

georgicus

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Re: Next steps with our tax advantaged and taxable accounts?
« Reply #2 on: May 28, 2016, 01:12:46 AM »
Yes, make sure you get the employer match.

Beyond that, I would second keeping it in a taxable account, but in a fund (such as an SP500 index fund) that you are going to keep a long time.

The reason for this is that you want to make sure you have enough money outside of retirement accounts to cover the years between retirement and when you turn 60.

Paul der Krake

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Re: Next steps with our tax advantaged and taxable accounts?
« Reply #3 on: May 28, 2016, 05:36:15 AM »
I adhere to the Mad Fientist school of thought that dodging taxes now is better than later. As such, I max out all the tax advantaged space for which I am eligible before doing anything else.


Also to clarify, I think $96,000/year ($8k/mo) puts you in the 25% Federal tax bracket.  The confusion might come from your long-term capital gains tax rate, which is indeed 15% (also for qualified dividends).
Her 15% bracket comes from the fact that the 457 and Simple IRA contributions lower their AGI below the 25% threshold (74,900 for 2015).

Greenpez

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Re: Next steps with our tax advantaged and taxable accounts?
« Reply #4 on: May 28, 2016, 07:26:49 AM »
Yeah, if you've set up your pretax withholdings to get you to 15% and are maxing company match than a roth ira is the next step in my mind. *I* would nuke the loan next assuming you don't have higher interest debt elsewhere, tho I think a lot of people would advise you to put the rest in a taxable because the rate on that loan is low.

Dusty Dog Ranch

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Re: Next steps with our tax advantaged and taxable accounts?
« Reply #5 on: May 28, 2016, 09:01:04 AM »
Thanks for the replies so far. His company (a tiny nonprofit) match is as high as it will go. The student loan is our last remaining debt.


MustacheAndaHalf

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Re: Next steps with our tax advantaged and taxable accounts?
« Reply #6 on: May 28, 2016, 10:29:36 AM »
I adhere to the Mad Fientist school of thought that dodging taxes now is better than later. As such, I max out all the tax advantaged space for which I am eligible before doing anything else.


Also to clarify, I think $96,000/year ($8k/mo) puts you in the 25% Federal tax bracket.  The confusion might come from your long-term capital gains tax rate, which is indeed 15% (also for qualified dividends).
Her 15% bracket comes from the fact that the 457 and Simple IRA contributions lower their AGI below the 25% threshold (74,900 for 2015).
Good point: 457 ($18k) + Trad IRA ($5.5k) + Simple IRA ($4.8k) => $28.3k of tax reduction
In addition, married filing jointly has the standard deduction + personal exemptions to bring them into the 15% bracket.  So they might comfortably in the 15% Federal bracket - which has a kind of "tax super-power": long-term capital gains are taxed at 0%.  Same with qualified dividends.

Since OP is in 15% bracket now, and plans to retire within 10 years, I think taxable beats Traditional IRA.  In taxable, you'll pay 0% on qualified dividends (like for an S&P 500 fund).  But when you retire, a Traditional IRA will be taxed at ordinary income tax rates (15%).  Selling a fund held in taxable for 1+ years means you pay the long-term capital gains rate.. again, "tax super power" means you pay 0% in this tax bracket.  You might grow out of the 15% bracket in the next 7-10 years, but after the job income is gone you'll most likely be back in the 15% bracket for selling stocks.

Dusty Dog Ranch

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Re: Next steps with our tax advantaged and taxable accounts?
« Reply #7 on: May 28, 2016, 12:44:20 PM »

Since OP is in 15% bracket now, and plans to retire within 10 years, I think taxable beats Traditional IRA.  In taxable, you'll pay 0% on qualified dividends (like for an S&P 500 fund).  But when you retire, a Traditional IRA will be taxed at ordinary income tax rates (15%).  Selling a fund held in taxable for 1+ years means you pay the long-term capital gains rate.. again, "tax super power" means you pay 0% in this tax bracket.  You might grow out of the 15% bracket in the next 7-10 years, but after the job income is gone you'll most likely be back in the 15% bracket for selling stocks.

Interesting...good food for thought. So does taxable also beat a Roth IRA? I am leaning toward opening the Roth and paying off the loan, but maybe there's a good reason to NOT open a Roth?

bearkat

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Re: Next steps with our tax advantaged and taxable accounts?
« Reply #8 on: May 31, 2016, 08:59:21 PM »

Since OP is in 15% bracket now, and plans to retire within 10 years, I think taxable beats Traditional IRA.  In taxable, you'll pay 0% on qualified dividends (like for an S&P 500 fund).  But when you retire, a Traditional IRA will be taxed at ordinary income tax rates (15%).  Selling a fund held in taxable for 1+ years means you pay the long-term capital gains rate.. again, "tax super power" means you pay 0% in this tax bracket.  You might grow out of the 15% bracket in the next 7-10 years, but after the job income is gone you'll most likely be back in the 15% bracket for selling stocks.

Interesting...good food for thought. So does taxable also beat a Roth IRA? I am leaning toward opening the Roth and paying off the loan, but maybe there's a good reason to NOT open a Roth?

I think Go Curry Cracker does a nice job of mentioning the downsides of Roth IRA's: http://www.gocurrycracker.com/roth-sucks/

MDM

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Re: Next steps with our tax advantaged and taxable accounts?
« Reply #9 on: May 31, 2016, 10:32:39 PM »
Since OP is in 15% bracket now, and plans to retire within 10 years, I think taxable beats Traditional IRA.  In taxable, you'll pay 0% on qualified dividends (like for an S&P 500 fund).  But when you retire, a Traditional IRA will be taxed at ordinary income tax rates (15%).  Selling a fund held in taxable for 1+ years means you pay the long-term capital gains rate.. again, "tax super power" means you pay 0% in this tax bracket.  You might grow out of the 15% bracket in the next 7-10 years, but after the job income is gone you'll most likely be back in the 15% bracket for selling stocks.
Interesting...good food for thought. So does taxable also beat a Roth IRA? I am leaning toward opening the Roth and paying off the loan, but maybe there's a good reason to NOT open a Roth?
At this point state income tax becomes important. 

If no state income tax, and if existing federal tax law remains unchanged, for someone paying in the 15% bracket now and the 15% bracket when withdrawing (and if the marginal rates are also equal),  Roth is the same as taxable which is the same as traditional.

If there is state income tax on qualified dividends and capital gains, then Roth is the same as traditional and both are better than taxable.

MDM

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Re: Next steps with our tax advantaged and taxable accounts?
« Reply #10 on: May 31, 2016, 10:41:32 PM »
I think Go Curry Cracker does a nice job of mentioning the downsides of Roth IRA's: http://www.gocurrycracker.com/roth-sucks/
Unfortunately the main body of that article could lead people down the wrong path because it talks about using "aggregate" tax rate.  Unless one plans to make a lifelong decision to use traditional or Roth, that is not a correct approach. 

For those who plan to use the IRS-allowed flexibility to change between traditional and Roth every year if desired (or even more frequently), GCC correctly states (11-Feb-2106 comment) "You need to compare current marginal rate vs expected future marginal rate to determine which is best."  See also https://www.bogleheads.org/wiki/Traditional_versus_Roth.