The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: LiseE on April 27, 2014, 06:51:16 AM
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My hubby and I are new mustachians (hubby still catching up a bit but on board). We are currently focused on managing a budget to identify areas to trim (something we have never done in our lives!) .. feels great to be getting a grip on things.
We also have significant debt that we are working to aggressively pay down. Our gross incomes combined is appx 230K. We currently allocate 16% of our income to our 401K's all of which is 100% matched. My hubby's company will match 100% up to 20% so we will be maxing that out shortly once the debt starts to clear or we can trim from our spending to free up the additional $650 a month that will need to come out of his salary. I know we are leaving a ton of money on the table right now but we have to get debt paid down right now. I've been chasing these credit card bills for years!
My question is this .. once we get our credit debt paid off and an emergency fund funded, we would like to build up our investments. I've always been confused about taxable accounts vs taxable returns .. letting returns grow tax free vs. taxable returns. I mean I understand what these investments do by the nature of their names, but I don't know which would be best for us to explore and what the pros and cons are of both. We are in a high tax bracket so I think getting our taxable income down would be a good thing.
Are there any good books out there about taxable/non taxable investments? Maybe if I understand how they work better it will become clearer to me which investments are best for us.
PS .. I don't believe we qualify for a ROTH IRA .. is that correct?
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I'm still new to this forum, so I am sure many of the more experienced members will chime in with better advice. As for the Roth IRA, you do make too much to make a standard Roth IRA contribution, but if you don't already have a traditional IRA, you could take advantage of the "back door Roth IRA" technique pretty easily.
As for emergency fund, it seems that the preference here is to skip the emergency fund and keep those dollars working for you in an investment. Do you have a home equity line of credit that you could tap in case of emergency? That could help provide a backstop should an emergency arise at a time when your investments are down.
Good luck!
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As for tax treatment of investments you are just going to have to change your perspective a bit. There are investment vehicles such as IRA's and 401k's which have tax deferment or tax fee growth...etc. a good resource to understand the benefits is one of madfientist's blog posts. But don't just take it for gospel. As you pay down debt learn how to run your numbers.
http://www.madfientist.com/traditional-ira-vs-roth-ira/
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Very simply, in a traditional IRA/401k you put money in pre-tax (you get a tax deduction for the money earned that goes into these accounts), the money is not subject to taxes on earnings while it is in the account, and every dollar you eventually take out is counted as taxable income. In a Roth you put money in after tax, it is not subject to taxes on earnings in the account, and it is not taxed or counted as income when you take the money out of the account. In a taxable account, you put after tax money into the account, any dividends/interest/capital gains are taxed, and when you take money out you only pay taxes on it to the extent you realize capital gains while doing so.
In your tax bracket, you would want to max out the traditional 401ks, since you are paying up on taxes and the deduction is worth a lot. You are not eligible for a Roth, so any additional savings would go into a taxable account. If you put the tax efficient investments (equity index funds) in your taxable account, you will have vanishingly small tax bills from it.
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I applaud your desire to pay down this debt. But you really should max out your 401k's now, AND pay down your debt. Getting a 100% match on 20% contributions is stellar, do not leave that on the table. You likely don't have any credit cards with 100% interest rates plus tax advantages, so do not pass up this 401k benefit in the name of paying down debt.
That said, at your income levels, you should be able to do both easily. Max out those 401k's to get all the matching funds and tax breaks, and attack that debt like your hair is on fire.
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I applaud your desire to pay down this debt. But you really should max out your 401k's now, AND pay down your debt. Getting a 100% match on 20% contributions is stellar, do not leave that on the table. You likely don't have any credit cards with 100% interest rates plus tax advantages, so do not pass up this 401k benefit in the name of paying down debt.
That said, at your income levels, you should be able to do both easily. Max out those 401k's to get all the matching funds and tax breaks, and attack that debt like your hair is on fire.
+1
I can understand the emotional appeal of paying down the credit card debt, but an instant 100% risk-free return is the best investment you'll make in this lifetime. I'd prioritize that over everything except perhaps an emergency liquidity fund.
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I applaud your desire to pay down this debt. But you really should max out your 401k's now, AND pay down your debt. Getting a 100% match on 20% contributions is stellar, do not leave that on the table. You likely don't have any credit cards with 100% interest rates plus tax advantages, so do not pass up this 401k benefit in the name of paying down debt.
That said, at your income levels, you should be able to do both easily. Max out those 401k's to get all the matching funds and tax breaks, and attack that debt like your hair is on fire.
+1
I can understand the emotional appeal of paying down the credit card debt, but an instant 100% risk-free return is the best investment you'll make in this lifetime. I'd prioritize that over everything except perhaps an emergency liquidity fund.
Allow me to +2 this. MAX OUT THAT 401k BABY!!! A 20% match is unbelievable. Please let us all know who he works for so that we can join in the fun. FYI my company matches 3% if I put in 5%, and that's pretty standard. Anything better than that is gravy. Max out that 401k and pay down debt with what's left over. With a $230k income you should be able to cut out expenses enough that you can pay down whatever debt you have really fast, even after maxing out the 401k. It just takes discipline to not buy the $500k house, the $50k+ cars (x2), the $50k boat, and the $10k+ vacations. It's tough to do because all your friends are doing it. But to steal a line from Dave Ramsey, "in order to live like nobody else you're gonna have to first live like nobody else."
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Max out that 401k ASAP. I doubt the debt has a 100% interest rate.
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Definitely have your husband max the 401k - I think I did the math for you in another thread and it was very clear that he was leaving a crazy amount of money on the table by not doing it.
Also, as I mentioned in the other thread, if, as you said, you are contributing 6% of your salary and he is contributing 9% of his salary, that does not make 16% of the total. Your contribution rate is somewhere between 6-9% of the total, depending on the proportion of the total each of you makes.
Next step for you would be to max both yours and his 401k contributions for $35K total contributed annually. Don't even think about taxable investing until you both contribute the max to the 401k . The only potential exception to this would be for you if the investment choices and fees in your 401k were terrible, then you may consider doing what you are doing already which is contribute to the match. But even in that situation the tax savings would easily offset expensive 401k funds.
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I applaud your desire to pay down this debt. But you really should max out your 401k's now, AND pay down your debt. Getting a 100% match on 20% contributions is stellar, do not leave that on the table. You likely don't have any credit cards with 100% interest rates plus tax advantages, so do not pass up this 401k benefit in the name of paying down debt.
That said, at your income levels, you should be able to do both easily. Max out those 401k's to get all the matching funds and tax breaks, and attack that debt like your hair is on fire.
+3 on that 20% match. Fantastic deal. I would prioritise over debt as well, for the reasons previously stated by others.
And an IRA for each of you after the debt* is gone will also be good, as your tax rates now will be higher than when you FIRE.
*note: I do not consider a 15 or 30 year fixed mortgage to be bad debt. As long as you are not paying PMI, and the house itself is modest, taking advantage of the Feds free money is a no brainer.
+1
I can understand the emotional appeal of paying down the credit card debt, but an instant 100% risk-free return is the best investment you'll make in this lifetime. I'd prioritize that over everything except perhaps an emergency liquidity fund.
Allow me to +2 this. MAX OUT THAT 401k BABY!!! A 20% match is unbelievable. Please let us all know who he works for so that we can join in the fun. FYI my company matches 3% if I put in 5%, and that's pretty standard. Anything better than that is gravy. Max out that 401k and pay down debt with what's left over. With a $230k income you should be able to cut out expenses enough that you can pay down whatever debt you have really fast, even after maxing out the 401k. It just takes discipline to not buy the $500k house, the $50k+ cars (x2), the $50k boat, and the $10k+ vacations. It's tough to do because all your friends are doing it. But to steal a line from Dave Ramsey, "in order to live like nobody else you're gonna have to first live like nobody else."