Author Topic: Trying to figure out what to do.  (Read 4252 times)

78bird

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Trying to figure out what to do.
« on: March 03, 2015, 11:06:31 AM »
I recently started reading MMM and I'd like to get a few opinions on what the wife and I should be investing in.

2014 gross income 170,000
I have a pension and annuity at work.  I cannot put anything into those.  The employer contributes 100%.
I have a traditional IRA with around 10k.
The wife has a 401k with a 4% match.

My questions are:

I believe we are over the threshold for the tIRA deduction and just under the threshold for contributing to a roth IRA.  Since we cant take the tIRA deduction should we just put $5,500 each into a roth IRA?  Is there anything better we could do?

Should the wife max out her 401k contributions even if they only match up to 4%?

Is there anything else I'm not thinking of that we should be taking advantage of?  The rest of our savings I was thinking of opening a regular taxable account at Vanguard.

Any help is greatly appreciated

seattlecyclone

  • Walrus Stache
  • *******
  • Posts: 5210
  • Age: 35
  • Location: Seattle, WA
    • My blog
Re: Trying to figure out what to do.
« Reply #1 on: March 03, 2015, 11:15:59 AM »
I believe we are over the threshold for the tIRA deduction and just under the threshold for contributing to a roth IRA.  Since we cant take the tIRA deduction should we just put $5,500 each into a roth IRA?  Is there anything better we could do?

If you've already maxed out all pre-tax retirement options, a Roth IRA is a great way to save some more tax-advantaged money.

Quote
Should the wife max out her 401k contributions even if they only match up to 4%?

Yes. At your income level, you should take advantage of all possible ways to save pre-tax.

Quote
Is there anything else I'm not thinking of that we should be taking advantage of?  The rest of our savings I was thinking of opening a regular taxable account at Vanguard.

Do you have a high-deductible health plan with an HSA available to you? If so, the HSA is another great tax-advantaged savings vehicle that can allow you to shelter even more cash. After that, a Vanguard taxable account is a great place to put any extra income you want to invest.

Cwadda

  • Handlebar Stache
  • *****
  • Posts: 2181
  • Age: 25
Re: Trying to figure out what to do.
« Reply #2 on: March 03, 2015, 11:38:57 AM »
Quote
If you've already maxed out all pre-tax retirement options, a Roth IRA is a great way to save some more tax-advantaged money.
The OP may be over the income limit to contribute to a Roth IRA.

Quote
Since we cant take the tIRA deduction should we just put $5,500 each into a roth IRA?
I don't think you're allowed to do that.

Quote
Should the wife max out her 401k contributions even if they only match up to 4%?
Yes, absolutely go for $18k PLUS whatever your employer match gives you. This decreases your taxable income, which may also put you under the Traditional IRA deduction threshold.

Quote
Do you have a high-deductible health plan with an HSA available to you? If so, the HSA is another great tax-advantaged savings vehicle that can allow you to shelter even more cash. After that, a Vanguard taxable account is a great place to put any extra income you want to invest.
+1 for this idea. You can sock away about $6,000 more and you don't have to pay social security or medicare taxes if it's via automatic payroll deduction.

seattlecyclone

  • Walrus Stache
  • *******
  • Posts: 5210
  • Age: 35
  • Location: Seattle, WA
    • My blog
Re: Trying to figure out what to do.
« Reply #3 on: March 03, 2015, 11:48:46 AM »
Quote
If you've already maxed out all pre-tax retirement options, a Roth IRA is a great way to save some more tax-advantaged money.
The OP may be over the income limit to contribute to a Roth IRA.

Quote
Since we cant take the tIRA deduction should we just put $5,500 each into a roth IRA?
I don't think you're allowed to do that.

Married people can make full Roth contributions if their MAGI is less than $183k. If the OP's wife maxes out her 401(k), their MAGI should be $152k or less, depending on health insurance premiums or other pre-tax payroll deductions.

78bird

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Re: Trying to figure out what to do.
« Reply #4 on: March 03, 2015, 11:54:20 AM »
We have healthcare through my employer at no cost to us other than copays and deductibles.  That would count me out for an HSA right?

seattlecyclone

  • Walrus Stache
  • *******
  • Posts: 5210
  • Age: 35
  • Location: Seattle, WA
    • My blog
Re: Trying to figure out what to do.
« Reply #5 on: March 03, 2015, 12:01:03 PM »
We have healthcare through my employer at no cost to us other than copays and deductibles.  That would count me out for an HSA right?

Not necessarily. It's perfectly possible for an employer to offer an HDHP to its employees and cover their premiums. My employer does exactly that for employees who only need coverage for themselves and not their families. The key requirement is that your health plan needs to have a deductible of at least $1,300 ($2,600 for family coverage) and an out-of-pocket max no higher than $6,450 ($12,900). I would expect, though, that it's unlikely your employer would offer you a qualifying HDHP without also at least mentioning that you can contribute to an HSA along with it.

brooklynguy

  • Handlebar Stache
  • *****
  • Posts: 2204
  • Age: 39
Re: Trying to figure out what to do.
« Reply #6 on: March 03, 2015, 12:15:22 PM »
I would expect, though, that it's unlikely your employer would offer you a qualifying HDHP without also at least mentioning that you can contribute to an HSA along with it.

Unless the employer doesn't offer an HSA, in which case (assuming the insurance coverage is indeed a qualifying HDHP) the OP can open an HSA outside his employer and still get all the benefits of an HSA (except for the potential FICA tax savings).

Wolf359

  • Stubble
  • **
  • Posts: 137
Re: Trying to figure out what to do.
« Reply #7 on: March 03, 2015, 01:46:56 PM »
First, I'd max out your wife's 401k.  See if she has a Roth 401k option. 

Second, $10,000 in a traditional IRA is low enough that you might consider converting it to a Roth.  Then, whether you're over the income limit to contribute to a Roth, you can always do a "back-door Roth."  That is, you open a traditional IRA, then immediately convert it to a Roth.

Third, if you currently don't have a lot of money in tax advantaged accounts, you might want to reverse the traditional advice and put bonds in your taxable accounts and stocks in your tax advantaged accounts.  The idea is to let them grow to expand your tax advantaged space, then shift allocations later.  Stocks grow faster than bonds.  The fact that you're just starting out means 1) you don't have a lot of bonds; and 2) with bond yield pretty low, the tax implications aren't that bad right now.  As your portfolio grows, you'll eventually shift your bond allocation to either tax exempt bonds (depends on your income level as to whether or not it's worth it right now), or move them to the tax advantaged accounts.

Buying equity index funds and holding them forever in a taxable account is actually very tax efficient.  You don't get taxed until you sell them.  In addition, if your bonds are in your taxable account, they may be able to double as your emergency fund, allowing you to shift more money to investments.

Retired To Win

  • Handlebar Stache
  • *****
  • Posts: 1494
  • Age: 72
  • Location: Virginia
  • making the most of my time and my money
    • Retired To Win
Re: Trying to figure out what to do.
« Reply #8 on: March 04, 2015, 01:57:17 PM »
78Bird...

Have you got an Emergency Reserve Fund?  Preferably 12 months' worth of your basic living expenses?  At a minimum 6 months' worth?

In your shoes, I would be addressing that question first; THEN start looking at investments.

Good luck.

Cwadda

  • Handlebar Stache
  • *****
  • Posts: 2181
  • Age: 25
Re: Trying to figure out what to do.
« Reply #9 on: March 04, 2015, 02:14:25 PM »
Quote
If you've already maxed out all pre-tax retirement options, a Roth IRA is a great way to save some more tax-advantaged money.
The OP may be over the income limit to contribute to a Roth IRA.

Quote
Since we cant take the tIRA deduction should we just put $5,500 each into a roth IRA?
I don't think you're allowed to do that.

Married people can make full Roth contributions if their MAGI is less than $183k. If the OP's wife maxes out her 401(k), their MAGI should be $152k or less, depending on health insurance premiums or other pre-tax payroll deductions.

Are you allowed to deduct for an HSA too?

seattlecyclone

  • Walrus Stache
  • *******
  • Posts: 5210
  • Age: 35
  • Location: Seattle, WA
    • My blog
Re: Trying to figure out what to do.
« Reply #10 on: March 04, 2015, 02:22:10 PM »
Quote
If you've already maxed out all pre-tax retirement options, a Roth IRA is a great way to save some more tax-advantaged money.
The OP may be over the income limit to contribute to a Roth IRA.

Quote
Since we cant take the tIRA deduction should we just put $5,500 each into a roth IRA?
I don't think you're allowed to do that.

Married people can make full Roth contributions if their MAGI is less than $183k. If the OP's wife maxes out her 401(k), their MAGI should be $152k or less, depending on health insurance premiums or other pre-tax payroll deductions.

Are you allowed to deduct for an HSA too?

Sure, if you have the right health plan. I don't think there's any income limit for HSA contributions.

Cwadda

  • Handlebar Stache
  • *****
  • Posts: 2181
  • Age: 25
Re: Trying to figure out what to do.
« Reply #11 on: March 04, 2015, 02:25:15 PM »
Quote
If you've already maxed out all pre-tax retirement options, a Roth IRA is a great way to save some more tax-advantaged money.
The OP may be over the income limit to contribute to a Roth IRA.

Quote
Since we cant take the tIRA deduction should we just put $5,500 each into a roth IRA?
I don't think you're allowed to do that.

Married people can make full Roth contributions if their MAGI is less than $183k. If the OP's wife maxes out her 401(k), their MAGI should be $152k or less, depending on health insurance premiums or other pre-tax payroll deductions.

Are you allowed to deduct for an HSA too?

Sure, if you have the right health plan. I don't think there's any income limit for HSA contributions.

An HSA decreases your MAGI too then?
I read this link here and it doesn't mention that. http://www.irs.gov/publications/p590a/ch03.html#en_US_2014_publink1000231195

seattlecyclone

  • Walrus Stache
  • *******
  • Posts: 5210
  • Age: 35
  • Location: Seattle, WA
    • My blog
Re: Trying to figure out what to do.
« Reply #12 on: March 04, 2015, 02:52:25 PM »
Sure, if you have the right health plan. I don't think there's any income limit for HSA contributions.

An HSA decreases your MAGI too then?
I read this link here and it doesn't mention that. http://www.irs.gov/publications/p590a/ch03.html#en_US_2014_publink1000231195

Actually it does mention exactly that, but in a way that requires you to be familiar with form 1040. See, the HSA deduction happens on line 25 of your tax return, so it is already subtracted from your income before you get to line 38 (AGI). You then have to add some things to your AGI to calculate your MAGI, but the HSA deduction is not mentioned as something you need to add back in so it does indeed reduce your MAGI for Roth IRA purposes.

(note that MAGI is an ambiguous term, because different deductions and credits modify the AGI in different ways to determine the MAGI for that scenario)

Cwadda

  • Handlebar Stache
  • *****
  • Posts: 2181
  • Age: 25
Re: Trying to figure out what to do.
« Reply #13 on: March 04, 2015, 03:02:35 PM »
Sure, if you have the right health plan. I don't think there's any income limit for HSA contributions.

An HSA decreases your MAGI too then?
I read this link here and it doesn't mention that. http://www.irs.gov/publications/p590a/ch03.html#en_US_2014_publink1000231195

Actually it does mention exactly that, but in a way that requires you to be familiar with form 1040. See, the HSA deduction happens on line 25 of your tax return, so it is already subtracted from your income before you get to line 38 (AGI). You then have to add some things to your AGI to calculate your MAGI, but the HSA deduction is not mentioned as something you need to add back in so it does indeed reduce your MAGI for Roth IRA purposes.

(note that MAGI is an ambiguous term, because different deductions and credits modify the AGI in different ways to determine the MAGI for that scenario)

This is why I always end up getting infuriated with all the forms and such during tax season. :/
But thanks for the info. I'm going to go through my dad's taxes to make sure he's eligible for the right things.