What bucket do I use?

[MakeitRain]

Hoping to get some insight on what bucket I should be putting our money in.  Here is our situation, any and all input is greatly appreciated:


Me-41
Wife-42
Boys - 8 and 6 yrs old

Gross Income - $120,000

Roth IRA Balance - $75,600 (S&P 500 Vanguard)
401k/IRAs - $493,249.09 
After Tax - Company Stock (ESPP 15% Discount) - $28,000

Wife and I both have 401ks:

Me- 401k maxing out - 18k (6.5% match)
Wife - 401k - 8k (5% match)

Home Loan - $230,000 @ 3.5%
Rental Property Loan - $85,000 @ 5.5%

Living Expenses are roughly:
$4,500

No Car Loans
No College Loans
No Credit Card Debt

We would like to work another 5 to 10 years and find new jobs that are less stressful to provide a little income and health insurance.  Trying to figure out the best place to put our money given our high tax bracket and our time horizon.  We aren't able to contribute to a deductible IRA, but can contribute to a Roth.  My concern is putting too much of our money in retirement accounts that we can't touch until 59.5. 

We just finished up paying off a car loan and a small credit card bill and now looking to put that money toward our plan.  We want to save additionally outside of what we're doing in our 401ks, but we are unsure where to put it.  Roth?  Taxable Account?  Dividend Portfolio?  Pay down mortgage of rental property? 

Question:
1.  What is the best bucket to put our money?  Is it a Roth and then pull out only our contributions?
2.  Do we start putting money away into a taxable account? 
3.  I've thought about putting money into a taxable dividend generating mutual fund, but not sure if that is the best approach given our tax bracket.
4.  Do I pay down the mortgage on my rental property given that it's 5.5%?  The rent I collect covers the mortgage and taxes. 
5.  Do we increase my wife's 401k contributions?


Thanks!!! 

[nereo]

Question:
1.  What is the best bucket to put our money?  Is it a Roth and then pull out only our contributions?
2.  Do we start putting money away into a taxable account? 
3.  I've thought about putting money into a taxable dividend generating mutual fund, but not sure if that is the best approach given our tax bracket.
4.  Do I pay down the mortgage on my rental property given that it's 5.5%?  The rent I collect covers the mortgage and taxes. 
5.  Do we increase my wife's 401k contributions?

All of these are what *I* would do in your circumstances, with quick notes as to why.  YMMV

1) Up your wife's 401(k) contributions to $18k and contribute $11,000 to a tIRA (not a roth).  THis will save you 25% on taxes.
2) yes - but only after maxing out both 401(k)s and tIRAs.  Based on your spending ($4500/mo) and income - tax-deferred investments you should have approximately $1,000 after taxes/mo
3) Given your tax bracket your best approach is to max out your 401(k)s and tIRAs.  This will save you $11,750 come tax time (25% of $47k in contirbutions)
4) at 5.5% I would pay down the mortgage faster.  You may want to do this while contributing to a taxable account or just forgo the taxable account for a while and take the 5.5% 'return' on paying down your mortgage.
5) Yes (for reasons stated above).

Final remarks:  You are in a nice spot - good income but still within IRA ranges after deductions.  You have no debt other than the mortgages, and quite a bit in savings.  I would NOT contribute to a ROTH at your bracket, but plan on using a ROTH pipeline late in life (you already have $75k in there, so that's a great start).
Finally - $4,500/mo is a very high burn rate for monthly living expenses. There's probably a lot of fat there you could trim - if you do a case study and/or break down expenses we might be able to find another $500-1500/mo you could use to kill that rental property loan.

If you have a HELOC that's under 5% (and fixed) you might consider using it to pay down your rental property.  Alternatively, if you have a lot of equity in your home, now is a good time to refinance to cash out some of that equity and pay down that rental property debt. 

[MakeitRain]

Thank you for your reply.

Can I contribute to a deductible IRA?  I thought the cut off for a deductible IRA for married filing jointly was < $96,001 AGI?   

[dandarc]

Thank you for your reply.

Can I contribute to a deductible IRA?  I thought the cut off for a deductible IRA for married filing jointly was < $96,001 AGI?   

Technically MAGI.  For MAGI, I get:

120K gross - 36K 401K = 84K max from your jobs - you also deduct health insurance premiums, and hsa/fsa and similar stuff too.  How much is your other income - rentals, dividends and such?

[nereo]

Thank you for your reply.

Can I contribute to a deductible IRA?  I thought the cut off for a deductible IRA for married filing jointly was < $96,001 AGI?   

The deduction goes through a phase-out between $96k and $118k for married couples filling jointly based on your AGI.  You said your gross salary was $120k.  Remember that you get a standard deduction for both of you which will lower your AGI.  Also, 401(k) contributions are typically excluded from your taxable income (the reason why the phase-out deduction limits are different for filers who have a retirment plan at work vs. those that don't).

Youll have to double-check your own AGI to make sure (just look at your 2015 taxes) but if you are earning $120k gross and contributing that much to your 401(k)s it should be under the $96k threshold.  If it isn't, then your income is either much higher than you reported (and youv'e got big spending leaks) or something's fishy with your taxes.

[MakeitRain]

Ok.....I looked at my tax return for 2015 and my AGI is $121,000. 

Gross Income is about 145,000. 

[dandarc]

Ok.....I looked at my tax return for 2015 and my AGI is $121,000. 

Gross Income is about 145,000. 

Ah - well, not going to be able to deduct the tIRA, but I'd still max out the 401Ks - that AGI puts you in the 25% bracket, assuming MFJ.  That's $2500 in tax savings you're leaving on the table by not maxing her's out to 18K if you can.

Then there are some other things you can do to save on taxes, which you may already be doing but the post doesn't say.

Either of you work for government / schools?  See if they offer a 457B in addition to the 401K / 403B.  That gives you another 18K deferral bucket - that could be huge for you.

Kids go to daycare or camps or whatnot?  Look into a dependent care flexible spending account at an employer.

Have HSA-eligible health insurance?  Max that out.

Don't?  Employer offer a healthcare FSA?

Basically, read that benefits packet cover-to-cover.

[nereo]

Ok.....I looked at my tax return for 2015 and my AGI is $121,000. 

Gross Income is about 145,000.

Ok - then it's time to take a much closer look at your numbers, because something is sucking your cash away.  A lot of that may be taxes, but I suspect there's more to the story.

You earn: $145,000 (gross)
You spend: $54,000 (estimated living expenses)
401k contributions: $26k (estimated) - ERROR: Gross pay - 401(k) contributions ≠ $121k.  Extra rental income?
Taxes on income: ~~$21,500 (est. - does not include rental income, etc.)
Mortgages: not stated - rough estimate $2k/month based on numbers given.

Take a closer look at your numbers.  If you can provide details on your rental income, monthly mortgage payments, etc. then we can better answer your original question.

[dandarc]

The deduction goes through a phase-out between $96k and $118k for married couples filling jointly based on your AGI.  You said your gross salary was $120k.  Remember that you get a standard deduction for both of you which will lower your AGI.  Also, 401(k) contributions are typically excluded from your taxable income (the reason why the phase-out deduction limits are different for filers who have a retirment plan at work vs. those that don't).

Youll have to double-check your own AGI to make sure (just look at your 2015 taxes) but if you are earning $120k gross and contributing that much to your 401(k)s it should be under the $96k threshold.  If it isn't, then your income is either much higher than you reported (and youv'e got big spending leaks) or something's fishy with your taxes.

Technical point - the standard deduction, itemized deductions, and personal exemptions do not lower AGI or MAGI (AGI before the tIRA deduction for most people).  Those lower taxable income.  401K does lower AGI / MAGI.  tIRA deduction is determined on MAGI, so this is important to understand when planning out your taxes.

[nereo]

The deduction goes through a phase-out between $96k and $118k for married couples filling jointly based on your AGI.  You said your gross salary was $120k.  Remember that you get a standard deduction for both of you which will lower your AGI.  Also, 401(k) contributions are typically excluded from your taxable income (the reason why the phase-out deduction limits are different for filers who have a retirment plan at work vs. those that don't).

Youll have to double-check your own AGI to make sure (just look at your 2015 taxes) but if you are earning $120k gross and contributing that much to your 401(k)s it should be under the $96k threshold.  If it isn't, then your income is either much higher than you reported (and youv'e got big spending leaks) or something's fishy with your taxes.

Technical point - the standard deduction, itemized deductions, and personal exemptions do not lower AGI or MAGI (AGI before the tIRA deduction for most people).  Those lower taxable income.  401K does lower AGI / MAGI.  tIRA deduction is determined on MAGI, so this is important to understand when planning out your taxes.

ah - thanks for the correction.  At a gross salary of $145k (+ potential rental income) the OP likely won't get his/her AGI down to a level where a tIRA makes sense.  However there's still a lot of extra tax being paid by not maxing out the wife's 401(k), and the 'burn' rate as about 2x higher than the $4500 in living expenses.

[dandarc]

nereo touched on the Roth pipeline method, but this post details getting around the 59.5 thing:

http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

[MakeitRain]

We spent a good portion of 2015 paying off debt and getting ourselves in a position to start putting away money.  We just wrapped up our debt and now want to start putting away money.  We're on the accumulation phase of our journey now and it definitely feels great!  I wish I would have started this whole new way of thinking and looking at all this sooner!! 

So it sounds like a Roth or after tax are my only options after maxing out the wife's 401k, HSA and Dependent Care Spending Account.  I'm wondering if we need the money in 5 to 10 years, is it worth putting in a Roth or just throw it in a taxable account?  Or do a do both?  I'm looking for a bucket to use before 59.5. 

Most of our 401k/IRA money is made up of my 401k that I have now.  I'm not able to roll that over or do anything with it until I leave my company. 

Thanks

[nereo]

So it sounds like a Roth or after tax are my only options after maxing out the wife's 401k, HSA and Dependent Care Spending Account.  I'm wondering if we need the money in 5 to 10 years, is it worth putting in a Roth or just throw it in a taxable account?  Or do a do both?  I'm looking for a bucket to use before 59.5. 

See dandarc's link about accessing your retirement accounts.  The most persistent finance myth is that you can't get that money before age 59.5

Yes, raise your wife's 401(k) account and contribute to a ROTH at that income.  Only AFTER those are maxed out should you fund a taxable account.
Remember, you can take contributions out of a ROTH at any time, penalty free.

Now that you spend 2015 paying down debt and you have an income of $145k gross + rental income (presumably?) you should have an absolute fire-hose of cash.  You've said your living expenses (outside of the mortgages) are about $4500/month.  That's high but not outrageous.  After maxing out the 401(k) and ROTH and paying taxes I estimate you should have ~$6.5k/month.  That leaves you $2k to pay for you primary mortgage and/or invest.  Does that sound about right?  Hopefully your rental is at least revenue-neutral; if not, consider selling it.