Author Topic: Advice for relatively high earning couple (USA)  (Read 1514 times)

Scortius

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Advice for relatively high earning couple (USA)
« on: February 20, 2017, 11:52:12 AM »
Hi all, relatively new here and trying to get things in order for a path to FI in approximately 10-15 years.

I recently started a new job that is quite stable and pays very well.  My wife earns a smaller but decent amount at her job.  This year our combined income will be quite high, so I'm trying to plan ahead now to maximize our contributions and lower our tax burden.  We are also interested in buying a house this year, so we may not be able to go all out on our retirement contributions, but either way it'll be helpful to have this figured out.

Primarily I'm a bit confused about how a Roth Ladder, a Mega Backdoor, and traditional IRA contributions all fit together.  I imagine this isn't the first time this has come up.

For reference, I make about 120k in salary and have a match up to 10% of my salary on my 401k (!!!), and my wife makes around 45k with about a 5% match.  We would like to retire in about 15 years in our early 50s.  I'm not sure about hers, but my 401k offers me some fantastic low expense funds, so no need to rush out of it if not necessary.

So, if we both contribute 18k individually, that gets us:
36k + 15k(ish) = 51k into a traditional 401k

Can we both also contribute the full 5.5k into a traditional IRA?  I read somewhere that there are income limits near our salaries.
Assuming so: 11k into traditional IRAs

Total: 62k into traditional accounts (if my assumptions above hold).

So far we're already killing it, but we live in a cheap area so there's a possibility we could go ever further (especially so after we're done saving for our down-payment).  This is where my confusion about the mega backdoor, or even a regular backdoor Roth conversion come into play.  Further, given we'll be a decade or so short of 59.5, we would need to start thinking about how to access those funds a bit early, or whether or not we should just go for a pure taxable account and retire at or below the 15% tax bracket (which I've heard is tax free on capital gains?).

I have 15 years to figure out the details so I don't have to understand everything perfectly, but I would like to start planning the contributions now so we can get set in the right direction before 2017 tax season hits us hard next year.

So, the main questions I guess:
1) Are my above assumptions correct in that we can at the very least do traditional contributions of ~62k?
2) If so, are there questions I need to be asking my HR department regarding in-service contributions, Roth rollovers, etc for contributions beyond the 18k/5.5k limits?
3) Given that we will be hopefully funding some/all of our 2 kids college educations around the time we also want to retire, are there ways to prepare for those expenses in a tax advantaged way (we have small 529s for each of them, but they're not a priority).
4) How and when should we start planning on setting up a Roth ladder?
5) Is it true we can invest post-tax money tax-free if we stay below the 15% bracket upon retirement (assuming that rule remains)?
6) Am I missing anything else that would help?

Thanks a ton and sorry in advance for asking Roth conversion questions that I'm sure have been addressed many times.  I just can't seem to find answers that address my personal situation to the point where I can wrap my head around them.
« Last Edit: February 20, 2017, 02:09:44 PM by Scortius »

Scortius

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Re: Advice for relatively high earning couple (USA)
« Reply #1 on: February 20, 2017, 03:10:38 PM »
Just to add real quick that I took some time today to examine my 401k plan, and it does look like I may be able to take advantage of a mega backdoor using after tax contributions.

Further, it looks like I'm ineligible for pre-tax traditional IRAs, but I would be able to contribute directly to a Roth IRA (and thus no need for a regular backdoor Roth conversion).

Given all that I assume it's worth it to max pre-tax, then hit the Roth IRA, then max my mega-backdoor contributions in that order?  Then I assume we can look into the 529 plans and/or taxable brokerage accounts?

Am I right that I will then be able to withdraw Roth contributions, but I will have to leave any gains in those accounts until 59.5?  This is so confusing... I don't know how everyone here keeps track of everything!

Thanks in advance once again!

Ocinfo

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Advice for relatively high earning couple (USA)
« Reply #2 on: February 20, 2017, 04:15:52 PM »
You likely won't be able to deduct contributions to a traditional IRA because of your salaries since you have access to a 401k (limit is lower than if you didn't have one through work as shown here: https://www.google.com/amp/s/www.fool.com/amp/retirement/2016/11/05/ira-income-limits-for-2016-and-2017.aspx?client=safari)

Never mind, saw you realized this but link is still useful so I'll leave the post.

Sent from my iPhone using Tapatalk
« Last Edit: February 20, 2017, 04:17:37 PM by Ocinfo »

MDM

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Re: Advice for relatively high earning couple (USA)
« Reply #3 on: February 20, 2017, 06:04:58 PM »
So, the main questions I guess:
1) Are my above assumptions correct in that we can at the very least do traditional contributions of ~62k?
2) If so, are there questions I need to be asking my HR department regarding in-service contributions, Roth rollovers, etc for contributions beyond the 18k/5.5k limits?
3) Given that we will be hopefully funding some/all of our 2 kids college educations around the time we also want to retire, are there ways to prepare for those expenses in a tax advantaged way (we have small 529s for each of them, but they're not a priority).
4) How and when should we start planning on setting up a Roth ladder?
5) Is it true we can invest post-tax money tax-free if we stay below the 15% bracket upon retirement (assuming that rule remains)?
6) Am I missing anything else that would help?
See Investment Order and How to withdraw funds from your IRA and 401k without penalty before age 59.5 - those should answer at least some of your questions.

Regarding question #5: there are some qualifiers needed.  Qualified dividends and long term capital gains are tax free to the extent total taxable income stays in the 15% bracket (under current rules).