Author Topic: Check my plan???  (Read 5078 times)

Gin1984

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Check my plan???
« on: September 24, 2015, 07:10:26 AM »
I am married with one child and we currently plan to keep our taxable income at $43050 which because of child tax credit, EITC and savings credit our federal tax burden is only $645 this year.  However we live in NY so our state tax burden is $1101.  Granted even at that level we are paying less than 5% on $43050 so it seems decent.  We still have $1100 post tax to put in either a Roth, a 529 with a state tax deduction ($57 savings), our EF which is admittedly small or into our 403b to decrease both state and federal.  Any opinions on which is better?
I am leaning toward Roth because of the flexibility and for grabbing the low rate right now.
« Last Edit: September 24, 2015, 07:56:11 AM by Gin1984 »

seattlecyclone

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Re: Check my plan???
« Reply #1 on: September 24, 2015, 08:06:31 AM »
Your effective tax rate is irrelevant to this calculation. What is your marginal rate, taking any changes in tax credits into account? Do you expect that rate to be higher, lower, or the same during retirement?

Since you're in EITC territory, that probably makes your effective tax rate a bit higher than it would be otherwise, since reducing your income should cause that tax credit to go up. Therefore my gut feeling says the 403(b) might be the better deal.

If you're going to go with a post-tax option, the state tax deduction for the 529 makes that sound a little bit better than a Roth as long as you're reasonably certain you'll use the entire sum on education. If not, go with the Roth.

Gin1984

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Re: Check my plan???
« Reply #2 on: September 24, 2015, 08:13:29 AM »
Top rate for federal is 10% but then we have $1000 for the child care tax credit (refundable), $200 for savers credit (non-refundable), $100ish for EITC (refundable).  For state our top bracket is 5.25% and we get 30% of EITC off of that.  That is why I am a little unsure because the credits change things.  But then again, they won't be there when we retire either so I don't know which will be cheaper.
I am almost 95% sure we would use it all for education unless something horrible happened (that possibility is why I keep leaning Roth). 

seattlecyclone

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Re: Check my plan???
« Reply #3 on: September 24, 2015, 11:06:28 AM »
About the saver's credit: based on the $200 figure you reported, it sounds like you're in the income bucket that gets you a 10% saver's credit and your spouse isn't contributing anything to retirement accounts. You're allowed to contribute to an IRA for your spouse even if they don't earn any money on their own. By contributing at least $2,000 to your spouse's IRA, that would increase your saver's credit to $400. If I were in your shoes, that might be the first thing I would do.

Roth or traditional IRA? If you can make enough traditional contributions to bring your AGI down below $39,500, that would increase your saver's credit from $400 to $800. This is probably worth doing if at all possible. If you can contribute another $3,000 on top of that into traditional IRAs or your 403(b), your saver's credit could go up to $2,000 (or your total tax before credits, whichever is lower). The EITC and child tax credit would then be added on top of this to make your total federal tax be quite negative.

I believe that for the purpose of the EITC, it's generally better to make 403(b) contributions than traditional IRA contributions because money that you contributed to the 403(b) doesn't show up on your W-2 so it doesn't even count as "earned income" for this purpose. So contribute $2,000 to a traditional IRA for your spouse and then put enough into your 403(b) to get your AGI below $36,500 to really hit the saver's credit sweet spot. Once you get to this level, if you still have money left to save, go with Roth because your saver's credit is already erasing all of the federal tax it can.

MDM

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Re: Check my plan???
« Reply #4 on: September 24, 2015, 01:19:48 PM »
The best thing you could do is fill out your 2015 tax forms now, then adjust numbers to see the effects.  Ok, you can't do exactly that because
  - you don't know precisely what the rest of 2015 will bring, and
  - the final versions of 2015 tax forms aren't available yet.
But you can make a good estimate of your own situation, and most (all?) 2015 tax rules that will affect you are known, so you should be able to come very close.  See http://forum.mrmoneymustache.com/taxes/the-mustache-tax-guide-(u-s-version)/ and http://forum.mrmoneymustache.com/ask-a-mustachian/turbo-tax-vs-cpa/ for more ideas about this.

Change your income/contribution/whatever by $100 and the change in total tax will be your marginal tax rate with respect to that income/contribution/whatever.  Then follow seattlecyclone's advice.

Gin1984

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Re: Check my plan???
« Reply #5 on: September 24, 2015, 05:25:56 PM »
About the saver's credit: based on the $200 figure you reported, it sounds like you're in the income bucket that gets you a 10% saver's credit and your spouse isn't contributing anything to retirement accounts. You're allowed to contribute to an IRA for your spouse even if they don't earn any money on their own. By contributing at least $2,000 to your spouse's IRA, that would increase your saver's credit to $400. If I were in your shoes, that might be the first thing I would do.

Roth or traditional IRA? If you can make enough traditional contributions to bring your AGI down below $39,500, that would increase your saver's credit from $400 to $800. This is probably worth doing if at all possible. If you can contribute another $3,000 on top of that into traditional IRAs or your 403(b), your saver's credit could go up to $2,000 (or your total tax before credits, whichever is lower). The EITC and child tax credit would then be added on top of this to make your total federal tax be quite negative.

I believe that for the purpose of the EITC, it's generally better to make 403(b) contributions than traditional IRA contributions because money that you contributed to the 403(b) doesn't show up on your W-2 so it doesn't even count as "earned income" for this purpose. So contribute $2,000 to a traditional IRA for your spouse and then put enough into your 403(b) to get your AGI below $36,500 to really hit the saver's credit sweet spot. Once you get to this level, if you still have money left to save, go with Roth because your saver's credit is already erasing all of the federal tax it can.
Actually my husband is putting money in our retirement account.  I am ineligible for the saver's credit because I just graduated grad school.

seattlecyclone

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Re: Check my plan???
« Reply #6 on: September 24, 2015, 05:44:51 PM »
About the saver's credit: based on the $200 figure you reported, it sounds like you're in the income bucket that gets you a 10% saver's credit and your spouse isn't contributing anything to retirement accounts. You're allowed to contribute to an IRA for your spouse even if they don't earn any money on their own. By contributing at least $2,000 to your spouse's IRA, that would increase your saver's credit to $400. If I were in your shoes, that might be the first thing I would do.

Roth or traditional IRA? If you can make enough traditional contributions to bring your AGI down below $39,500, that would increase your saver's credit from $400 to $800. This is probably worth doing if at all possible. If you can contribute another $3,000 on top of that into traditional IRAs or your 403(b), your saver's credit could go up to $2,000 (or your total tax before credits, whichever is lower). The EITC and child tax credit would then be added on top of this to make your total federal tax be quite negative.

I believe that for the purpose of the EITC, it's generally better to make 403(b) contributions than traditional IRA contributions because money that you contributed to the 403(b) doesn't show up on your W-2 so it doesn't even count as "earned income" for this purpose. So contribute $2,000 to a traditional IRA for your spouse and then put enough into your 403(b) to get your AGI below $36,500 to really hit the saver's credit sweet spot. Once you get to this level, if you still have money left to save, go with Roth because your saver's credit is already erasing all of the federal tax it can.
Actually my husband is putting money in our retirement account.  I am ineligible for the saver's credit because I just graduated grad school.

Ah, makes sense. Are you 100% certain that the number of credits you were registered for during your last semester was enough for your university to consider you a full-time student? When I was in grad school, I was taking six credits at a time while also being a TA. The university considered anything less than eight credits to be a part-time enrollment, which did allow me to claim the saver's credit.

Regardless, there are still pretty compelling benefits to getting your income below that $36.5k level if possible, just not quite as much as if you can both claim the saver's credit.

Gin1984

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Re: Check my plan???
« Reply #7 on: September 24, 2015, 07:17:45 PM »
About the saver's credit: based on the $200 figure you reported, it sounds like you're in the income bucket that gets you a 10% saver's credit and your spouse isn't contributing anything to retirement accounts. You're allowed to contribute to an IRA for your spouse even if they don't earn any money on their own. By contributing at least $2,000 to your spouse's IRA, that would increase your saver's credit to $400. If I were in your shoes, that might be the first thing I would do.

Roth or traditional IRA? If you can make enough traditional contributions to bring your AGI down below $39,500, that would increase your saver's credit from $400 to $800. This is probably worth doing if at all possible. If you can contribute another $3,000 on top of that into traditional IRAs or your 403(b), your saver's credit could go up to $2,000 (or your total tax before credits, whichever is lower). The EITC and child tax credit would then be added on top of this to make your total federal tax be quite negative.

I believe that for the purpose of the EITC, it's generally better to make 403(b) contributions than traditional IRA contributions because money that you contributed to the 403(b) doesn't show up on your W-2 so it doesn't even count as "earned income" for this purpose. So contribute $2,000 to a traditional IRA for your spouse and then put enough into your 403(b) to get your AGI below $36,500 to really hit the saver's credit sweet spot. Once you get to this level, if you still have money left to save, go with Roth because your saver's credit is already erasing all of the federal tax it can.
Actually my husband is putting money in our retirement account.  I am ineligible for the saver's credit because I just graduated grad school.

Ah, makes sense. Are you 100% certain that the number of credits you were registered for during your last semester was enough for your university to consider you a full-time student? When I was in grad school, I was taking six credits at a time while also being a TA. The university considered anything less than eight credits to be a part-time enrollment, which did allow me to claim the saver's credit.

Regardless, there are still pretty compelling benefits to getting your income below that $36.5k level if possible, just not quite as much as if you can both claim the saver's credit.
I am not going to get my spending down $4000 by the end of the year.  Though, honestly I am not sure the great benefits of getting it that low.  Especially when I already only am paying about $645.  I can't see how that out weighs the Roth. 
But no, I was a full time student.

seattlecyclone

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Re: Check my plan???
« Reply #8 on: September 24, 2015, 07:57:31 PM »
About the saver's credit: based on the $200 figure you reported, it sounds like you're in the income bucket that gets you a 10% saver's credit and your spouse isn't contributing anything to retirement accounts. You're allowed to contribute to an IRA for your spouse even if they don't earn any money on their own. By contributing at least $2,000 to your spouse's IRA, that would increase your saver's credit to $400. If I were in your shoes, that might be the first thing I would do.

Roth or traditional IRA? If you can make enough traditional contributions to bring your AGI down below $39,500, that would increase your saver's credit from $400 to $800. This is probably worth doing if at all possible. If you can contribute another $3,000 on top of that into traditional IRAs or your 403(b), your saver's credit could go up to $2,000 (or your total tax before credits, whichever is lower). The EITC and child tax credit would then be added on top of this to make your total federal tax be quite negative.

I believe that for the purpose of the EITC, it's generally better to make 403(b) contributions than traditional IRA contributions because money that you contributed to the 403(b) doesn't show up on your W-2 so it doesn't even count as "earned income" for this purpose. So contribute $2,000 to a traditional IRA for your spouse and then put enough into your 403(b) to get your AGI below $36,500 to really hit the saver's credit sweet spot. Once you get to this level, if you still have money left to save, go with Roth because your saver's credit is already erasing all of the federal tax it can.
Actually my husband is putting money in our retirement account.  I am ineligible for the saver's credit because I just graduated grad school.

Ah, makes sense. Are you 100% certain that the number of credits you were registered for during your last semester was enough for your university to consider you a full-time student? When I was in grad school, I was taking six credits at a time while also being a TA. The university considered anything less than eight credits to be a part-time enrollment, which did allow me to claim the saver's credit.

Regardless, there are still pretty compelling benefits to getting your income below that $36.5k level if possible, just not quite as much as if you can both claim the saver's credit.
I am not going to get my spending down $4000 by the end of the year.  Though, honestly I am not sure the great benefits of getting it that low.  Especially when I already only am paying about $645.  I can't see how that out weighs the Roth. 
But no, I was a full time student.

I typed some numbers into the case study spreadsheet to make some comparisons. For all of the below comparisons, your husband contributed $2,000 to a traditional IRA. Any additional contributions are to your 403(b).
With $40,000 AGI, you have a saver's credit of $200, EITC of $423 and total federal income tax of -$83.
With $38,000 AGI, you have a saver's credit of $400, EITC of $743 and total federal income tax of -$807.
With $36,000 AGI, you have a saver's credit of $1,000, EITC of $1,063 and total federal income tax of -$1,923.

Contributing an extra $4,000 to your 403(b) might only reduce your take-home pay by $1,840, minus any change in state tax. That's over a 50% marginal tax rate on this income! This definitely outweighs the Roth unless you plan on having a marginal tax rate of over 50% in retirement. Not likely!

If you can't afford it you can't afford it, but the benefits are quite real if you can make it work.
« Last Edit: September 24, 2015, 08:00:27 PM by seattlecyclone »

Gin1984

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Re: Check my plan???
« Reply #9 on: September 25, 2015, 06:12:23 AM »
About the saver's credit: based on the $200 figure you reported, it sounds like you're in the income bucket that gets you a 10% saver's credit and your spouse isn't contributing anything to retirement accounts. You're allowed to contribute to an IRA for your spouse even if they don't earn any money on their own. By contributing at least $2,000 to your spouse's IRA, that would increase your saver's credit to $400. If I were in your shoes, that might be the first thing I would do.

Roth or traditional IRA? If you can make enough traditional contributions to bring your AGI down below $39,500, that would increase your saver's credit from $400 to $800. This is probably worth doing if at all possible. If you can contribute another $3,000 on top of that into traditional IRAs or your 403(b), your saver's credit could go up to $2,000 (or your total tax before credits, whichever is lower). The EITC and child tax credit would then be added on top of this to make your total federal tax be quite negative.

I believe that for the purpose of the EITC, it's generally better to make 403(b) contributions than traditional IRA contributions because money that you contributed to the 403(b) doesn't show up on your W-2 so it doesn't even count as "earned income" for this purpose. So contribute $2,000 to a traditional IRA for your spouse and then put enough into your 403(b) to get your AGI below $36,500 to really hit the saver's credit sweet spot. Once you get to this level, if you still have money left to save, go with Roth because your saver's credit is already erasing all of the federal tax it can.
Actually my husband is putting money in our retirement account.  I am ineligible for the saver's credit because I just graduated grad school.

Ah, makes sense. Are you 100% certain that the number of credits you were registered for during your last semester was enough for your university to consider you a full-time student? When I was in grad school, I was taking six credits at a time while also being a TA. The university considered anything less than eight credits to be a part-time enrollment, which did allow me to claim the saver's credit.

Regardless, there are still pretty compelling benefits to getting your income below that $36.5k level if possible, just not quite as much as if you can both claim the saver's credit.
I am not going to get my spending down $4000 by the end of the year.  Though, honestly I am not sure the great benefits of getting it that low.  Especially when I already only am paying about $645.  I can't see how that out weighs the Roth. 
But no, I was a full time student.

I typed some numbers into the case study spreadsheet to make some comparisons. For all of the below comparisons, your husband contributed $2,000 to a traditional IRA. Any additional contributions are to your 403(b).
With $40,000 AGI, you have a saver's credit of $200, EITC of $423 and total federal income tax of -$83.
With $38,000 AGI, you have a saver's credit of $400, EITC of $743 and total federal income tax of -$807.
With $36,000 AGI, you have a saver's credit of $1,000, EITC of $1,063 and total federal income tax of -$1,923.

Contributing an extra $4,000 to your 403(b) might only reduce your take-home pay by $1,840, minus any change in state tax. That's over a 50% marginal tax rate on this income! This definitely outweighs the Roth unless you plan on having a marginal tax rate of over 50% in retirement. Not likely!

If you can't afford it you can't afford it, but the benefits are quite real if you can make it work.
Why are you putting $2000 in a traditional?  Can you explain that?  I think the other problem is I am looking at it from $43050 and you are starting with $40000.  It is not a $4000 difference but a $7000.  If it was from $40000 to $36000, I would agree with you and find the extra $900.  But you are saying drop $7000. To me that is a 30% ROI.  Good but not as great as you were thinking. 

teen persuasion

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Re: Check my plan???
« Reply #10 on: September 25, 2015, 07:16:06 AM »
I am married with one child and we currently plan to keep our taxable income at $43050 which because of child tax credit, EITC and savings credit our federal tax burden is only $645 this year.  However we live in NY so our state tax burden is $1101.  Granted even at that level we are paying less than 5% on $43050 so it seems decent.  We still have $1100 post tax to put in either a Roth, a 529 with a state tax deduction ($57 savings), our EF which is admittedly small or into our 403b to decrease both state and federal.  Any opinions on which is better?
I am leaning toward Roth because of the flexibility and for grabbing the low rate right now.
Roth will not change taxes.
EF will not change taxes.
529 you say gives $57 savings on NYS taxes.
403b is only unknown here.  Since you are MFJ with one child, it looks like the EITC phaseout rate is roughly 16%.  The 30% NY EITC match adds another 4.8%.  You said your fed rate is 10%, and what is your marginal NY rate, 6% 5.2%?  So a total of something like 36+% 36% tax reduction for whatever you can add to a 403b, more if you can bump to a better Saver's credit bracket.

Is that useful?

ETA: Duh, obviously your NY marginal rate is more like 5.2% if your 529 savings are $57.  So just about 36% exactly.
« Last Edit: September 25, 2015, 07:35:56 AM by teen persuasion »

seattlecyclone

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Re: Check my plan???
« Reply #11 on: September 25, 2015, 08:35:51 AM »
I typed some numbers into the case study spreadsheet to make some comparisons. For all of the below comparisons, your husband contributed $2,000 to a traditional IRA. Any additional contributions are to your 403(b).
With $40,000 AGI, you have a saver's credit of $200, EITC of $423 and total federal income tax of -$83.
With $38,000 AGI, you have a saver's credit of $400, EITC of $743 and total federal income tax of -$807.
With $36,000 AGI, you have a saver's credit of $1,000, EITC of $1,063 and total federal income tax of -$1,923.

Contributing an extra $4,000 to your 403(b) might only reduce your take-home pay by $1,840, minus any change in state tax. That's over a 50% marginal tax rate on this income! This definitely outweighs the Roth unless you plan on having a marginal tax rate of over 50% in retirement. Not likely!

If you can't afford it you can't afford it, but the benefits are quite real if you can make it work.
Why are you putting $2000 in a traditional?  Can you explain that?

Putting it into a traditional IRA lowers your AGI, which brings you into a better saver's credit bracket. Roth contributions do not.

Quote
I think the other problem is I am looking at it from $43050 and you are starting with $40000.  It is not a $4000 difference but a $7000.  If it was from $40000 to $36000, I would agree with you and find the extra $900.  But you are saying drop $7000. To me that is a 30% ROI.  Good but not as great as you were thinking.

I was starting from a $43k salary as well. The first example was having your husband contribute $2k to a traditional IRA and you contribute $1k to your 403(b), for an AGI of $40k. The second example had you increase your 403(b) contribution to $3k, and the third example is with a $5k 403(b) contribution.

MDM

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Re: Check my plan???
« Reply #12 on: September 25, 2015, 11:31:00 AM »
In the spreadsheet seattlecyclone mentions, there is a table starting in cell K35 that lists the marginal and cumulative tax savings for various 401k/403b contributions, all else being constant.  Might be worth downloading and entering your own numbers to evaluate.

Gin1984

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Re: Check my plan???
« Reply #13 on: September 25, 2015, 02:18:17 PM »
In the spreadsheet seattlecyclone mentions, there is a table starting in cell K35 that lists the marginal and cumulative tax savings for various 401k/403b contributions, all else being constant.  Might be worth downloading and entering your own numbers to evaluate.
I did and the savers credit was inaccurate for me (I checked the actual IRS site to make sure), and I still can't figure out how the EITC is calculated which makes me nervous.

MDM

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Re: Check my plan???
« Reply #14 on: September 25, 2015, 02:41:20 PM »
In the spreadsheet seattlecyclone mentions, there is a table starting in cell K35 that lists the marginal and cumulative tax savings for various 401k/403b contributions, all else being constant.  Might be worth downloading and entering your own numbers to evaluate.
I did and the savers credit was inaccurate for me (I checked the actual IRS site to make sure), and I still can't figure out how the EITC is calculated which makes me nervous.
Yes, the spreadsheet saver's credit calculation does not understand that you were a full time student.  You could change =MIN(2000*G6,D130)... to =MIN(2000*1,D130)... in cell G19 for the purpose of restricting the calculation to one person only.

AFAIK the EIC calculation would be correct for you.  There is the qualifier in the Instructions: "The number of children <17 years old is used for both the child and earned income tax credits.  This could underestimate the EIC if there are older children in the household."  But your child is young, correct?  Also, you can't have more than $3350 "investment income" to claim the EIC.  The spreadsheet imposes that limit (see cell G22) for "common" cases, but if you have something unusual....

Gin1984

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Re: Check my plan???
« Reply #15 on: September 26, 2015, 11:19:09 AM »
In the spreadsheet seattlecyclone mentions, there is a table starting in cell K35 that lists the marginal and cumulative tax savings for various 401k/403b contributions, all else being constant.  Might be worth downloading and entering your own numbers to evaluate.
I did and the savers credit was inaccurate for me (I checked the actual IRS site to make sure), and I still can't figure out how the EITC is calculated which makes me nervous.
Yes, the spreadsheet saver's credit calculation does not understand that you were a full time student.  You could change =MIN(2000*G6,D130)... to =MIN(2000*1,D130)... in cell G19 for the purpose of restricting the calculation to one person only.

AFAIK the EIC calculation would be correct for you.  There is the qualifier in the Instructions: "The number of children <17 years old is used for both the child and earned income tax credits.  This could underestimate the EIC if there are older children in the household."  But your child is young, correct?  Also, you can't have more than $3350 "investment income" to claim the EIC.  The spreadsheet imposes that limit (see cell G22) for "common" cases, but if you have something unusual....
My issue is I can't figure out how one would calculate EITC now, given the IRS has not published the chart.  Does someone have the calculation and where it is posted from IRS etc.

MDM

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Re: Check my plan???
« Reply #16 on: September 26, 2015, 11:50:08 AM »
My issue is I can't figure out how one would calculate EITC now, given the IRS has not published the chart.  Does someone have the calculation and where it is posted from IRS etc.
The spreadsheet calculations (see cells AB8:AJ32) are based on
http://thismatter.com/money/tax/tax-credits/earned-income-credit.htm
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?DocID=36&Topic2id=40&Topic3id=42.

If you find that the spreadsheet isn't accurate, please advise.  Might be able to fix it for you and others if so.

Cathy

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Re: Check my plan???
« Reply #17 on: September 27, 2015, 09:36:07 AM »
My issue is I can't figure out how one would calculate EITC now, given the IRS has not published the chart.

The algorithm for the earned income tax credit ("EITC") is described in 26 USC 32. It is not invented by the IRS or subject to change by the IRS. That said, the statute does direct the Secretary of the Treasury to publish tables to be used for calculating the EITC, although it doesn't specify a deadline for doing so. 26 USC 32(f)(1).

The IRS has already published a draft version of the tax year 2015 table, available at pages 58 to 69 of the Draft 2015 Form 1040 Instructions (pages 59 to 70 of the PDF document, since the PDF includes an initial unnumbered page). If you wanted tables for past years, they are presumably available in the Form 1040 Instructions of those respective years.
« Last Edit: September 27, 2015, 09:50:14 AM by Cathy »