Author Topic: Reader case study: tax exempt situation  (Read 3157 times)

stardusty

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Reader case study: tax exempt situation
« on: January 18, 2016, 06:09:30 PM »
Hi everyone - I work for the United Nations, therefore, my entire salary is tax exempt. I am not a US citizen but will spend the next 25 years working in the US. I am 37 years old. I live in Washington DC. I have no student loans, credit card debt or car loans. I do have a mortgage. I am quite good at saving but clueless when it comes to investing and my question to the MMM community is how would you suggest I best invest my current and future savings in order to retire comfortably by 60 the latest?


Income:
Gross pay:       $135,000 annual ($5625 biweekly)

Heath insurance: $100 (biweekly)
Pension contribution: $600 (biweekly)

Net pay:      $4925 (biweekly)    $9850 (per month)

Taxes:
No federal or state tax (entire salary tax exempt as UN staff)

Expenses:

Groceries:      $700 (approximately per month)
Mortgage, insurance, and tax:       $2200 (per month)
Utilities:         $250 (per month)
Cable and internet: $120 (per month)
Gym: $50 (per month)
Leisure and travel: $300 (per month)
Other: $300 (per month)

   Total         $3920  (DC is an expensive city!)

Assets:
Home: Value $800,000 (I owe $330,000)
Cash:   $200,000  (I have not yet invested this - would like help with this in particular)
Online brokerage account:   $30,000
   Total         $1,030,000

Retirement:
   UN Pension:      $70,000

Total Assets:         $1,100,000

Liabilities:

Mortgage: $330,000 (amount I owe)


Total Liabilities:     $770,000       

Net Worth:         $440,000

Thanks a lot for any advice!...especially on how best to invest cash savings of $200K with a time horizon of 20 years


MDM

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Re: Reader case study: tax exempt situation
« Reply #1 on: January 18, 2016, 09:05:24 PM »
Interesting situation.  Some questions:
 - Do you expect to retire in the US or repatriate or go elsewhere?
 - Do you have any restrictions on investing in the US or in your native country?
 - Do you pay taxes on interest, dividends, capital gains, etc.?  US taxes or your home country's tax?
 - Are you eligible to contribute to Roth accounts here or similar (tax-free earnings and withdrawals, perhaps with some age restrictions) ones in your home country?

golfreak12

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Re: Reader case study: tax exempt situation
« Reply #2 on: January 18, 2016, 09:45:38 PM »
Man, must be nice making $135K tax free.

Bracken_Joy

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Re: Reader case study: tax exempt situation
« Reply #3 on: January 18, 2016, 09:52:46 PM »
Very interesting circumstances! I don't have any advice, but am following to learn.

electriceagle

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Re: Reader case study: tax exempt situation
« Reply #4 on: January 19, 2016, 01:27:51 AM »
Here's a question: who insures a UN pension?

What happens if (god forbid) the UN goes the way of the League of Nations?

Will your home country take over the pension obligation to you?

Mother Fussbudget

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Re: Reader case study: tax exempt situation
« Reply #5 on: January 19, 2016, 02:25:00 PM »
Your situation is a bit unique in that you don't have to worry about the US income tax component that most people here are thinking about.  Otherwise, the advice is pretty much the same:
    "Live on less than you earn.  Save the difference."

In your case, the 'back-of-the-envelope-math' simple math looks like:
Income/mth:  $9,850.00
Expenses/mth:  $3,920.00
Savings/mth:  $5,930.00
Savings to date:  $230,000.00
25X annual  expenses:  $1,176,000.00 (assumes a 4% Safe Withdrawal Rate)
Annual ROI: 7% (0.5833%/month - big assumption here - 5 year *AVG* market return is 12%, but last year was -1%)
Additional Savings needed:  $946,000.00
#months to save to reach $946K @7% interest:  78
#years to save to reach $946K @7% interest:  6.5

What to do with all that money?
Invest in no-load stock index funds - ETF=Exchange Traded Fund. Vanguard S&P500 Index Fund (VFINX), Vanguard Total Stock Market Index Fund (VTI, VTSAX) etc. with zero commissions when bought in a Vanguard brokerage account. (Fidelity, etc. has similar offers/funds)
Low Expense ratio:  0.17% - for every $100,000 held, they subtract $170/year from their gains to pay for the fund upkeep.  Many funds charge 10-to-20 times as much.
Bonds:  safer, yes - with lower rates of return.  Vanguard Total Bond Fund.  Some choose to invest X% in bonds where X=their age.
Real Estate:  own your own home – pay that ~4% interest… and think of it as a ~4% BOND you’re paying to yourself. Invest in REIT ETF funds if you want more exposure to the housing market.

There are as many opinions on investment asset allocation as there are investors.  Pick whatever allocation allows you to sleep at night, and stick with it.

Want further reading?  Read JHCollins' "Stock series" on JHCollins.com

Gin1984

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Re: Reader case study: tax exempt situation
« Reply #6 on: January 19, 2016, 02:35:20 PM »
Will you be retiring to another country?  Do you have to file taxes if you have income (like investment income)?

ulrichw

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Re: Reader case study: tax exempt situation
« Reply #7 on: January 19, 2016, 02:53:07 PM »
Your situation is a bit unique in that you don't have to worry about the US income tax component that most people here are thinking about. 

I don't think this is exactly true - I believe the given exemption is only applicable to stardusty's UN salary. Any other income (including investment income) would be taxable. Furthermore, depending on stardusty's status, (s)he may be paying taxes, but getting reimbursed by the UN.

Stardusty, it would help if you could provide information about which case applies to you - taxes, current and future, could have some impact on investment advice.

[...]
25X annual  expenses:  $1,176,000.00 (assumes a 4% Safe Withdrawal Rate)
[...]
Additional Savings needed:  $946,000.00 [...]
Note that Stardusty mentioned a $70K UN pension - this amount "needed" only applies if Stardusty wants to retire early and live on savings.

In general, I agree with the investment advice. Another great resource is bogleheads.com - Look for the 3 fund strategy for a simple to understand and effective way to invest for the long term.

Also, where do you plan to retire? If in the US, I'd investigate your ability to make Roth contributions and/or conversions. This will allow you to convert a portion of your taxable portfolio to tax-free. Your status has a big impact here, because if you're being reimbursed (vs tax-free), Roth conversions will come with significant tax liabilities.

stardusty

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Re: Reader case study: tax exempt situation
« Reply #8 on: January 19, 2016, 08:03:57 PM »
Thanks everyone for taking the time to respond. Great question regarding who insures UN pensions, I have no idea!
It's difficult to say where I will retire given I have another 25+ years ahead of me but considering I am married to an American there is a good chance I will retire in the US and become a citizen upon retirement. I don't have any restrictions on investing in the US. It is only my UN salary that is tax exempt so I do pay taxes on capital gains and real estate.

Mother Fussbudget

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Re: Reader case study: tax exempt situation
« Reply #9 on: January 20, 2016, 11:54:20 AM »
Do you have access to a 401K plan, or other tax-deferred retirement investment accounts?
Since your investment returns are taxable, you should ask your human resources contact about this.  Contribute to the annual limit every year, and invest that account in ETF's.

I noticed there's a United Nations Federal Credit Union with a 401K plan - but it's unclear if they're actually associated with the UN, or if that's just their company name.  If they're really a UN credit union, are you a member?  Can you participate in their 401K plan?

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[And a personal note... thank you for "doing the thankless" - you may not even think your contribution is that valuable, but IMHO the UN works toward improved world peace.   Thank you for working for world peace.]