Personal Finances

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clayr361
Posts: 20
Joined: Tue Aug 19, 2014 2:48 pm

Personal Finances

Post by clayr361 » Wed Aug 20, 2014 9:31 am

I am 28, wife is 27, first kid on the way in January. We live in Texas, so no state tax. Our AGI for last year was 139K. Should be close to 155K - 165K this year. I am an independent contractor and run my business through an LLC. We have health insurance though my wife's company. Wife gets an 8% match through employer on Roth 401K and contributes 10% herself to total about 13K per year. I have an IRA which I max out at $5,500 a year but have been exploring the option of opening a solo 401K and would max that out. Wife has about 60K in a cash management account, 30K in Cd's (Cd's earning just about nothing), 15K in checking/savings. I have 20K in a personal checking/savings account, 36K in the business Checking/savings, 22K in IRA, 5K in cash management account. We own 2 houses 1 of which is being rented out and covers all associated costs with it but we have to show as income on taxes.

Mortgage 220K at 4.375%. Monthly @ $1620 + additional $580 principal only payment to pay down faster.
No student loans
No vehicle loans
No other debt besides mortgage

I guess my question is how to reduce the tax burden and where should excess money be going. I know my first step should be to open the Solo 401K. My question to this is since I have already contributed the max $5,500 to an IRA how much could I contribute to a 401K before years end? Should I contribute to a regular or Roth 401K? Being an independent contractor and trying to reduce taxes wouldn't a regular 401k be better? Any advice on where to open a Solo 401K. I run my IRA and CMA through Merrill Lynch. I have looked at their plans and the fees are .52% of account yearly plus $23/month for admin/record keeping fees. Are those fees reasonable or is there a better option? Also I am planning on contributing to a low cost Vanguard target date fund in the 401K once opened, good or bad idea? After maxing out retirement accounts I am planning to start a 529 plan for the little one, thinking about putting in 1K month to that account. Are there any other tax advantaged accounts I should be looking at after this? What about opening an HSA account before years end to pay for some of the costs of the child birth, Etc.. next year. After all tax accounts are done where should money go? It is earning nothing now in savings and Cd's but need to keep a cushion with me being an independent contractor.

My first post on Bogleheads so sorry if all the information is a bit scattered. If there is any more information needed just ask and I will provide it.

Thanks in advance for any replies.

investor1
Posts: 1040
Joined: Thu Mar 15, 2012 8:15 pm

Re: Personal Finances

Post by investor1 » Wed Aug 20, 2014 2:01 pm

The age old question of Roth vs traditional basically boils down to whether you think your tax rate is higher now than it will be during your retirement years. If you think the rate is higher now, defer paying the bill (i.e. go with a traditional account). If you think the rate will be higher in retirement, pay the bill while the rate is low (i.e. go with a Roth).

I think you have the right idea opening up your own 401(k). I'd max that out and max out your Roth IRA. I'd set the wife up to do the same (well, she'll be limited to the $17.5k + employer match limit whereas you'll have easy access to the entire $51k worth of space). I'm not an expert on the logistics of a Solo 401(k), so I'll leave that to the gurus to chime in.

Yes, low cost, passively managed index funds are a good idea. This is VG's bread and butter :) Go with a target date fund if you are looking for a set it and forget it solution and you like the asset classes and glide path. Otherwise, just buy the index funds for the asset classes you want and handle the rebalancing and AA shifts yourself.

529s vary by state. Read up on yours. Also look into UGMA/UGTA and Coverdell plans. Start with the wiki ;)

An HSA is a good idea too. You can pay medical expenses throughout your life, and the account behaves similar to an IRA after your reach the age of 65 (under the current law). Read the wiki on that too.

You seem to be keen on lowering your tax bill. You didn't mention a taxable account, but I'd take the time to read the wiki on tax efficient fund placement. Between your Solo 401(k), your Roth IRA, her 401(k), her Roth IRA, your/her family HSA, you have access to over $86k worth of tax advantaged space, and that doesn't count the college savings plans.

clayr361
Posts: 20
Joined: Tue Aug 19, 2014 2:48 pm

Re: Personal Finances

Post by clayr361 » Wed Aug 20, 2014 2:33 pm

investor1 wrote:The age old question of Roth vs traditional basically boils down to whether you think your tax rate is higher now than it will be during your retirement years. If you think the rate is higher now, defer paying the bill (i.e. go with a traditional account). If you think the rate will be higher in retirement, pay the bill while the rate is low (i.e. go with a Roth).

I think you have the right idea opening up your own 401(k). I'd max that out and max out your Roth IRA. I'd set the wife up to do the same (well, she'll be limited to the $17.5k + employer match limit whereas you'll have easy access to the entire $51k worth of space). I'm not an expert on the logistics of a Solo 401(k), so I'll leave that to the gurus to chime in.

Yes, low cost, passively managed index funds are a good idea. This is VG's bread and butter :) Go with a target date fund if you are looking for a set it and forget it solution and you like the asset classes and glide path. Otherwise, just buy the index funds for the asset classes you want and handle the rebalancing and AA shifts yourself.

529s vary by state. Read up on yours. Also look into UGMA/UGTA and Coverdell plans. Start with the wiki ;)

An HSA is a good idea too. You can pay medical expenses throughout your life, and the account behaves similar to an IRA after your reach the age of 65 (under the current law). Read the wiki on that too.

You seem to be keen on lowering your tax bill. You didn't mention a taxable account, but I'd take the time to read the wiki on tax efficient fund placement. Between your Solo 401(k), your Roth IRA, her 401(k), her Roth IRA, your/her family HSA, you have access to over $86k worth of tax advantaged space, and that doesn't count the college savings plans.


I guess I didn't realize the max for an individual 401K would be 51K. I do not think I am prepared to put that much into it just yet but very good to know. I thought it had the same 17.5K limit like my wife's does. Would it be dumb to put say 17-20K into the individual 401K and 5500 into a ROTH IRA? That way I get both traditional and ROTH accounts. Our tax rate is pretty dang high as it is right now so I think the traditional route would be best for most of the money.

I think the "set and forget" target date would be fine in the 401K but the IRA I might do some balancing and individual funds/ETS's myself as a learning process.

If I went with a 529 it would be out of state. Texas pays no income tax therefore we get no tax breaks like other states do. It is my understanding you can by any states plan and use it anywhere. I am leaning towards Utah's plan, it looks like one of the best from what I have seen.

I think my main focus is lowering the tax bill. We do have some money in taxable accounts though. My wife's 60K and my 5K in the cash management accounts are taxed.

Thanks for your reply and I will do some reading on the Wiki.

livesoft
Posts: 57272
Joined: Thu Mar 01, 2007 8:00 pm

Re: Personal Finances

Post by livesoft » Wed Aug 20, 2014 2:36 pm

Here is a great thread on reducing a family's tax burden: viewtopic.php?t=79510

Read it carefully. Also do not use Roth 401(k), but use traditional 401(k).

HSA is only for folks with an HDHP. Do you all have one?
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investor1
Posts: 1040
Joined: Thu Mar 15, 2012 8:15 pm

Re: Personal Finances

Post by investor1 » Wed Aug 20, 2014 4:03 pm

"Would it be dumb to put say 17-20K into the individual 401K and 5500 into a ROTH IRA? That way I get both traditional and ROTH accounts."

No. Go with whichever plan has the funds you want at the lowest cost (expense ratio, taxes, etc.). If having a mix of traditional and Roth investments puts you at ease, go for it. It has the advantage of giving you more options to control your finances in retirement. It may or may not be better than sticking with one type of contributions, but determining that requires accurately predicting the future. I don't know anyone that can do that :)

placeholder
Posts: 3954
Joined: Tue Aug 06, 2013 12:43 pm

Re: Personal Finances

Post by placeholder » Wed Aug 20, 2014 6:00 pm

clayr361 wrote:I guess I didn't realize the max for an individual 401K would be 51K.

That's because you get to play both employee and employer (and what a generous employer to your sole hard working employee you get to be) and it's 52k this year.

livesoft
Posts: 57272
Joined: Thu Mar 01, 2007 8:00 pm

Re: Personal Finances

Post by livesoft » Wed Aug 20, 2014 6:18 pm

And the $52K max is only for folks exceeding certain income limitations.
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denovo
Posts: 3524
Joined: Sun Oct 13, 2013 1:04 pm

Re: Personal Finances

Post by denovo » Wed Aug 20, 2014 9:11 pm

Regular 401k seems like the better idea.

ralph124cf
Posts: 1739
Joined: Tue Apr 01, 2014 11:41 am

Re: Personal Finances

Post by ralph124cf » Wed Aug 20, 2014 9:40 pm

Ref your question on the Merrill Lynch account fees: They are quite high. You can do much better at Vanguard, Schwab, or Fidelity. Merrill's trade commissions are also higher than most places.

Ralph

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Zabar
Posts: 635
Joined: Thu Feb 27, 2014 9:05 pm
Location: San Francisco Bay Area

Re: Personal Finances

Post by Zabar » Wed Aug 20, 2014 10:41 pm

clayr361 wrote:I am an independent contractor and run my business through an LLC. We have health insurance though my wife's company. Wife gets an 8% match through employer on Roth 401K and contributes 10% herself to total about 13K per year. I have an IRA which I max out at $5,500 a year but have been exploring the option of opening a solo 401K and would max that out.

A solo 401(k) makes sense IF you are the only employee of your LLC. Remember, if you're generous with the employer's contribution to your account, you'll have to be equally generous to every eligible employee as well. Here's how it breaks down:

• You can contribute the first $17,500 of your income from the LLC, either as a traditional 401(k) account or as a Roth.

• Your company can contribute an amount equal to 25% of your compensation up to $34,500. The combined employer+employee contribution can't be higher than $54,000 at your age.

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