What can we do better?

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Topic Author
Mtns2C
Posts: 2
Joined: Sun Mar 20, 2016 4:06 pm

What can we do better?

Post by Mtns2C » Sun Mar 20, 2016 4:14 pm

Hello to all,
Recently found this site and am very pleased with its professionalism, both members and moderators. Recently completed our taxes and found out we hit a limit on our Roth IRA contributions, surprise. Have never done an analysis before or never sought any financial planning help. We do what we can to pay ourselves first and live within our means.

Here is the information:
Married, filing jointly, started very late for retirement, been preparing for ~5yrs now.
3 Kids: two independent and last one finishing HS in 2016.
State: Washington

Income
2015 govt wages him (age 51) – 92k
2015 military pension – 15k (Use Tricare prime so no HSA)
2015 govt wages her (age 46) – 81k
188k total

Liabilities
275k Mortgage balance @ 3.25% 30yr (1450 month)
No debt other than mortgage on only home
275k total

Assets
10k Cash/savings
22k - His Vanguard Roth IRA: contribute max 6.5k/yr to VTSAX
140k - His TSP: contribute 24k/yr 100% in C fund (Roth)
23k - Her Vanguard Roth IRA: contribute max 5.5/yr to VTSAX
96k - Her TSP: contribute 18k/yr 80/10/10% in G/C/S fund (Roth)
(~75k/yr to retirement: ~20k – Combined yearly contributions to taxable accounts and 54k - Combined yearly contributions to Roth TSP/IRS)
Joint Taxable Vanguard accounts:
33k – VBTLX
33k – VTIAX
33k – VTSAX
390k total

Misc
Recently finished a 2k monthly payment. Considerations for using the monthly 2k include:
- Paying down mortgage sooner (~$375 month extra to save ~17 years from mortgage)
- And contributing remaining $1600 to Vanguard taxable accounts.
Both 2007 vehicles are paid
Our goal is to retire around 2022.

Questions
a. What options could help us save more money efficiently for retirement?
b. What options could make efficient use of 2k monthly extra funds?
c. How can we reduce our taxable footprint?
d. Roth vs Traditional TSP/IRA contribution strategies?

Thanks in advance !!

User avatar
alec
Posts: 3063
Joined: Fri Mar 02, 2007 2:15 pm

Re: What can we do better?

Post by alec » Sun Mar 20, 2016 5:16 pm

Mtns2C wrote:
Questions
a. What options could help us save more money efficiently for retirement?
b. What options could make efficient use of 2k monthly extra funds?
c. How can we reduce our taxable footprint?
d. Roth vs Traditional TSP/IRA contribution strategies?

Thanks in advance !!
Looks like you're holding taxable bonds in the taxable account (VBTLX) when you could hold essentially the same fund (F fund) in the TSP and exchange VBTLX for equities in your taxable account.

If it were, me I'd start paying off the mortgage instead of using the 2K per month to buy equities so you have no (or much less) mortgage in retirement.

Have you looked into Backdoor Roth IRAs?

-Alec
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair

User avatar
William4u
Posts: 1373
Joined: Fri Jun 01, 2012 3:02 pm

Re: What can we do better?

Post by William4u » Sun Mar 20, 2016 5:18 pm

Anyone can do a backdoor roth, which are common here.

https://www.bogleheads.org/wiki/Backdoor_Roth_IRA
viewtopic.php?t=147307

User avatar
Watty
Posts: 18434
Joined: Wed Oct 10, 2007 3:55 pm

Re: What can we do better?

Post by Watty » Sun Mar 20, 2016 10:57 pm

One thing I would add is to have a car fund to save up to pay cash for future cars.

Mtns2C wrote:c. How can we reduce our taxable footprint?
One thing to do is to look ahead at how your Social Security will be taxed when you start it since the effective tax rate can get very high.

https://www.bogleheads.org/wiki/Taxatio ... y_benefits

https://www.bogleheads.org/wiki/Social_ ... calculator

There are lots of ways you can try to minimize this but two things come to mind.
1) Plan on doing Roth conversions when you can.
2) Get your house paid off by the time you retire. This will reduce your retirement income needs.
Mtns2C wrote: d. Roth vs Traditional TSP/IRA contribution strategies?
It looks like you are using the Roth TSP right now but you are in a pretty high tax bracket. I would consider using the deductible TSP instead but then use the tax savings to pay down your mortgage. I would make a wild guess that could free up something in that ballpark of $15K a year. That and the extra $2K a month you have, along with your normal mortgage payment would allow you to pay down the house by around $50K a year.

You could then do Roth conversions after you retire.

stungerz
Posts: 72
Joined: Sat Apr 28, 2012 12:43 pm

Re: What can we do better?

Post by stungerz » Sun Mar 20, 2016 11:32 pm

Watty pretty much mentioned this, I would change to a traditional TSP to try and get down to the 25% tax bracket it you aren't already there and I think that would then enable you to contribute to a Roth 401k.

Topic Author
Mtns2C
Posts: 2
Joined: Sun Mar 20, 2016 4:06 pm

Re: What can we do better?

Post by Mtns2C » Sat Mar 26, 2016 9:26 pm

Thank you all. As we’re new to this I have some clarifying questions. Disclaimer, I’ve read some of the recommended site reading and The Boglehead’s guide to investing book, but a lot of nuances and reasons why are not the easiest for me to grasp. Thanks in advance for your patience.

Alec,
If we went traditional IRA/TSP instead of Roth:
a. How does that affect the bond issue? Should we not have bonds in our taxable account? By the way, we’re trying to do the 3-fund portfolio strategy. If bonds are held only within TSP, what affect does that cause on TSP and then the taxable account if bonds are replaced with stocks?

Watty,
Thanks for the idea of traditional over Roth for the TSP/IRA combined with the $2K. I’ll have to do a sample run through Turbo Tax. It would be nice to have no house payment during retirement.

I’ll have to noodle on the SS and tax info. How does the now affect my taxes in the future regarding SS? Currently my understanding extends to the traditional/Roth difference. :-/

Thanks again !!

User avatar
alec
Posts: 3063
Joined: Fri Mar 02, 2007 2:15 pm

Re: What can we do better?

Post by alec » Mon Mar 28, 2016 7:54 pm

Mtns2C wrote: Alec,
If we went traditional IRA/TSP instead of Roth:
a. How does that affect the bond issue? Should we not have bonds in our taxable account? By the way, we’re trying to do the 3-fund portfolio strategy. If bonds are held only within TSP, what affect does that cause on TSP and then the taxable account if bonds are replaced with stocks?
I think using the traditional TSP would lead one to use that for bonds. Some (on this board) are of the opinion that the Roth space should be filled with the highest potential returning assets (i.e. equities), but I'm not totally convinced. If you were to hold bonds in the TSP(s), you'd just sell (buy) bonds in the taxable (TSP) accounts, and buy (sell) equities in the taxable (TSP) accounts.

If, instead, you wanted to keep doing the Roth TSPs and IRAs, and you wanted to hold mostly equities in the Roth accounts, look into whether municipal bonds (like Vanguard's intermediate term national muni fund) would be better than the taxable bond fund in the taxable account.

-Alec
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair

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