Married 31yo, funding retirement or cutting debts?

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FlowControl
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Joined: Tue Jul 14, 2015 1:04 pm

Married 31yo, funding retirement or cutting debts?

Post by FlowControl » Mon May 02, 2016 10:27 am

Hello! I posted viewtopic.php?f=1&t=169532 a while back and got some really good feedback; it has been about a year and now there are a few new goals I have w.r.t. investments. Fist, some background.

I'm a married 31 y.o. with a 2 y.o. son and another that is a few months old.

Assets

Emergency funds/Cash in accounts: Five months of expenses.
Debt: Mortgage - 389k (of 393k) @ 4%; Auto Loan - 15k @ 5%
Tax Filing Status: Married
Tax Rate: 18% Federal (Net, I'm in the 25% bracket), 7% State
State of Residence: South Carolina
Age: 31
Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: 10% of stocks

Portfolio Size and Generic Breakdown:

I'm split between 2 401(k) accounts; former employer[1] and current employer[2], have a non-exempt investment account, health savings account (HSA), multiple grants of restricted stock units. In total, probably about $80k in assets with an additional ~45k of restricted stock in my employer that will vest over a period of years at 25% per year. My wife has about $20k in stocks but I have very little visibility into her holdings, save for ~$200 in dividends/yr, for that reason, I won't list her assets below. Approximately yearly pre-tax income is 104k. I am the only income earner.

To get a little more specific...

Tax advantaged accounts: (~40k total)
9.1k pre-tax in 401(k) [1]
12.3k post-tax (ROTH) in 401(k) [1]
18.3k pre-tax in current employer 401(k) [2]

Tax applicable accounts: (~39k total)
13k cash (savings, checking)
17k in taxable investment account
9k in RSUs (62k of these total upon vesting)

Asset allocation by account:

401(k) [1]: (Passively re-balanced quarterly)
30% large cap
5% small cap
15% international
50% lifecycle


401(k) [2]: (Have not set AA)
100% lifecycle, haven't looked at choices

Investment Account:
28% cash, money market (recently sold some securities)
0% small mid/cap
37% large cap
35% blended funds


Contributions

8% to 401k (50% employer match up to 6% for 3% total). I just increased this from 6 -> 8.
$ leftover/TBD taxable (for retirement, not short term goals)

Available funds

Funds available in 401(k) [1] (by type)
Snipped, because not relevant


Funds available in 401(k) [2] (by type)
Snipped, because not relevant


Questions: (Sorry there are so many. Don't feel obligated to answer all of them if one jumps out as more interesting)

  1. I have approximately 9.1k in vested RSUs ready to cash out. Combined with the 12k in cash I have in the bank, would it be best to pay off the car loan entirely, first? This would leave me with ~6k in cash, approximately a 2 month reserve but would eliminate that 5% interest, which seems fairly high. There is no penalty for early repayment of the loan. - Solved
  2. After I have rebuilt my cash reserves, which was impacted by our car purchase, should I allocate more towards employer 401k or open an IRA? If IRA, with whom should I open it? Based on my spending plan / monthly budget, I have somewhere between 500-1200 extra monthly. My short-term goals are to build our emergency fund back up to 10k, replace my current vehicle within 2 years (2004 with 175k+ miles on it), and more aggressively fund retirement. - Solved, going with t401(k) to max. Then tIRA whenever I can more aggressively fund.
  3. Should I work on paying down the mortgage faster, rather than allocating more towards tax deferred retirement vehicles? I look at it as 4% guaranteed ROI for early mortgage payments vs ?% return in the market. I'm not used to carrying any kind of debt so owning a house with that kind of outstanding debt worries me. I looked at my retirement funds and they only grew by 10k over the past year or so between appreciation and contributions. That's pretty bad.
  4. Lifecycle funds make it very difficult to ascertain my exact AA, I think my AA is well outside of 90/10 as my projected intent above. Not really a question, so much as a statement. I kind of put together a plan for how I might get back to my desired AA:

    1. Sell all investments in taxable account; this would rebuild my emergency fund and allow me to pay down a portion of the mortgage.
    2. Rollover previous trad. 401k into IRA, allocate 90/10, wait for opportunity to do conversion to roth.
    3. Rollover previous roth 401k into roth IRA, allocate 90/10, pick up some international here to match overall portfolio weighting.
    4. Reallocate new employer 401k into 90% VTIAX (approximates SP500, .05% ER), 10% VLTBX (total bond, .06% ER)
    5. Set up automatic rebalancing.
    Does this all make sense? Are there tax considerations I should be worried about?
  5. Are there any considerations to how I can roll over my 401k[1] either to my current employer or to an IRA?

Thanks in advance!
Last edited by FlowControl on Mon May 02, 2016 2:23 pm, edited 4 times in total.

User avatar
BL
Posts: 7338
Joined: Sun Mar 01, 2009 2:28 pm

Re: Married 31yo, funding retirement or cutting debts?

Post by BL » Mon May 02, 2016 11:15 am

You don't say what year the Target funds you have are, but most out-year ones are only 10% bonds.
If that is what you want, you could stick with that and maybe add bonds to off-set your RSUs.
That is a high rate on car payments, so pay it off when you can.

You don't give ERs for the funds you have, hopefully they are way below 0.5%

Most Vanguard funds are great. So are index funds at several brokerages if you look carefully.

Take a look at this pdf booklet. The 3-fund portfolio is good. (so is the one-fund target fund, a 4-fund portfolio):
https://www.etf.com/docs/IfYouCan.pdf

KlangFool
Posts: 6983
Joined: Sat Oct 11, 2008 12:35 pm

Re: Married 31yo, funding retirement or cutting debts?

Post by KlangFool » Mon May 02, 2016 11:24 am

OP,

<< Contributions

6% to 401k (50% employer match up to 6% for 3% total)
$ leftover/TBD taxable (for retirement, not short term goals)>>

You are in 25% marginal tax rate with 7% state income tax. Every dollar that you do not put into Pre-tax 401K, you are paying 32% tax.

1) Contribute as much as you can into Pre-Tax 401K.

2) The leftover / TBD contribute to Roth IRA. You can contribute up to 5.5K X 2 = 11K per year.

<< I have approximately 9.1k in vested RSUs ready to cash out. Combined with the 12k in cash I have in the bank, would it be best to pay off the car loan entirely, first?>>

3) You are paying 32% tax on those money. Why not contribute to Pre-tax 401K instead?

If you are doing Roth 401K and not maxing up your pre-tax 401K, you are paying too much tax.

KlangFool

FlowControl
Posts: 17
Joined: Tue Jul 14, 2015 1:04 pm

Re: Married 31yo, funding retirement or cutting debts?

Post by FlowControl » Mon May 02, 2016 11:25 am

BL wrote:You don't say what year the Target funds you have are, but most out-year ones are only 10% bonds.
If that is what you want, you could stick with that and maybe add bonds to off-set your RSUs.
That is a high rate on car payments, so pay it off when you can.

You don't give ERs for the funds you have, hopefully they are way below 0.5%

Most Vanguard funds are great. So are index funds at several brokerages if you look carefully.

Take a look at this pdf booklet. The 3-fund portfolio is good. (so is the one-fund target fund, a 4-fund portfolio):
https://www.etf.com/docs/IfYouCan.pdf


Thanks for the reply. They are Vanguard 2045 target funds. They are weighted about 55% US stock 35% INTL stock 6.6% US Bonds 3.3% INTL Bonds. The ER on that is 0.16%.

I haven't paid a car payment yet. Just purchased it within the past week. I intend to pay it down before making any payments.

FlowControl
Posts: 17
Joined: Tue Jul 14, 2015 1:04 pm

Re: Married 31yo, funding retirement or cutting debts?

Post by FlowControl » Mon May 02, 2016 11:32 am

KlangFool wrote:OP,

<< Contributions

6% to 401k (50% employer match up to 6% for 3% total)
$ leftover/TBD taxable (for retirement, not short term goals)>>

You are in 25% marginal tax rate with 7% state income tax. Every dollar that you do not put into Pre-tax 401K, you are paying 32% tax.

1) Contribute as much as you can into Pre-Tax 401K.

2) The leftover / TBD contribute to Roth IRA. You can contribute up to 5.5K X 2 = 11K per year.

<< I have approximately 9.1k in vested RSUs ready to cash out. Combined with the 12k in cash I have in the bank, would it be best to pay off the car loan entirely, first?>>

3) You are paying 32% tax on those money. Why not contribute to Pre-tax 401K instead?

If you are doing Roth 401K and not maxing up your pre-tax 401K, you are paying too much tax.

KlangFool


Sorry if I was unclear in my first post. I'm not currently contributing to Roth 401(k), that was while I was at my previous employer and making less than half my current salary.

Just upped it to 8% going towards pre-tax 401(k) as you were typing your reply. This won't be the maximum contribution but I'm going to gradually increase this so I can judge impact on budget. I would think contributions of leftover should go to pre-tax IRA rather than roth because I don't expect to be at the 25% tax bracket in retirement. Right?

KlangFool
Posts: 6983
Joined: Sat Oct 11, 2008 12:35 pm

Re: Married 31yo, funding retirement or cutting debts?

Post by KlangFool » Mon May 02, 2016 11:38 am

FlowControl wrote:
Sorry if I was unclear in my first post. I'm not currently contributing to Roth 401(k), that was while I was at my previous employer and making less than half my current salary.

Just upped it to 8% going towards pre-tax 401(k) as you were typing your reply. This won't be the maximum contribution but I'm going to gradually increase this so I can judge impact on budget. I would think contributions of leftover should go to pre-tax IRA rather than roth because I don't expect to be at the 25% tax bracket in retirement. Right?


FlowControl,

<<I would think contributions of leftover should go to pre-tax IRA rather than roth >>

1) Roth IRAs can be used as holding places for Emergency Fund. You cannot do that for Pre-tax IRA. You can take the contribution out any time. It could be used in place of taxable account investing.

2) You have (2 x 18K = 36K ) tax-deferred place in Pre-tax 401K. Why do you need Pre-tax IRA?

KlangFool

FlowControl
Posts: 17
Joined: Tue Jul 14, 2015 1:04 pm

Re: Married 31yo, funding retirement or cutting debts?

Post by FlowControl » Mon May 02, 2016 11:45 am

KlangFool wrote:FlowControl,

<<I would think contributions of leftover should go to pre-tax IRA rather than roth >>

1) Roth IRAs can be used as holding places for Emergency Fund. You cannot do that for Pre-tax IRA. You can take the contribution out any time. It could be used in place of taxable account investing.

2) You have (2 x 18K = 36K ) tax-deferred place in Pre-tax 401K. Why do you need Pre-tax IRA?

KlangFool


That's an interesting concept. I know that you can withdraw from rIRA with no penalty if only withdrawing the contributions, not interest. How does that work, practically?

If I put in $10 and it appreciates to $11, can I withdraw $10 and the $1 remains invested in the account?

KlangFool
Posts: 6983
Joined: Sat Oct 11, 2008 12:35 pm

Re: Married 31yo, funding retirement or cutting debts?

Post by KlangFool » Mon May 02, 2016 11:52 am

FlowControl wrote:
KlangFool wrote:FlowControl,

<<I would think contributions of leftover should go to pre-tax IRA rather than roth >>

1) Roth IRAs can be used as holding places for Emergency Fund. You cannot do that for Pre-tax IRA. You can take the contribution out any time. It could be used in place of taxable account investing.

2) You have (2 x 18K = 36K ) tax-deferred place in Pre-tax 401K. Why do you need Pre-tax IRA?

KlangFool


That's an interesting concept. I know that you can withdraw from rIRA with no penalty if only withdrawing the contributions, not interest. How does that work, practically?

If I put in $10 and it appreciates to $11, can I withdraw $10 and the $1 remains invested in the account?


FlowControl,

Yes. And, you can do this anytime.

KlangFool

campy2010
Posts: 852
Joined: Sun Nov 28, 2010 5:01 pm

Re: Married 31yo, funding retirement or cutting debts?

Post by campy2010 » Mon May 02, 2016 12:14 pm

I know this is a contentious issue on this forum but I wouldn't pay off the car loan and would use the RSU money to increase 401k or Roth IRA contributions. Instead, I would refinance the auto loan at a lower interest rate. Penfed has a 1.49% auto loan, which for a $20k car loan costs ~$500 over 3 years. For me, I would much rather have that $15k invested since it will reduce taxes (if invested in tax-deferred savings) and will hopefully return more than 400-something dollars over 3 years.

For the same reason, I wouldn't accelerate payments on the home loan. With these historically low interest rates, it makes more financial sense to invest rather than repay low-interest debt. The equation changes a bit when you have enough cash flow to max out retirement savings. At that point, paying down low-interest debt for emotional rather than financial reasons seems more reasonable.
Last edited by campy2010 on Mon May 02, 2016 12:23 pm, edited 1 time in total.

hafjell
Posts: 128
Joined: Tue Nov 10, 2015 8:49 am

Re: Married 31yo, funding retirement or cutting debts?

Post by hafjell » Mon May 02, 2016 12:21 pm

campy2010 wrote:The equation changes a bit when you have enough cash flow to max out retirement savings. At that point, paying down low-interest debt for emotional rather than financial reasons seems more reasonable.

I don't want to start an argument, especially because your tone was so fair, but if the OP can't max out retirement savings, many would consider that they own too much car. In this case, $20,000 in a car (in a warm weather state) might be living above your means.

campy2010
Posts: 852
Joined: Sun Nov 28, 2010 5:01 pm

Re: Married 31yo, funding retirement or cutting debts?

Post by campy2010 » Mon May 02, 2016 12:35 pm

hafjell wrote:
campy2010 wrote:The equation changes a bit when you have enough cash flow to max out retirement savings. At that point, paying down low-interest debt for emotional rather than financial reasons seems more reasonable.

I don't want to start an argument, especially because your tone was so fair, but if the OP can't max out retirement savings, many would consider that they own too much car. In this case, $20,000 in a car (in a warm weather state) might be living above your means.


The OP's car loan is $15k. I used $20k for my calculation of the cost of the loan because I'm lazy and like round numbers.

Personally, I don't think we should base every financial decision on whether we can max out all of our retirement savings vehicles. The amount of 401k/Roth IRA/457/401b/401a/solo 401k space available to us is pretty arbitrary since in many instances it is a function of our employer and not our financial situation. People should be saving based on projections for how much they will need in retirement. Many people get along just fine in retirement without ever maxing out their retirement accounts.

KlangFool
Posts: 6983
Joined: Sat Oct 11, 2008 12:35 pm

Re: Married 31yo, funding retirement or cutting debts?

Post by KlangFool » Mon May 02, 2016 12:48 pm

campy2010 wrote:
hafjell wrote:
campy2010 wrote:The equation changes a bit when you have enough cash flow to max out retirement savings. At that point, paying down low-interest debt for emotional rather than financial reasons seems more reasonable.

I don't want to start an argument, especially because your tone was so fair, but if the OP can't max out retirement savings, many would consider that they own too much car. In this case, $20,000 in a car (in a warm weather state) might be living above your means.


The OP's car loan is $15k. I used $20k for my calculation of the cost of the loan because I'm lazy and like round numbers.

Personally, I don't think we should base every financial decision on whether we can max out all of our retirement savings vehicles. The amount of 401k/Roth IRA/457/401b/401a/solo 401k space available to us is pretty arbitrary since in many instances it is a function of our employer and not our financial situation. People should be saving based on projections for how much they will need in retirement. Many people get along just fine in retirement without ever maxing out their retirement accounts.


campy2010,

<< People should be saving based on projections for how much they will need in retirement. Many people get along just fine in retirement without ever maxing out their retirement accounts.>>

I disagreed. The 401K/Roth IRA are tax management tools. It does not have to do with RETIREMENT. OP can do Roth conversion for his Pre-Tax 401K and spend the money before retirement. The question here is whether OP is willing to pay 32% tax NOW for every dollar that he use to pay the car loan. Ditto for money in Roth IRA account. The contribution could be taken out to be used for any purposes.

Pre-Tax 401K account could be used to shift the time when OP need to pay tax on the money. Park the money into the Pre-tax 401K account when the tax rate is 32%. Roth converts the money whenever the tax rate is lower. In fact, in some cases, it might be useful and tax efficient to spend from the taxable account while contributing to Pre-tax 401K and Roth IRA account at the same time.

Officially, for this year, if I did nothing, I will be in 25% marginal tax rate. But, by spending from Taxable account and contributing to 2 X Pre-tax 401K accounts, my effective Federal income tax rate for this year will be less than 5%.

KlangFool

FlowControl
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Joined: Tue Jul 14, 2015 1:04 pm

Re: Married 31yo, funding retirement or cutting debts?

Post by FlowControl » Mon May 02, 2016 12:57 pm

campy2010 wrote:The OP's car loan is $15k. I used $20k for my calculation of the cost of the loan because I'm lazy and like round numbers.

Personally, I don't think we should base every financial decision on whether we can max out all of our retirement savings vehicles. The amount of 401k/Roth IRA/457/401b/401a/solo 401k space available to us is pretty arbitrary since in many instances it is a function of our employer and not our financial situation. People should be saving based on projections for how much they will need in retirement. Many people get along just fine in retirement without ever maxing out their retirement accounts.


campy2010 wrote:I know this is a contentious issue on this forum but I wouldn't pay off the car loan and would use the RSU money to increase 401k or Roth IRA contributions. Instead, I would refinance the auto loan at a lower interest rate. Penfed has a 1.49% auto loan, which for a $20k car loan costs ~$500 over 3 years. For me, I would much rather have that $15k invested since it will reduce taxes (if invested in tax-deferred savings) and will hopefully return more than 400-something dollars over 3 years.

For the same reason, I wouldn't accelerate payments on the home loan. With these historically low interest rates, it makes more financial sense to invest rather than repay low-interest debt. The equation changes a bit when you have enough cash flow to max out retirement savings. At that point, paying down low-interest debt for emotional rather than financial reasons seems more reasonable.


This might be a little off-topic from my original questions but here's my reasoning:

We were living as a single car family between two adults and two children under 2; getting another car was becoming more necessary between work and family commitments. With 401k (at 8%), taxes, benefits, HSA contributions, monthly bills (to include mortgage, etc), and deductions factored in, my net takehome is ~2,200 a month. Does that impact your assessment of whether that is living above my means? I used the auto loan as a means to purchase the car while waiting on the trading window to open for the RSUs because I didn't want to have to use anything from my taxable investments, and try not to leave too much in savings. I never intended to make car payments (nor do I intend to in the future).

FlowControl
Posts: 17
Joined: Tue Jul 14, 2015 1:04 pm

Re: Married 31yo, funding retirement or cutting debts?

Post by FlowControl » Mon May 02, 2016 1:03 pm

KlangFool wrote:
campy2010,

<< People should be saving based on projections for how much they will need in retirement. Many people get along just fine in retirement without ever maxing out their retirement accounts.>>

I disagreed. The 401K/Roth IRA are tax management tools. It does not have to do with RETIREMENT. OP can do Roth conversion for his Pre-Tax 401K and spend the money before retirement. The question here is whether OP is willing to pay 32% tax NOW for every dollar that he use to pay the car loan. Ditto for money in Roth IRA account. The contribution could be taken out to be used for any purposes.

Pre-Tax 401K account could be used to shift the time when OP need to pay tax on the money. Park the money into the Pre-tax 401K account when the tax rate is 32%. Roth converts the money whenever the tax rate is lower. In fact, in some cases, it might be useful and tax efficient to spend from the taxable account while contributing to Pre-tax 401K and Roth IRA account at the same time.

Officially, for this year, if I did nothing, I will be in 25% marginal tax rate. But, by spending from Taxable account and contributing to 2 X Pre-tax 401K accounts, my effective Federal income tax rate for this year will be less than 5%.

KlangFool


I'm afraid this might be a moot point considering that my 12k in cash, 17k in taxable, and 9k in vested RSUs are all not eligible for contributions to any pre-tax account (as they have been already taxed!). At this point, I figure it is best to use these available funds to avoid a guaranteed 5% interest for a possible gain. Conceptually, I understand the argument that one could potentially pay somewhere in 5-15% rather than 32% in income tax on that money, making it more attractive to delay for a lower tax rate.

KlangFool
Posts: 6983
Joined: Sat Oct 11, 2008 12:35 pm

Re: Married 31yo, funding retirement or cutting debts?

Post by KlangFool » Mon May 02, 2016 1:53 pm

FlowControl wrote:
KlangFool wrote:
campy2010,

<< People should be saving based on projections for how much they will need in retirement. Many people get along just fine in retirement without ever maxing out their retirement accounts.>>

I disagreed. The 401K/Roth IRA are tax management tools. It does not have to do with RETIREMENT. OP can do Roth conversion for his Pre-Tax 401K and spend the money before retirement. The question here is whether OP is willing to pay 32% tax NOW for every dollar that he use to pay the car loan. Ditto for money in Roth IRA account. The contribution could be taken out to be used for any purposes.

Pre-Tax 401K account could be used to shift the time when OP need to pay tax on the money. Park the money into the Pre-tax 401K account when the tax rate is 32%. Roth converts the money whenever the tax rate is lower. In fact, in some cases, it might be useful and tax efficient to spend from the taxable account while contributing to Pre-tax 401K and Roth IRA account at the same time.

Officially, for this year, if I did nothing, I will be in 25% marginal tax rate. But, by spending from Taxable account and contributing to 2 X Pre-tax 401K accounts, my effective Federal income tax rate for this year will be less than 5%.

KlangFool


I'm afraid this might be a moot point considering that my 12k in cash, 17k in taxable, and 9k in vested RSUs are all not eligible for contributions to any pre-tax account (as they have been already taxed!). At this point, I figure it is best to use these available funds to avoid a guaranteed 5% interest for a possible gain. Conceptually, I understand the argument that one could potentially pay somewhere in 5-15% rather than 32% in income tax on that money, making it more attractive to delay for a lower tax rate.


FlowControl,

<< I'm afraid this might be a moot point considering that my 12k in cash, 17k in taxable, and 9k in vested RSUs are all not eligible for contributions to any pre-tax account (as they have been already taxed!).>>

Come on! Money is fungible!

1) Keep your 401K contribution at 8% and DO NOT SPEND the 26K already taxed on living expenses.

2) Increase your 401K contribution while using the 17K in taxable and 9K in vested RSU to cover your normal living expenses

What is THE DIFFERENCE? You save 32% tax with (2). You can save 32% tax with 26K of additional 401K contribution via your taxable account and vested RSU.

3) You should contribute to Roth IRAs instead of keeping your investment in taxable account too.

KlangFool

P.S.: You save about 12K in tax with (2).

P.S.2: Put the 12K of tax savings into Roth IRAs as your additional Emergency Fund.

hafjell
Posts: 128
Joined: Tue Nov 10, 2015 8:49 am

Re: Married 31yo, funding retirement or cutting debts?

Post by hafjell » Mon May 02, 2016 2:01 pm

campy2010 wrote:This might be a little off-topic from my original questions but here's my reasoning:

We were living as a single car family between two adults and two children under 2; getting another car was becoming more necessary between work and family commitments. With 401k (at 8%), taxes, benefits, HSA contributions, monthly bills (to include mortgage, etc), and deductions factored in, my net takehome is ~2,200 a month. Does that impact your assessment of whether that is living above my means? I used the auto loan as a means to purchase the car while waiting on the trading window to open for the RSUs because I didn't want to have to use anything from my taxable investments, and try not to leave too much in savings. I never intended to make car payments (nor do I intend to in the future).

The comment wasn't meant to judge; just to notice that servicing $15k of debt effects your cash flow. And, if that cash is diverted from a traditional 401k or tIRA, it can effect your tax basis too. Just a gentle reminder that the culture is car crazy and people will make up any excuse to purchase too much car with debt.

FlowControl
Posts: 17
Joined: Tue Jul 14, 2015 1:04 pm

Re: Married 31yo, funding retirement or cutting debts?

Post by FlowControl » Mon May 02, 2016 2:14 pm

KlangFool wrote:
FlowControl,

<< I'm afraid this might be a moot point considering that my 12k in cash, 17k in taxable, and 9k in vested RSUs are all not eligible for contributions to any pre-tax account (as they have been already taxed!).>>

Come on! Money is fungible!

1) Keep your 401K contribution at 8% and DO NOT SPEND the 26K already taxed on living expenses.

2) Increase your 401K contribution while using the 17K in taxable and 9K in vested RSU to cover your normal living expenses

What is THE DIFFERENCE? You save 32% tax with (2). You can save 32% tax with 26K of additional 401K contribution via your taxable account and vested RSU.

3) You should contribute to Roth IRAs instead of keeping your investment in taxable account too.

KlangFool

P.S.: You save about 12K in tax with (2).

P.S.2: Put the 12K of tax savings into Roth IRAs as your additional Emergency Fund.



So, to boil down your point 2, you are suggesting to:

  • Use already taxed dollars to pay off the auto loan (meeting with my plan).
  • Move leftover current investment account and emergency funds to rIRA.
  • Related: Expand t401(k) contributions to avoid ~26%+ nominal tax rate.

FlowControl
Posts: 17
Joined: Tue Jul 14, 2015 1:04 pm

Re: Married 31yo, funding retirement or cutting debts?

Post by FlowControl » Mon May 02, 2016 2:19 pm

hafjell wrote:
campy2010 wrote:This might be a little off-topic from my original questions but here's my reasoning:

We were living as a single car family between two adults and two children under 2; getting another car was becoming more necessary between work and family commitments. With 401k (at 8%), taxes, benefits, HSA contributions, monthly bills (to include mortgage, etc), and deductions factored in, my net takehome is ~2,200 a month. Does that impact your assessment of whether that is living above my means? I used the auto loan as a means to purchase the car while waiting on the trading window to open for the RSUs because I didn't want to have to use anything from my taxable investments, and try not to leave too much in savings. I never intended to make car payments (nor do I intend to in the future).

The comment wasn't meant to judge; just to notice that servicing $15k of debt effects your cash flow. And, if that cash is diverted from a traditional 401k or tIRA, it can effect your tax basis too. Just a gentle reminder that the culture is car crazy and people will make up any excuse to purchase too much car with debt.


Unfortunately, my underfunding of my 401(k) as compared the max contribution wasn't related (at least directly) to this car purchase. It definitely does have an effect on my investment ability. I'm hoping that it lasts as long as my current (over 100k miles, etc.).

KlangFool
Posts: 6983
Joined: Sat Oct 11, 2008 12:35 pm

Re: Married 31yo, funding retirement or cutting debts?

Post by KlangFool » Mon May 02, 2016 2:34 pm

FlowControl wrote:
KlangFool wrote:
FlowControl,

<< I'm afraid this might be a moot point considering that my 12k in cash, 17k in taxable, and 9k in vested RSUs are all not eligible for contributions to any pre-tax account (as they have been already taxed!).>>

Come on! Money is fungible!

1) Keep your 401K contribution at 8% and DO NOT SPEND the 26K already taxed on living expenses.

2) Increase your 401K contribution while using the 17K in taxable and 9K in vested RSU to cover your normal living expenses

What is THE DIFFERENCE? You save 32% tax with (2). You can save 32% tax with 26K of additional 401K contribution via your taxable account and vested RSU.

3) You should contribute to Roth IRAs instead of keeping your investment in taxable account too.

KlangFool

P.S.: You save about 12K in tax with (2).

P.S.2: Put the 12K of tax savings into Roth IRAs as your additional Emergency Fund.



So, to boil down your point 2, you are suggesting to:

  • Use already taxed dollars to pay off the auto loan (meeting with my plan).
  • Move leftover current investment account and emergency funds to rIRA.
  • Related: Expand t401(k) contributions to avoid ~26%+ nominal tax rate.


FlowControl,

<<[*]Use already taxed dollars to pay off the auto loan (meeting with my plan).>>

No. If you do that, you have 15K less to contribute to Pre-tax 401K.

<<[*]Move leftover current investment account and emergency funds to rIRA.>>

You may do that later if you have any money left later this year.

<<[*]Related: Expand t401(k) contributions to avoid ~26%+ nominal tax rate.[/list]>>>>

Do this first. You could increase your t401(K) contribution up to 18K. Then, do the rest with your wife's t401K. Or, slip 50-50. No, it is NOT 26% nominal tax rate. You pay 32% tax on your contribution. Use taxcaster to check the number.

https://turbotax.intuit.com/tax-tools/c ... taxcaster/

KlangFool

FlowControl
Posts: 17
Joined: Tue Jul 14, 2015 1:04 pm

Re: Married 31yo, funding retirement or cutting debts?

Post by FlowControl » Mon May 02, 2016 3:32 pm

KlangFool wrote:
FlowControl,

<<[*]Use already taxed dollars to pay off the auto loan (meeting with my plan).>>

No. If you do that, you have 15K less to contribute to Pre-tax 401K.

<<[*]Move leftover current investment account and emergency funds to rIRA.>>

You may do that later if you have any money left later this year.

<<[*]Related: Expand t401(k) contributions to avoid ~26%+ nominal tax rate.[/list]>>>>

Do this first. You could increase your t401(K) contribution up to 18K. Then, do the rest with your wife's t401K. Or, slip 50-50. No, it is NOT 26% nominal tax rate. You pay 32% tax on your contribution. Use taxcaster to check the number.

https://turbotax.intuit.com/tax-tools/c ... taxcaster/

KlangFool


The calculator you posted has me at 15% marginal tax rate (federal); this would put me at ~22% with ~7% state tax rate. This is based on...

104k income
21k deductions
16k exemptions

= 66,900 taxable income

I think the disparity comes from ~15k in estimated interest payments (home loan) and having 2 dependents under 16. Also, I put in 104k which is my gross despite contributing to 401(k), HSA, and 529.

[Edit; I have three dependents. I forgot my wife! This puts me at ~63k taxable.]

This is actually surprising to me as I thought I'd be at 25%.

I still don't understand how I would use anything other than the dollars I have on hand, whether from taxable account/savings/RSU, to pay off the car loan. I can fund the t401k higher, but that doesn't impact the loan payments necessary.

KlangFool
Posts: 6983
Joined: Sat Oct 11, 2008 12:35 pm

Re: Married 31yo, funding retirement or cutting debts?

Post by KlangFool » Mon May 02, 2016 3:52 pm

FlowControl wrote:
KlangFool wrote:
FlowControl,

<<[*]Use already taxed dollars to pay off the auto loan (meeting with my plan).>>

No. If you do that, you have 15K less to contribute to Pre-tax 401K.

<<[*]Move leftover current investment account and emergency funds to rIRA.>>

You may do that later if you have any money left later this year.

<<[*]Related: Expand t401(k) contributions to avoid ~26%+ nominal tax rate.[/list]>>>>

Do this first. You could increase your t401(K) contribution up to 18K. Then, do the rest with your wife's t401K. Or, slip 50-50. No, it is NOT 26% nominal tax rate. You pay 32% tax on your contribution. Use taxcaster to check the number.

https://turbotax.intuit.com/tax-tools/c ... taxcaster/

KlangFool


The calculator you posted has me at 15% marginal tax rate (federal); this would put me at ~22% with ~7% state tax rate. This is based on...

104k income
21k deductions
16k exemptions

= 66,900 taxable income

I think the disparity comes from ~15k in estimated interest payments (home loan) and having 2 dependents under 16. Also, I put in 104k which is my gross despite contributing to 401(k), HSA, and 529.

[Edit; I have three dependents. I forgot my wife! This puts me at ~63k taxable.]

This is actually surprising to me as I thought I'd be at 25%.

I still don't understand how I would use anything other than the dollars I have on hand, whether from taxable account/savings/RSU, to pay off the car loan. I can fund the t401k higher, but that doesn't impact the loan payments necessary.


FlowControl,

<<I can fund the t401k higher, but that doesn't impact the loan payments necessary.>>

1) So, you are 22% marginal tax rate. If you put additional $1,000 into t401K, you pay $282 less tax. So, does have MORE MONEY impact or does not impact the loan payment?

2) Or, look at the other way. You could take 15K of your money to pay off the car loan. Or, you could put the 15K into t401K and save $4230 in tax. So, essentially, you are paying 22% tax for every dollar that you used to pay off the car loan. Is it worth it?

It is ONE POOL of MONEY. Money is fungible. You could CHOOSE to use it many different ways. And, it impacts your tax and how much money you get to keep and spend.

KlangFool

P.S.: 529 does not reduce your federal income tax. It is after tax contribution.

KlangFool
Posts: 6983
Joined: Sat Oct 11, 2008 12:35 pm

Re: Married 31yo, funding retirement or cutting debts?

Post by KlangFool » Mon May 02, 2016 4:12 pm

OP,

At 15% marginal tax rate. the advantage of funding t401K is not as overwhelming. So, it is a wash whether you put money into t401K or pay off the car loan. So, just pick whatever that you are comfortable with. But, in any case, I would suggest that you move your investment in taxable account to Roth IRAs.

KlangFool

FlowControl
Posts: 17
Joined: Tue Jul 14, 2015 1:04 pm

Re: Married 31yo, funding retirement or cutting debts?

Post by FlowControl » Tue May 03, 2016 10:06 am

I can't put the 15k of already taxed money back into the

P.S.: 529 does not reduce your federal income tax. It is after tax contribution.


Ah, good point!

KlangFool
Posts: 6983
Joined: Sat Oct 11, 2008 12:35 pm

Re: Married 31yo, funding retirement or cutting debts?

Post by KlangFool » Tue May 03, 2016 10:13 am

FlowControl wrote:I can't put the 15k of already taxed money back into the

P.S.: 529 does not reduce your federal income tax. It is after tax contribution.


Ah, good point!


FlowControl,

I do not think you should contribute to 529 at all. Roth IRA should come first. Then, max up t401K. After that, you may do either taxable account and / or 529.

KlangFool

FlowControl
Posts: 17
Joined: Tue Jul 14, 2015 1:04 pm

Re: Married 31yo, funding retirement or cutting debts?

Post by FlowControl » Tue May 03, 2016 1:25 pm

Poking see if anyone has thoughts on 4. or 5.

As always, thanks in advance.

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