New Boglehead, Kids's College, & Emergency Fund Transfer

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GMercier
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New Boglehead, Kids's College, & Emergency Fund Transfer

Post by GMercier » Sun Mar 19, 2017 9:44 pm

Financial Status:
Emergency funds: $20K - 6 months living expense
Debt: $95K home at 4.875% 23 years left; no other debt
Tax Filing Status: Married Filing Jointly, wife no income, stays home with kids
Tax Rate: I don’t know; making $55K/annually
State of Residence: NY
Age: 35
Desired Asset allocation: I don’t know. Trusting VFIFX at the moment, which I guess means 90% stock, 10% bonds; w/ 36% international stock.

Current portfolio:
My retirement:
$11K in VFIFX in Roth IRA (maxed out 2016 and 2017) only 1 year old @ Vanguard
$1500 in 2 separate 403b, one dead; one employment just started adding 3% (no matching). I don’t know where these are invested other than the “aggressive growth” option, but will be paying more attention as I learn more.

Wife’s Retirement:
$1K in VFIFX in Roth IRA (new ROTH account @ Vanguard)

Local Bank:
$8K checking/savings
$20K MM earning 0.2% (emergency fund)

Questions:
I’m only a few years in learning about money. I’ve read a bunch of books (some on the Boglehead list) but don’t understand a lot of what I read. I know enough to give 10%, stay out of debt, and invest 15% for retirement. I’m finally at that exact stage in my life, though not enough $ margin at the moment for saving for the kids college, or paying extra on the mortgage. I know that I'll never be able to give investing a ton of my energy or time, and that is okay by me, but I want to do my due diligence at least.

1. How am I doing overall? I am thinking about moving to a 3 or 4 fund portfolio in the Roth IRAs once I have the money in them to balance appropriately. For now they reside in VFIFX.

2. If I had a little extra income, I was going to extra fund wife’s Roth IRA and use that as an avenue for the kids’ college money since we will not be maxing her IRA out right now. Even $25/month for 2 kids will give them something when they get to college age. Is that okay? The idea in my head is that the 529s go against us in FAFSAs and kids might not go to college - military is an acceptable option. Plus if we come into money later for their college (inheritance, better job, etc) we have the extra now growing for our own retirement.

3. I want to move my emergency fund into Vanguard. I was thinking about using my wife’s Roth IRA but it is not 5 years old yet, so even if we only withdrew contributions for en emergency, I believe there would be penalties. So, I think my safe options are VMMXX (which Vanguard website suggests, or VFSUX which someone suggested once upon a time in a forum). Are one of these better than the other for me to park $20K for the next 4-30 years?

Thank you all.

livesoft
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Re: New Boglehead, Kids's College, & Emergency Fund Transfer

Post by livesoft » Sun Mar 19, 2017 10:10 pm

Given your income, I would not bother saving for children's college right now. Your idea to fund both Roth IRAs is a good one, but with your income, you should not be paying any income taxes I would think. Indeed, you all can probably contribute to traditional IRAs to reduce taxable income even more. That is, I'm not sure Roth IRAs are what you should be doing.

With no match to the 403(b), I would put all my investments into traditional IRAs. You can contribute $5500 to yours and $5500 to your spouse''s. VFIFX is fine for both of them. If you have money leftover, then put that in the 403(b).
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aristotelian
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Re: New Boglehead, Kids's College, & Emergency Fund Transfer

Post by aristotelian » Sun Mar 19, 2017 10:13 pm

I would recommend maxing your wife's Roth before contributing to the 403b. You are in a low tax bracket, so the tax deferral of the 403b is not as big a benefit as tax free growth in Roth.

No offense, but with only one income and current savings I would not bother thinking about the kids right now. Get to a point where you are maxing both Roths and your 403b, then start thinking about college. Until then, the kids can take out loans and you can help when you can.

What do you want to put your emergency funds in?

shanghaista
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Re: New Boglehead, Kids's College, & Emergency Fund Transfer

Post by shanghaista » Sun Mar 19, 2017 11:05 pm

I agree with Aristotelian, max out your/your wife's Roth IRAs first. You're currently most likely comfortably in the 15% bracket (married, $18,651 - $75,900) which is definitely on the lower end of taxes when considering IRAs and often where people most recommend utilizing the Roth.

The old adage is your kids can borrow for school; you can't borrow for retirement. At 36, you should have much more than $12.5k saved up for retirement; at the low end, you need to be at least 1.5x your salary (aka you should have $75k+ saved already).
You need to supercharge your retirement savings.

1) You have $28k cash on hand. If your Emergency Fund is $20k, I'd count your checking/savings as part of it. So you can have $8k repurposed for either your RIRAs or something else. And there are a ton of money market/savings accounts that yield 1%+ (Ally, Synchrony, Barclays, ect...) Even if you like to keep the liquid $8k in checking, at least move the $20k you're not touching into something higher-yielding.
Banks are better than VMMXX (higher rate and FDIC safety). VFSUX is a bit more convuluted; the 2%+ yield looks good, but there are price drops. Remember, this is your EMERGENCY FUND. I'd leave it in something that can only go up, but if you're comfortable with the risk, go for it.

2) If your old 403b is "dead", roll it over to the new one (provided the new one has favorable investments/expenses). Sometimes you get tacked with hidden fees and penalties at old accounts. And it's easier to track when it's in one place.

3) 529s are complicated - they may inflate the kids' assets (but not as much as you think). In any case, 529 should only be done last.
IRA/Roth IRAs have a yearly limit ($5,500 per year). 529's have no such limit; the effective limit per year is $28,000 ($14,000 gift from you and your wife). So you can essentially lump it all in at once.
Last edited by shanghaista on Sun Mar 19, 2017 11:15 pm, edited 1 time in total.

Grt2bOutdoors
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Re: New Boglehead, Kids's College, & Emergency Fund Transfer

Post by Grt2bOutdoors » Sun Mar 19, 2017 11:15 pm

livesoft wrote:Given your income, I would not bother saving for children's college right now. Your idea to fund both Roth IRAs is a good one, but with your income, you should not be paying any income taxes I would think. Indeed, you all can probably contribute to traditional IRAs to reduce taxable income even more. That is, I'm not sure Roth IRAs are what you should be doing.

With no match to the 403(b), I would put all my investments into traditional IRAs. You can contribute $5500 to yours and $5500 to your spouse''s. VFIFX is fine for both of them. If you have money leftover, then put that in the 403(b).


+1. I agree, the OP is doing a fantastic job on almost all points. Use of a Traditional IRA is the better choice for two reasons, upfront tax deduction and in retirement, assuming you remain in NY you will likely have little to zero tax liability upon withdrawals in retirement. I would not do Roth.

If you document/declare your charitable contributions and use the Traditional IRA for both you and spouse, I agree with Livesoft, you should have close to zero if not zero Federal tax liability and since State of NY pretty much follows Federal taxes, you'd likely have no liability there as well.

I would leave your emergency savings in an FDIC insured savings account, you can find one like Ally Bank currently yielding 1%. While I know the rate is nothing to cheer over, the point is the account needs to be liquid, return of capital is more important than return on capital. You need to be able to sleep at night - that includes your spouse and kids.

College - don't worry about that now, at current situation, your kids will be eligible for assistance at schools, if they have good grades they should be able to get merit aid along with major reduction in costs. Go to an in-state school, NYS does offer Pell and I believe, TAP (free money) is still available.

OP - let me say it again, you really are doing a great job on all fronts. :sharebeer
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Grt2bOutdoors
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Re: New Boglehead, Kids's College, & Emergency Fund Transfer

Post by Grt2bOutdoors » Sun Mar 19, 2017 11:23 pm

shanghaista wrote:I agree with Aristotelian, max out your/your wife's Roth IRAs first. You're currently most likely comfortably in the 15% bracket (married, $18,651 - $75,900) which is definitely on the lower end of taxes when considering IRAs and often where people most recommend utilizing the Roth.

The old adage is your kids can borrow for school; you can't borrow for retirement. At 36, you should have much more than $12.5k saved up for retirement; at the low end, you need to be at least 1.5x your salary (aka you should have $75k+ saved already).
You need to supercharge your retirement savings.


It's a mistake to use the ROTH, what is most important at OP's stage is to maximize cash flow and to understand that they will have little to zero tax liability at retirement if they use the Traditional IRA. The only advantage the ROTH provides is the ability to tap into the principal contributions if needed, however the Emergency fund fills that bill quite nicely. In the meantime, using the Traditional IRA permits the OP to receive an upfront refund so to speak on their contributions, reducing any federal/state tax liability today. That is literally, cash in hand. The present value of the dollar in hand today is worth pursuing the Traditional IRA, the Roth presents zero cash in hand today while preserving the full value of the amount deposited. At retirement, if OP remains in 15% tax bracket, their tax liability in retirement if making $50K jointly is ZERO. That is today's tax law.

OP should not be discouraged, OP has time to catch-up. It's not multiples of income required, it's multiples of expenses less known resources at retirement like Social Security, etc.
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Watty
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Re: New Boglehead, Kids's College, & Emergency Fund Transfer

Post by Watty » Sun Mar 19, 2017 11:40 pm

One thing to be sure to look at is to see if you can get a Retirement Savings Contributions Credit by making retirement account contributions for you and your wife. This can be an IRA, Roth, 401k, etc.

https://www.irs.gov/retirement-plans/pl ... ers-credit

You need to look at your actual numbers since the income numbers that are listed in that link are after a lot of subtractions and adjustments, it is not your salary. If it is just a 10% credit if you put $2,000 into both your and your spouse's retirement account ($4,000 total) that would get you an extra $400. If you are in the 15% tax bracket that would also save you another $600 (4,000 * 15%).

I don't think it is a refundable credit though so if you are not paying any federal taxes then it might not be worth anything to you.

If you put the $4,000 into a Roth then you can still get to it if you have a big emergency in the future.

https://www.bogleheads.org/wiki/Roth_IR ... gency_fund

You really need to figure out your tax bracket since if you are not paying any federal taxes this year then that would likely make the Roth a better choice. If you did your own taxes with tax software you can make a dummy copy of your tax return and add $100 to your income to see how much the taxes increase. It it increases by $15 then you are in the 15% marginal tax bracket.

weedf16
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Re: New Boglehead, Kids's College, & Emergency Fund Transfer

Post by weedf16 » Mon Mar 20, 2017 5:14 am

Grt2bOutdoors wrote:
It's a mistake to use the ROTH, what is most important at OP's stage is to maximize cash flow and to understand that they will have little to zero tax liability at retirement if they use the Traditional IRA. The only advantage the ROTH provides is the ability to tap into the principal contributions if needed, however the Emergency fund fills that bill quite nicely. In the meantime, using the Traditional IRA permits the OP to receive an upfront refund so to speak on their contributions, reducing any federal/state tax liability today.



The guy is only 36 years old. If making $55K annually, he is paying little to no federal income tax (after standard deductions and exemptions). So the traditional contribution is not doing much for them. I would say there is a VERY good chance that he could be in a higher tax bracket in 25 to 30 years as he approaches retirement. Maybe his wife will get a career when the kids get older.

If this were me, I would be taking advantage of ROTH all day everyday, and twice on Sunday.

:sharebeer

Grt2bOutdoors
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Re: New Boglehead, Kids's College, & Emergency Fund Transfer

Post by Grt2bOutdoors » Mon Mar 20, 2017 6:32 am

It all depends on the current needs of family. IMO, I would rank current needs of family agaisnt future tax liability and career. OP, hasn't really stated what future career may look like.
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Jack FFR1846
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Re: New Boglehead, Kids's College, & Emergency Fund Transfer

Post by Jack FFR1846 » Mon Mar 20, 2017 6:40 am

As FAFSA calculations presently are today, you could qualify for aid for your kids for college. I'd focus on putting all money into Roth or other retirement accounts and as college approaches, take out a HELOC and pay as much as possible towards the mortgage.

I'd also move that money market account over to Redneck Bank Megamoney to get 1.24%. You might as well get something for the emergency fund.
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KlangFool
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Re: New Boglehead, Kids's College, & Emergency Fund Transfer

Post by KlangFool » Mon Mar 20, 2017 7:19 am

OP,

How many kids?

KlangFool

KlangFool
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Re: New Boglehead, Kids's College, & Emergency Fund Transfer

Post by KlangFool » Mon Mar 20, 2017 7:24 am

weedf16 wrote:
Grt2bOutdoors wrote:
It's a mistake to use the ROTH, what is most important at OP's stage is to maximize cash flow and to understand that they will have little to zero tax liability at retirement if they use the Traditional IRA. The only advantage the ROTH provides is the ability to tap into the principal contributions if needed, however the Emergency fund fills that bill quite nicely. In the meantime, using the Traditional IRA permits the OP to receive an upfront refund so to speak on their contributions, reducing any federal/state tax liability today.



The guy is only 36 years old. If making $55K annually, he is paying little to no federal income tax (after standard deductions and exemptions). So the traditional contribution is not doing much for them. I would say there is a VERY good chance that he could be in a higher tax bracket in 25 to 30 years as he approaches retirement. Maybe his wife will get a career when the kids get older.

If this were me, I would be taking advantage of ROTH all day everyday, and twice on Sunday.

:sharebeer


weedf16,

<< So the traditional contribution is not doing much for them. >>

I won't say that until we can confirm that he does not qualify for saver's credit and/or earned income tax credit by contributing to Trad. IRA. If he does, besides not paying tax, he may be getting money back.

In order to know that, we need to know the number of kids in the family.

KlangFool

teen persuasion
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Re: New Boglehead, Kids's College, & Emergency Fund Transfer

Post by teen persuasion » Mon Mar 20, 2017 7:30 am

OP is on the edge of eligibility for EITC (not sure if "kids" plural is 2 or 3+), and NY matches fed EITC at 30%. Contributions to the 403b could increase their refundable credits and reduce their tax, while tIRA contributions only reduce taxes owed.

The EITC phaseout rate is ~21%. If they are in the 15% fed bracket, and at least 4% NY tax, contributions to a 403b would increase their refund :
.21 + .063 + .15 + .04 = .463

NY also matches the CTC at 33% (but only for children over either 4 or 5, can't recall), also refundable.

Then the OP can redirect the sizable refunds toward Roth IRAs.

I've gotten our refundable credits large enough to fully fund 2 Roth IRAs in the past (with 5 kids). Can't get it that high currently with only one left at home and one dependent away at college. I wish I'd figured it out much earlier, when all the kids were young.

When filing the FAFSA, a low AGI (from 403b contributions) can sometimes get you into a sweet spot to qualify for either the Simplified Needs Test (no need to report assets) or an auto EFC = 0 , BEFORE those contributions are added back to "Available Income".

livesoft
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Re: New Boglehead, Kids's College, & Emergency Fund Transfer

Post by livesoft » Mon Mar 20, 2017 7:53 am

It seems the big argument here is whether to contribute to a traditional IRA or Roth IRA.

This is where doing a trial tax return will help make the decision. So I did a couple of scenarios. I assume $55K in income, but $2,000 for health insurance and no other income. MFJ, 2 kids under 16.

AGI is $53K without any IRA deduction, standard deduction (although they could probably do better if they bunched their 10% charitable contributions into every other year), 2 kids for 4 exemptions.

So with no IRAs they owe $706 in federal taxes after getting a $2000 child tax credit.
With Roth IRAs, they own $406 in federal taxes because of the additional $300 savers credit

With one Roth and one traditional, they get a refund of $519.
So switching $5500 from a Roth to traditional nets them an exta $925. That's an instant 17% return on their money.

With no Roth and two traditional IRA contributions of $5500 each, they get a refund of $1077 or an extra $558.

So using traditional IRAs instead of Roth IRAs gives them an extra $1484 a year.
Last edited by livesoft on Mon Mar 20, 2017 8:02 am, edited 4 times in total.
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livesoft
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Re: New Boglehead, Kids's College, & Emergency Fund Transfer

Post by livesoft » Mon Mar 20, 2017 7:55 am

I suspect the OP cannot put $11,000 a year into retirement savings unless they use their emergency fund to do so.

Since the 403(b) provides no match, I see no reason to contribute to it. The OP should use traditional IRAs, but if there are more than 2 kids let us know as the child tax credit for the additional children can change things.

It is true that Roth IRAs are good place to put emergency funds if one does not have enough money to have an emergency fund in the first place. But this family has an emergency fund, so I think Roth contributions would not be wise.

I see no reason to save separately for college for this family.

I did not investigate the additional lowering of income by bunching charitable deductions.
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livesoft
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Re: New Boglehead, Kids's College, & Emergency Fund Transfer

Post by livesoft » Mon Mar 20, 2017 8:08 am

GMercier wrote:Financial Status:
[b]Current portfolio:
My retirement:
$11K in VFIFX in Roth IRA (maxed out 2016 and 2017) only 1 year old @ Vanguard

If you have made Roth IRA contributions for 2016 and 2017, then you should consider recharacterizing some amount of them to traditional IRAs instead. I would think that would help you even more.
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livesoft
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Re: New Boglehead, Kids's College, & Emergency Fund Transfer

Post by livesoft » Mon Mar 20, 2017 8:12 am

And one more post to this thread:

It is a shame that the Roth versus traditional IRA decision is so complicated and some responses to this thread are not math based, but are emotional.

It looks like it takes tax software to figure out whether to do traditional or Roth. A family like the OP is very unlikely to use tax software in the way I showed: By testing scenarios.

Also if this family had their tax returns done by a JacksonHewitt or a HRBlock office, I seriously doubt if the tax preparer would run a few scenarios to tell them which was better: Roth or traditional.
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aristotelian
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Re: New Boglehead, Kids's College, & Emergency Fund Transfer

Post by aristotelian » Mon Mar 20, 2017 9:07 am

livesoft wrote:It seems the big argument here is whether to contribute to a traditional IRA or Roth IRA.

This is where doing a trial tax return will help make the decision. So I did a couple of scenarios. I assume $55K in income, but $2,000 for health insurance and no other income. MFJ, 2 kids under 16.

AGI is $53K without any IRA deduction, standard deduction (although they could probably do better if they bunched their 10% charitable contributions into every other year), 2 kids for 4 exemptions.

So with no IRAs they owe $706 in federal taxes after getting a $2000 child tax credit.
With Roth IRAs, they own $406 in federal taxes because of the additional $300 savers credit

With one Roth and one traditional, they get a refund of $519.
So switching $5500 from a Roth to traditional nets them an exta $925. That's an instant 17% return on their money.

With no Roth and two traditional IRA contributions of $5500 each, they get a refund of $1077 or an extra $558.

So using traditional IRAs instead of Roth IRAs gives them an extra $1484 a year.


It is clear that going Traditional will save them money this year. The question is what is the best long term.

There may be a good case for Roth if a) OP expects to get promotions or other salary increases over his career, or b) his wife decides to get a job, moving them to a higher tax bracket.

If there is no plan to do so, I would agree with Traditional. The other benefit of Traditional is it would help give them a stronger incentive to use the funds for retirement rather than emergency savings.

I had initially suggested Roth, but I would lean toward Traditional if OP expects his tax bracket to stay the same. If you are uncertain, you could always split the difference and do his Roth and her Traditional.

weedf16
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Re: New Boglehead, Kids's College, & Emergency Fund Transfer

Post by weedf16 » Mon Mar 20, 2017 10:25 am

livesoft wrote:
So using traditional IRAs instead of Roth IRAs gives them an extra $1484 a year.



I don't have the tax software, but see if my math makes sense.

Assumptions: $55K salary, 2 children under 17, able to save $11K into his/hers IRAs, married filing jointly

ROTH

$55,000 (salary)
- $12,600 (standard deduction)
- $16,200 (4 exemptions)
$26,200 (AGI)

18,550*.1 + (26,200-18,550)*.25 = 3,002 (Tax due)

$3,002
- $2000 (child tax credit)
- $4000 (savers credit) **with AGI less than $37K can claim 50% of contribution (max of $4,000)
-$2,998

Tax Liability = $0 (both child tax credit and savers credit are non-refundable)

TRADITIONAL

$55,000 (salary)
- $11,000 (traditional contributions)
- $12,600 (standard deduction)
- $16,200 (4 exemptions)
$15,200 (AGI)

15,200*.1 = 1,520 (Tax due)

$1,520
- $2000 (child tax credit)
- $4000 (savers credit) **with AGI less than $37K can claim 50% of contribution (max of $4,000)
-$4,480

Tax Liability = $0 (both child tax credit and savers credit are non-refundable)

By my calculations, their refund would be the same regardless of ROTH or Traditional

Making ROTH the way to go. Where am I going wrong?

:sharebeer

livesoft
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Re: New Boglehead, Kids's College, & Emergency Fund Transfer

Post by livesoft » Mon Mar 20, 2017 10:34 am

weedf16 wrote: Where am I going wrong?

:sharebeer

You didn't use tax software. I did. That's probably where you went wrong.

The child tax credit is a partly refundable credit, so if no taxes, then some credit is not given.
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weedf16
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Re: New Boglehead, Kids's College, & Emergency Fund Transfer

Post by weedf16 » Mon Mar 20, 2017 11:57 am

livesoft wrote:
The child tax credit is a partly refundable credit, so if no taxes, then some credit is not given.


Thanks livesoft, forgot about the "additional" child tax credit. Looks like in my scenarios above the OP would get an additional $480 by going traditional.

:sharebeer

GMercier
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Re: New Boglehead, Kids's College, & Emergency Fund Transfer

Post by GMercier » Mon Mar 20, 2017 2:13 pm

Updates

Here I was thinking that I was doing great by standards of almost everyone I know in my tribe, and then I asked the Bogleheads. This was a bit of a wakeup call that I am in over my head! I super appreciate all your help. You guys are truly helpful.

I just moved from a $43K social service career into the $55K IT career this month. So the career has its $75K - $85K+ salary promises within 5-10 years, if I go that route.

Wife wants to work in about 15 years. ($30K - $40K range with NY State job.)

My tax software won’t let me play with the numbers to determine tax % since I’ve already filed.
But for 2016, I paid about $650 total in Fed taxes and a little under $700 total in NY taxes.

I have 2 kids, both under 6yo. Plan is for one more kid to come in 2018 and none after that.
I’m paying $1200 for my health insurance and adding $1200 to an HSA.

I can fund the retirement at 15% ($5.5K my RIRA and $1K wife’s RIRA and $1.6K 403b). Monthly budget has little margin. Unlikely we’ll be able to do $11K annually in IRAs and raise the kids. I got the 15% into retirement idea from Dave Ramsey, but hearing that I’m $63K behind target got me rattled. I’m humble and don’t mind a humble retirement, but I want to eat and fix my roof!

I went the RIRA (vs. Traditional) route because the USA has a big debt to repay at some point, and that means more taxes when I’m older. That was my simple formula, for better or worse. I’m open to reconsider but it looks like with the increase in salary over the next few decades, sticking with the Roth looks good.

Kids are on their own for college. I got that loud and clear from everyone here!

Redneck Bank looks good for EF if I can swallow the marketing for the extra .25%. I might just stick with VMMXX, though the lack of FDIC makes people crazy. Do you guys really think Vanguard will fail!? That confused me.

I got a good idea of where I need to focus and read some more. Thank you everyone so very much. If anything I’ve added greatly changes the suggestions, please feel free to update further. Thanks again.

livesoft
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Re: New Boglehead, Kids's College, & Emergency Fund Transfer

Post by livesoft » Mon Mar 20, 2017 6:11 pm

Even though your salary will go higher and your spouse will probably start working ... I think that you will be better off by recharacterizing your Roth IRA contribution for 2016 to a tIRA and if you have made a Roth contribution for 2017, to recharacterize that as well.

Note that by law, standard deductions, exemptions, and tax brackets will go up with inflation, so a $75K salary in the future will be the same as a $55K salary today. That is, do not be fooled by the future. The fact that you paid about $650 in Federal income taxes is consistent with my previous analysis. In your shoes, I would recharacterize and file an amendment to my tax return and pocket the extra $1400.

Note that in the future, even if one has traditional IRAs that one can do Roth conversions, but also that a big chunk of withdrawals can be tax-free just like with a Roth because of the standard deduction and exemptions. Furthermore, you could have moved to Florida by then and not have to pay state income tax.

BTW, when I was in my twenties, the USA had a big debt then and many people warned me about that. It is now 30+ years later and it is the same as it ever was. I would not let my political feeling interfere with sound investing strategy. I certainly wouldn't throw away $2,000 a year for this.
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teen persuasion
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Re: New Boglehead, Kids's College, & Emergency Fund Transfer

Post by teen persuasion » Mon Mar 20, 2017 7:07 pm

livesoft wrote:It seems the big argument here is whether to contribute to a traditional IRA or Roth IRA.

This is where doing a trial tax return will help make the decision. So I did a couple of scenarios. I assume $55K in income, but $2,000 for health insurance and no other income. MFJ, 2 kids under 16.

AGI is $53K without any IRA deduction, standard deduction (although they could probably do better if they bunched their 10% charitable contributions into every other year), 2 kids for 4 exemptions.

So with no IRAs they owe $706 in federal taxes after getting a $2000 child tax credit.
With Roth IRAs, they own $406 in federal taxes because of the additional $300 savers credit

With one Roth and one traditional, they get a refund of $519.
So switching $5500 from a Roth to traditional nets them an exta $925. That's an instant 17% return on their money.

With no Roth and two traditional IRA contributions of $5500 each, they get a refund of $1077 or an extra $558.

So using traditional IRAs instead of Roth IRAs gives them an extra $1484 a year.


Because EITC is in play, the decision is between 403b and Roth IRA. Traditional IRAs are inferior to payroll income reduction for EITC, because EITC tests both line 7 income and AGI. Traditional IRA contributions only reduce AGI, not line 7 income.

If we rerun Livesoft's scenario using $11,000 403b contributions, a family with 2 kids is eligible for $1721 EITC, with a state match of an additional $516.

Their tax before credits is $1323. If they only contribute to the 403b (nothing contributed to spouse's IRA) there is a $200 retirement Saver's credit, reducing tax to $1123. CTC is $2k, EITC is $1721, for a total of $3721 in refundable credits. Net refund is $2598.

If they use $2k of the refund to contribute to a Roth IRA for the spouse, the Retirement Saver's credit increases to $400, and the net refund is $2798 federal. They still have nearly $800 after contributing to the Roth IRA! And remember their state refund was increased by $516 in EITC as well.

livesoft
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Re: New Boglehead, Kids's College, & Emergency Fund Transfer

Post by livesoft » Mon Mar 20, 2017 7:11 pm

^Very nice! There is more than meets the eye here. I will re-run scenarios with my tax software.
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teen persuasion
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Re: New Boglehead, Kids's College, & Emergency Fund Transfer

Post by teen persuasion » Mon Mar 20, 2017 8:05 pm

Of course, if they instead increase the 403b contributions by $2001 (to get just below the $40k AGI threshold for 20% Retirement Saver's credit), their refund jumps to $3435 federal. That is, no Roth IRA for spouse but $13k 403b contribution. State EITC increases to $642.

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