Trying to Save and Invest more Efficiently

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vaught
Posts: 33
Joined: Fri Aug 11, 2017 2:00 pm

Trying to Save and Invest more Efficiently

Post by vaught » Fri Aug 11, 2017 2:33 pm

I have been saving and investing pretty regularly for the last five years but have had a couple life changes recently that necessitate revisiting what I've been doing and revising to save/invest more. The main change is that I have obtained a new job that gives my wife and I more flexibility to save more.

In my old job I maxed out my 401k at the full 18k (of which the first 4% was matched 100%).

I plan on doing the exact same at my new job (120k) (which also matches first 4% contributions at 100%).
Only other tax saving mechanism I use from a payroll deduction standpoint is contributing to flexible spending account (medical and dependent day care).
I also max out a roth IRA.
That is all that I currently do. Though we do have more than 6 months of expenses saved in a liquid account.

My wife maxes out a roth IRA.
She also has a mandatory contribution towards retirement that is more of a defined benefit plan through the state.
That is all we currently do for her.

She is a teacher for a public school district so does not have a 401k. Her salary is 48k
She does have access to a 403b (no match) and a 457b which we have never utilized.
Now we would like to start taking advantage of more tax savings.

If we can get by on just my salary, is there any reason not to start contributing the max to the 403b and the 457b?
Or after contributing 18k to one of the above would the taxes be so low that it would make more sense to go ahead and pay taxes and invest the after tax money directly in an investment account?

Lastly, we have two children.
I started 1 529 for the first with a pretty nominal $100/mth contribution.
We just had our second so I have not yet started a second 529.
Only real tax benefit is the state tax savings so on only $1200 contribution that is a tiny tax savings.
Also since the 529 plans can be maneuvered to pay for any child's expenses does it really make sense to start a second one or just double contribution to first one instead?
Or just invest that money elsewhere altogether and use other to pay for college when the time comes.
Children are 2 and 4 months so it would be a long term horizon.

Hopefully that's not an overwhelming amount of questions.

Thanks.

mega317
Posts: 1094
Joined: Tue Apr 19, 2016 10:55 am

Re: Trying to Save and Invest more Efficiently

Post by mega317 » Fri Aug 11, 2017 5:32 pm

Congrats on such a great savings rate. If you can afford it, I would max her 403b. I would also max her 457 if it is governmental (again if you can afford it). You would have to model your taxable income at various contribution levels to determine where you change brackets. But my calculator says you're still in the 25% bracket if you max all 3 accounts.

One reason to consider NOT contributing would be if the investment options are terrible.

You can also look into a high deductible health plan, and defer/eliminate more taxes by contributing to a heath savings account.

I usually refrain from saying much about 529s since there are strong opinions on both sides from smart people. I personally would contribute up to the state tax deduction and no more until your comfortable retirement is assured.

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ruralavalon
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Location: Illinois

Re: Trying to Save and Invest more Efficiently

Post by ruralavalon » Sat Aug 12, 2017 10:03 am

Welcome to the forum :) .

Congratulations on your new job

You have an excellent savings rate, and are right to make maximum use of your tax-advantaged accounts being your 401k and two Roth IRAs.
vaught wrote:
Fri Aug 11, 2017 2:33 pm
I have been saving and investing pretty regularly for the last five years but have had a couple life changes recently that necessitate revisiting what I've been doing and revising to save/invest more. The main change is that I have obtained a new job that gives my wife and I more flexibility to save more.

In my old job I maxed out my 401k at the full 18k (of which the first 4% was matched 100%).

I plan on doing the exact same at my new job (120k) (which also matches first 4% contributions at 100%).
Only other tax saving mechanism I use from a payroll deduction standpoint is contributing to flexible spending account (medical and dependent day care).
I also max out a roth IRA.
That is all that I currently do. Though we do have more than 6 months of expenses saved in a liquid account.

My wife maxes out a roth IRA.
She also has a mandatory contribution towards retirement that is more of a defined benefit plan through the state.
That is all we currently do for her.

She is a teacher for a public school district so does not have a 401k. Her salary is 48k
She does have access to a 403b (no match) and a 457b which we have never utilized.
Now we would like to start taking advantage of more tax savings.

If we can get by on just my salary, is there any reason not to start contributing the max to the 403b and the 457b?
Or after contributing 18k to one of the above would the taxes be so low that it would make more sense to go ahead and pay taxes and invest the after tax money directly in an investment account?

Lastly, we have two children.
I started 1 529 for the first with a pretty nominal $100/mth contribution.
We just had our second so I have not yet started a second 529.
Only real tax benefit is the state tax savings so on only $1200 contribution that is a tiny tax savings.
Also since the 529 plans can be maneuvered to pay for any child's expenses does it really make sense to start a second one or just double contribution to first one instead?
Or just invest that money elsewhere altogether and use other to pay for college when the time comes.
Children are 2 and 4 months so it would be a long term horizon.

Hopefully that's not an overwhelming amount of questions.

Thanks.
Some additional information will be helpful.

What is your tax bracket, both federal and state?

What are your ages?

Do you have an asset allocation (stock/bond mix) that you want to aim for?

Do you have any debt? If so what types, amounts and interest rates?

Are either or both of you eligible for a significant pension?

Are Roth contributions allowed in your 401k?

Are Roth contributions allowed in her 403b plan and 457 plan?

What providers are available in her 403b plan and 457 plan? If only one provider, then what are the funds offered by that one provider? Please give fund names, tickers and expense ratios.

You can simply add this to your original post using the edit button, it helps a lot if all of your information is in one place.

. . . . .

My guess is that it may be useful to contribute to her 403b or 457 plans or both But a lot depends on the quality and expense of the investments offered in those plans. So it's very important to know what providers are available in her 403b plan and what mutual funds are offered in that plan and in the 457 plan.

Unfortunately many 403b plans offered to public school teachers are horrible.

But if the funds offered are decent it probably makes sense to invest in one or both of those plans.

In general I think it's often better to make maximum use of tax-advantaged retirement accounts, before considering use of college savings type accounts. With your retirement savings in good shape, then when the time comes you can probably fund college expenses out of income while decreasing your retirement contributions then as necessary.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Mudpuppy
Posts: 5417
Joined: Sat Aug 27, 2011 2:26 am
Location: Sunny California

Re: Trying to Save and Invest more Efficiently

Post by Mudpuppy » Sat Aug 12, 2017 12:23 pm

As a public school teacher, her 457(b) plan is most likely a governmental plan. Without knowing the investment options, I would slightly favor a governmental 457(b) plan over a 403(b) plan due to the more flexible withdrawal rules for the 457(b) plan. One can withdraw from a governmental 457(b) plan after leaving one's employer without any tax penalties, regardless of age. With the 403(b) plan, one would pay a 10% penalty if the funds were withdrawn before age 59.5. So the 457(b) plan can help bridge any money gaps that might come due if she retires or leaves that job before she turns 59.5.

Of course, without seeing the investment options, this isn't a sure thing. We'd really need to know what the lineups are for both plans. If one is truly horrible, then it would be wiser to use the other.

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CyclingDuo
Posts: 839
Joined: Fri Jan 06, 2017 9:07 am

Re: Trying to Save and Invest more Efficiently

Post by CyclingDuo » Sun Aug 13, 2017 12:04 pm

vaught wrote:
Fri Aug 11, 2017 2:33 pm

She is a teacher for a public school district so does not have a 401k. Her salary is 48k
She does have access to a 403b (no match) and a 457b which we have never utilized.
Now we would like to start taking advantage of more tax savings.

If we can get by on just my salary, is there any reason not to start contributing the max to the 403b and the 457b?
Or after contributing 18k to one of the above would the taxes be so low that it would make more sense to go ahead and pay taxes and invest the after tax money directly in an investment account?

Lastly, we have two children.
I started 1 529 for the first with a pretty nominal $100/mth contribution.
We just had our second so I have not yet started a second 529.
Only real tax benefit is the state tax savings so on only $1200 contribution that is a tiny tax savings.
Also since the 529 plans can be maneuvered to pay for any child's expenses does it really make sense to start a second one or just double contribution to first one instead?
Or just invest that money elsewhere altogether and use other to pay for college when the time comes.
Children are 2 and 4 months so it would be a long term horizon.
403b

The voluntary 403b would help get your pre-tax income down, and is a nice portable tax deferred option. My wife has the same 403b voluntary option in addition to her mandatory pension with the employer match that goes to the state pension plan (Iowa called IPERS). The state of Iowa negotiated quite well with 4 providers (Horace Mann, Mass Mutual, Voya, and VALIC). All have similar wrap/administrative fees, and all did have some of the low cost Vanguard favorite Three Fund Portfolio options. We ended up choosing VALIC as the administrative fees were .02 less than the other options.

Spouse 403b (Voluntary Plan) AIG/VALIC which includes an administrative ER fee of .18 added to each fund as listed here...

Vanguard Institutional Index Fund 40% (total ER .22 - includes .18 administrative fee)
Vanguard Total International Stock Index Fund Admiral 20% (total ER .30 - includes .18 administrative fee)
Vanguard Total Bond Market Index Fund Admiral 40% (total ER .25 - includes .18 administrative fee)

What plans are available, and what are the underlying fund options for your wife?

We had avoided the 403b for many years due to income level with raising our two children not allowing us to afford contributing. Her mandatory pension contribution and the 8% employer match meant that, on average, 18-20% of her income was directed to the pension which we felt was enough when combined with the ROTH IRA. However, we decided to bump up the retirement investing the past two years, and especially this year as our transition to empty nest parents began in earnest this Summer. So we went to the full $24K for my wife in the 403b for 2017 (as well as mine at TIAA), and will likely keep adding as much as we can the next few years based on our cash flow needs staying the same on the home front.

What had been a rock solid pension plan here in Iowa via IPERS, is now under possible change, or threat of change by the Governor and legislature. No idea what that will mean or if any changes that would effect my wife will actually be voted into place, but it certainly helped push us over the edge to use the voluntary 403b in case anything gets cut or altered. Not saying your state is or could be in a similar situation, but the trend has not been favorable for state pensions "as they were", so it is always good to plan for the "what if's"....

529 for Children

We didn't have that option when we started, so went the UTMA route. We would suggest front end loading the 529's as much as you can in the early years to take advantage of time/compounding. If balances are kept too low, and the ER fees of the underlying funds are too high - a lot of treading water will take place. You didn't mention where the 529 plan you have started is located, but hopefully it is a low cost plan. Maintaining your dual income household during their college years will help you to be able to cash flow a lot of the expenses that were not saved for in the 18-22 years prior. We would certainly be aggressive savers for college education in the first 10 years. In our case, that took precedence over us maxing out anything related to our own retirement savings. We saved a lot in taxable for a myriad of reasons between 1989 and 2003 working overseas - so taxable is now the majority of our overall portfolio. End result - kids graduated from college debt free.

We are currently a dual income household in education, so taking advantage of some the over age 50 IRS rules of socking away $6500 each into our ROTH IRA's, $24K each into 403b's, plus my wife's pension, plus additional taxable savings every month has us in decent shape. We only mention that with regard to the possibility of being able to save and finance two college educations resulting in zero debt, as well as save and finance for retirement is doable - especially in your case as your income of $120K plus your wife's $48K salary tops ours. So if we were able to do it (our combined fluctuates between $116 - 129K total each year) - you should be fine as time is on your side.

The unknown element since you didn't list it, is how much debt you have, how much goes to the big three each month/year: housing/transportation/food. Keep all three of those down in cost, and you will be golden with fully paid for college educations, and fully funded retirement plans.

Keep up the good work!

vaught
Posts: 33
Joined: Fri Aug 11, 2017 2:00 pm

Re: Trying to Save and Invest more Efficiently

Post by vaught » Tue Aug 15, 2017 11:48 am

Since my original post, I've gotten a few pieces of news that will help with decision making.

1. Good news. I signed up for my new employer's 401k and there are multiple Vanguard accounts that I am used to seeing with super low expense ratios. I figured out what I had already contributed this year in my old 401k (9,800) and have the remainder of the year set up to get to 18k.

2. Good news. My wife's 457b provider also has Vanguard accounts (almost exclusively date range funds but I'm ok with that). I'm planning on having us max this out for the full 18k. No employer match.

3. Bad news. My wife's ONLY 403b provider is American Fidelity. I'm still awaiting the representative's call/email to give me some information but everything I've found on their site so far as it pertains to 403b lists one annuity as the only option. Not surprisingly I couldn't find the expense ratio explicitly stated on their site (guess they want you to ask the rep those questions) but looking elsewhere it appears to be really high (+2.0). Also no employer match.

Regarding number one, I was expecting that good news.

Regarding number two, I'm guessing that's a no-brainer now to get her signed up for the 457b and max it out to become more efficient.

Regarding number three, I'm not sure what to do. I'll of course get more information ASAP but I guess the options are:
a) begrudgingly invest in the American Fidelity 403b annuity despite the high expense ratio with the idea that it is still saving us money because it is being contributed pre-tax; or
b) do not contribute to 403b, pay the tax (should be fairly small after deductions and the 457b contributions) and invest the majority of her remaining salary in an after-tax account. Because I don't think her taxes will be very much on such a small salary after the deductions and contributions, a roth 403b seems like it would have been a perfect fit. Too bad they don't offer anything close to that.
c) any other ideas?

vaught
Posts: 33
Joined: Fri Aug 11, 2017 2:00 pm

Re: Trying to Save and Invest more Efficiently

Post by vaught » Tue Aug 15, 2017 11:58 am

To answer some of the pertinent questions asked:

1. Ages - 33, wife is 30, 2 yo and an infant
2. Asset Allocation - 90/10 stocks
3. Debt - we only have two pieces of debt. No credit card debt. No auto debt. Mortgage is 200k (home is conservatively 275-300k). Second piece of debt is wife's student loans (40k). Because she is a public school teacher, she can pay it off using the Public Service Student Loan Forgiveness Program. Long story short, it takes your AGI and limits your payment to a certain percentage of that. If you make 10 years worth of payments, the entirety of the debt is forgiven. You can only qualify for this if you have an income under a certain level which requires us to....
4. Tax filing status - married filing separately. We admittedly lose quite a few benefits by filing this way in order to utilize the Public Service Student Loan Forgiveness Program but we are about 4 years into this so there's really no turning back now. We sacrifice a couple grand at tax time to save much more than that in payments.

Mudpuppy
Posts: 5417
Joined: Sat Aug 27, 2011 2:26 am
Location: Sunny California

Re: Trying to Save and Invest more Efficiently

Post by Mudpuppy » Tue Aug 15, 2017 12:00 pm

vaught wrote:
Tue Aug 15, 2017 11:48 am
Regarding number three, I'm not sure what to do. I'll of course get more information ASAP but I guess the options are:
a) begrudgingly invest in the American Fidelity 403b annuity despite the high expense ratio with the idea that it is still saving us money because it is being contributed pre-tax; or
b) do not contribute to 403b, pay the tax (should be fairly small after deductions and the 457b contributions) and invest the majority of her remaining salary in an after-tax account. Because I don't think her taxes will be very much on such a small salary after the deductions and contributions, a roth 403b seems like it would have been a perfect fit. Too bad they don't offer anything close to that.
c) any other ideas?
If your tax bracket is low, a taxable investment account with low-cost investment options could be a better option than paying 2%+ fees to American Fidelity. Have you projected which federal tax bracket you'll be in for the year? Without knowing your other deductions, all I can tell is that you'll be in no more than the 25% bracket.

Edit: Just saw your post about being filing taxes separately. That changes things quite a bit. I'll let someone more experienced in this area chime in.

vaught
Posts: 33
Joined: Fri Aug 11, 2017 2:00 pm

Re: Trying to Save and Invest more Efficiently

Post by vaught » Wed Aug 16, 2017 10:02 am

mega317 wrote:
Fri Aug 11, 2017 5:32 pm
Congrats on such a great savings rate. If you can afford it, I would max her 403b. I would also max her 457 if it is governmental (again if you can afford it). You would have to model your taxable income at various contribution levels to determine where you change brackets. But my calculator says you're still in the 25% bracket if you max all 3 accounts.

One reason to consider NOT contributing would be if the investment options are terrible.

You can also look into a high deductible health plan, and defer/eliminate more taxes by contributing to a heath savings account.

I usually refrain from saying much about 529s since there are strong opinions on both sides from smart people. I personally would contribute up to the state tax deduction and no more until your comfortable retirement is assured.
This is something I had not thought of and don't know much about.

My wife as a school teacher has coverage on herself and our two children in a plan that would currently not qualify as high deductible.

I have my own really cheap plan as I am still relatively young and healthy (and not having babies like my wife). My individual plan would qualify as high deductible.

1. Can I start a HSA and contribute $6,750?
2. After reading a bit online and here, am I correct that I basically can treat this HSA just like a traditional IRA? My employer doesn't offer a HSA so I can't contribute pre-tax. So instead I would just contribute post-tax and deduct it for taxes. It reads like I then have the choice to (1) seek reimbursement from the HSA when I have a medical expense; or (2) just pay it out of pocket and let HSA continue to grow. Then once I turn 65 I can access the funds in the HSA with no penalty (just pay taxes on the gains). If I chose option 2, is that not basically an "extra" traditional IRA?
3. Is this as simple as creating an account at Vanguard and just choosing HSA as opposed to taxable or roth, etc...?

mega317
Posts: 1094
Joined: Tue Apr 19, 2016 10:55 am

Re: Trying to Save and Invest more Efficiently

Post by mega317 » Wed Aug 16, 2017 11:36 am

Some of your questions exceed my knowledge of HSAs. Hopefully others can help.

I do know the HSA contribution limit is lower for solo coverage as opposed to family. My employer and google tell me $3400. What I might do if your kids are healthy is move them to your HDHP to increase your contribution limit.

I am not sure how to proceed if your employer offers an HDHP but not an HSA.

bloom2708
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Location: Fargo, ND

Re: Trying to Save and Invest more Efficiently

Post by bloom2708 » Wed Aug 16, 2017 11:51 am

If your wife and kids are on her plan, then you can only save the $3,400 because you are on an individual plan.

If you have a HDHP, then you should have an HSA. You may not be putting any money in it/funding it.

Like investment accounts, not all HSA providers are created equal. Check fees, expense ratios and investment options.

Filling one of the 403b or 457 along with starting a Taxable account seems good. $3,400 to the HSA is tax free in, tax free earnings, tax free out.

Save, but I wouldn't do it until it hurts.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

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