Opinions for 2018 investment plans - tIRA to ROTH, pay off mortgage 10/1 ARM or student loans

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KATNYC
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Joined: Fri Apr 07, 2017 4:34 pm

Opinions for 2018 investment plans - tIRA to ROTH, pay off mortgage 10/1 ARM or student loans

Post by KATNYC » Thu Jan 11, 2018 9:45 pm

We aggressively paid down debt in 2017, partly due to an old defaulted $23,000 student loan that popped up unexpectedly (long story - get all the details for your GI bill in writing).

About us:
Ages: 33, 29
Tax Filing Status: Married Filing Jointly
No kids
Tax Rate: 25% Federal*
9% NYC rate
Salaries: 2017: $135K (includes bonus, no bonus guaranteed for 2018)/$44K (new job so earnings prorated in 2017)
State of Residence: NY (NYC)
Desired Asset allocation: 90% stocks/10% bonds
Specifically: 70% US stocks/ 20% International stocks / 10% bonds*

Assets:
$69,830 cash (9 months of expenses based on 2017 spending in 1% & 3% accounts)
NYC apartment $700,000 appraisal
2007 SUV $4,4000
Hers: $292,460 in 401K with 6% company match (401k loans available up to 50% of balance; no mega ROTH options) - maxed out in 2017
Hers: $6,060 Vanguard tIRA opened April 2017 - Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) (started in a different fund)
His: $6,280 Vanguard tIRA opened April 2017 - Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)

Debt:
His: $23,000 student loan - defaulted & never on credit report
Hers: $52,430 in student loan debt 3.71% fixed
$177,940 10/1 ARM mortgage 3.375%

Other:
Term Life insurance: $800,000 combined (about $20/month through employer)

401K Investment Mix (most have no tickers – recent 2017 change to fund options)*:
Large US Equity/Large Cap .04 ER
30%
Small/Mid Cap Equity .06 ER
35%
International Equity Index .13 ER
15%
Bond Index Fund .06 ER
10%
Company stock (has doubled over the years with company match + discretionary match)
10%

Social Security:
None of this accounts for social security, which may be totally restructured or not available when we retire.

We have a small business, not much income produced but we keep it for tax write-offs. We keep track of every expense, use a home office & deduct a portion of all utility/home maintenance/mortgage/repair costs and we turn all that over to our CPA of 5 years.

Questions:
1. We feel like our emergency fund is a too large. If we had to cut out non-essentials, we could cut that to $40,000 - $53,000 (9-12 months of essential expenses is our comfort level). We are considering paying down more debt for a guaranteed return rather than hold extra cash. Should we pay down the mortgage or student loans? We lean toward paying down the mortgage and plan to make double payments starting this month. Given the new tax bill, we can't deduct the mortgage interest unless we itemize, which we may not do for 2018 taxes. The student loan deduction phases out so that may go away for 2018 depending on MAGI.

2. tIRA contributions are not 100% tax-deductible for 2018/2019 due to higher incomes/bonus/overtime. We have business deductions that lowered out tax rate in 2016 that we also expect in 2017. We cannot roll tIRAs to 401K. We need to investigate how to roll tIRA's to ROTH IRAs with Vanguard. tIRA deduction was not the full $11,000 for 2016 taxes, the deduction was $9,370 since we decided we'd rather pay into tIRA's than pay the IRS. We have a CPA so they will prepare all the necessary forms, we just need to open the 2017 ROTH accounts and move the existing 2016 tIRA funds.

3. We will max out her 401K for 2018 & intend to pay down debt & invest any monthly leftover cash in a taxable account with low cost, index ETF's or mutual funds (tax efficient) and (b) muni bonds for fixed income exposure. We thought about Target Retirement Funds or the Life Strategy Growth Fund. Thoughts on this plan?

4. We do not have an HSA but do qualify to start one. Neither company offers an HSA so we'd have to use a private company. It would be as a separate retirement account not really for medical bills.

KATNYC
Posts: 434
Joined: Fri Apr 07, 2017 4:34 pm

Re: Opinions for 2018 investment plans - tIRA to ROTH, pay off mortgage 10/1 ARM or student loans

Post by KATNYC » Fri Jan 12, 2018 4:02 pm

Based on talking to our accountant about the new tax bill, we paid our January mortgage payment in December. We don't have the option to pay real estate taxes in advance.

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grabiner
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Re: Opinions for 2018 investment plans - tIRA to ROTH, pay off mortgage 10/1 ARM or student loans

Post by grabiner » Fri Jan 12, 2018 10:16 pm

KATNYC wrote:
Thu Jan 11, 2018 9:45 pm
1. We feel like our emergency fund is a too large. If we had to cut out non-essentials, we could cut that to $40,000 - $53,000 (9-12 months of essential expenses is our comfort level). We are considering paying down more debt for a guaranteed return rather than hold extra cash. Should we pay down the mortgage or student loans? We lean toward paying down the mortgage and plan to make double payments starting this month. Given the new tax bill, we can't deduct the mortgage interest unless we itemize, which we may not do for 2018 taxes. The student loan deduction phases out so that may go away for 2018 depending on MAGI.
You will probably be over the limit for student loan deductions in 2018, given your reported income.

Therefore, it makes sense to pay down the student loan first, for several reasons. It has a higher interest rate, and since it is a smaller loan, it will get paid off more quickly. When it is paid off, you will need less of an emergency fund, and will free up more money for either investing or paying down the mortgage. In contrast, you don't get any benefit from mortgage prepayments until the ARM resets in ten years (or you pay the whole thing off).
2. tIRA contributions are not 100% tax-deductible for 2018/2019 due to higher incomes/bonus/overtime. We have business deductions that lowered out tax rate in 2016 that we also expect in 2017. We cannot roll tIRAs to 401K. We need to investigate how to roll tIRA's to ROTH IRAs with Vanguard. tIRA deduction was not the full $11,000 for 2016 taxes, the deduction was $9,370 since we decided we'd rather pay into tIRA's than pay the IRS. We have a CPA so they will prepare all the necessary forms, we just need to open the 2017 ROTH accounts and move the existing 2016 tIRA funds.
What you want to do is "convert" your traditional IRA to a Roth IRA, not "roll over". You can do this for your 2017 contributions. You are also probably under the limit for contributing directly to a Roth IRA for 2018, so you may want to do that.
3. We will max out her 401K for 2018 & intend to pay down debt & invest any monthly leftover cash in a taxable account with low cost, index ETF's or mutual funds (tax efficient) and (b) muni bonds for fixed income exposure. We thought about Target Retirement Funds or the Life Strategy Growth Fund. Thoughts on this plan?
I would suggest paying down debt in preference to taxable investing, given that your debt is not deductible.

If you do make taxable investments, the Target Retirement and LifeStrategy funds are not good for a taxable account, because they lock you into their allocation. If you want to sell bonds (in order to buy NY munis instead, or hold bonds in a different account, or spend the money), you have to sell stocks as well, paying a capital-gains tax.
4. We do not have an HSA but do qualify to start one. Neither company offers an HSA so we'd have to use a private company. It would be as a separate retirement account not really for medical bills.
This has a big tax benefit, as contributions are deductible from your federal and NY taxes, and withdrawals for medical expenses are tax-free. Max out an HSA for 2017 if you were eligible last year; you can do this through April 17, 2018. And max out again for 2018. This is the best investment you can make other than a 401(k) with an employer match.
Wiki David Grabiner

KATNYC
Posts: 434
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Re: Opinions for 2018 investment plans - tIRA to ROTH, pay off mortgage 10/1 ARM or student loans

Post by KATNYC » Sat Jan 13, 2018 2:00 am

Thanks!

Just saw an email from the loan servicer about 1098E being mailed: $2,205 interest for 2017. I'm pretty confident this will phase out for 2018 based on rough calculations using 2017 salary and income/OT for the partial year.

The plan was to pay off the mortgage before the 10/1 ARM resets in June 2027. That can still happen based on my calculations, by January 2027, if we put the would-be double mortgage payment toward the student loans now instead.

We did the ROTH conversion online and sent an email to the accountant. He's sent 3 emails this week (automated) about starting our tax prep.
It was pretty easy on the Vanguard website to open ROTH accounts and convert 100% of both 2016 tIRAs.
I did not close the tIRA accounts and plan to leave them open since we will need them to do backdoor ROTHs eventually.

We are going to open a 2017 HSA next week. HSA $6,900 family coverage for 2018. Presuming bonuses are what I predict, we will be able to fully fund 2018 HSA & contribute to 2017 & 2018 ROTHs by March and keep a fully funded emergency fund.

For taxable, when we are able to start investing we are looking at Vanguard ETFs: VT & VTI.
We also intend to invest in Vanguard's limited-term national muni fund VMLTX and LT NY muni fund VNYTX.
Both VMLTX & VNYTX are daily accrual.


grabiner wrote:
Fri Jan 12, 2018 10:16 pm
KATNYC wrote:
Thu Jan 11, 2018 9:45 pm
1. We feel like our emergency fund is a too large. If we had to cut out non-essentials, we could cut that to $40,000 - $53,000 (9-12 months of essential expenses is our comfort level). We are considering paying down more debt for a guaranteed return rather than hold extra cash. Should we pay down the mortgage or student loans? We lean toward paying down the mortgage and plan to make double payments starting this month. Given the new tax bill, we can't deduct the mortgage interest unless we itemize, which we may not do for 2018 taxes. The student loan deduction phases out so that may go away for 2018 depending on MAGI.
You will probably be over the limit for student loan deductions in 2018, given your reported income.

Therefore, it makes sense to pay down the student loan first, for several reasons. It has a higher interest rate, and since it is a smaller loan, it will get paid off more quickly. When it is paid off, you will need less of an emergency fund, and will free up more money for either investing or paying down the mortgage. In contrast, you don't get any benefit from mortgage prepayments until the ARM resets in ten years (or you pay the whole thing off).
2. tIRA contributions are not 100% tax-deductible for 2018/2019 due to higher incomes/bonus/overtime. We have business deductions that lowered out tax rate in 2016 that we also expect in 2017. We cannot roll tIRAs to 401K. We need to investigate how to roll tIRA's to ROTH IRAs with Vanguard. tIRA deduction was not the full $11,000 for 2016 taxes, the deduction was $9,370 since we decided we'd rather pay into tIRA's than pay the IRS. We have a CPA so they will prepare all the necessary forms, we just need to open the 2017 ROTH accounts and move the existing 2016 tIRA funds.
What you want to do is "convert" your traditional IRA to a Roth IRA, not "roll over". You can do this for your 2017 contributions. You are also probably under the limit for contributing directly to a Roth IRA for 2018, so you may want to do that.
3. We will max out her 401K for 2018 & intend to pay down debt & invest any monthly leftover cash in a taxable account with low cost, index ETF's or mutual funds (tax efficient) and (b) muni bonds for fixed income exposure. We thought about Target Retirement Funds or the Life Strategy Growth Fund. Thoughts on this plan?
I would suggest paying down debt in preference to taxable investing, given that your debt is not deductible.

If you do make taxable investments, the Target Retirement and LifeStrategy funds are not good for a taxable account, because they lock you into their allocation. If you want to sell bonds (in order to buy NY munis instead, or hold bonds in a different account, or spend the money), you have to sell stocks as well, paying a capital-gains tax.
4. We do not have an HSA but do qualify to start one. Neither company offers an HSA so we'd have to use a private company. It would be as a separate retirement account not really for medical bills.
This has a big tax benefit, as contributions are deductible from your federal and NY taxes, and withdrawals for medical expenses are tax-free. Max out an HSA for 2017 if you were eligible last year; you can do this through April 17, 2018. And max out again for 2018. This is the best investment you can make other than a 401(k) with an employer match.

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grabiner
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Re: Opinions for 2018 investment plans - tIRA to ROTH, pay off mortgage 10/1 ARM or student loans

Post by grabiner » Sat Jan 13, 2018 10:58 am

KATNYC wrote:
Sat Jan 13, 2018 2:00 am
Just saw an email from the loan servicer about 1098E being mailed: $2,205 interest for 2017. I'm pretty confident this will phase out for 2018 based on rough calculations using 2017 salary and income/OT for the partial year.

The plan was to pay off the mortgage before the 10/1 ARM resets in June 2027. That can still happen based on my calculations, by January 2027, if we put the would-be double mortgage payment toward the student loans now instead.
This makes sense. If you are going to pay off two loans, you will finish the payoff sooner if you pay off the higher-rate loan first, since you pay the same amount of principal but less interest. Once the student loan is gone, the money which was making student loan payments can go to extra mortgage payments.
Wiki David Grabiner

Feedbackwrench
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Re: Opinions for 2018 investment plans - tIRA to ROTH, pay off mortgage 10/1 ARM or student loans

Post by Feedbackwrench » Sat Jan 13, 2018 11:22 am

How much income do you have for the small business? Are you averse to owning rental property such as duplexes or triplexes? Where are you at for your ["messing around" --admin LadyGeek] quotient? You could investigate into vanguards individual k for your small business which allows profit share side contributions that basically avoid self employment taxes.

KATNYC
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Re: Opinions for 2018 investment plans - tIRA to ROTH, pay off mortgage 10/1 ARM or student loans

Post by KATNYC » Sat Jan 13, 2018 12:49 pm

Feedbackwrench wrote:
Sat Jan 13, 2018 11:22 am
How much income do you have for the small business? Are you averse to owning rental property such as duplexes or triplexes? Where are you at for your ["messing around" --admin LadyGeek] quotient? You could investigate into vanguards individual k for your small business which allows profit share side contributions that basically avoid self employment taxes.
The small business doesn't kick out enough income to create individual 401Ks or quit day jobs.

We closed our real estate business a few years ago. We had single family homes, townhomes, new construction (started out with spec houses) and duplexes. We hated it by the end and would likely not be residential landlords again. We would try our hand at being commercial landlords with triple net leases. Otherwise, I'd prefer to invest in a REIT and let someone else handle the day to day and management of residential properties. I have been researching investing in mobile home parks. I haven't found any specific investment yet, but am interested in that niche.
Last edited by KATNYC on Sat Jan 13, 2018 12:55 pm, edited 1 time in total.

KATNYC
Posts: 434
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Re: Opinions for 2018 investment plans - tIRA to ROTH, pay off mortgage 10/1 ARM or student loans

Post by KATNYC » Sat Jan 13, 2018 12:51 pm

grabiner wrote:
Sat Jan 13, 2018 10:58 am
KATNYC wrote:
Sat Jan 13, 2018 2:00 am
Just saw an email from the loan servicer about 1098E being mailed: $2,205 interest for 2017. I'm pretty confident this will phase out for 2018 based on rough calculations using 2017 salary and income/OT for the partial year.

The plan was to pay off the mortgage before the 10/1 ARM resets in June 2027. That can still happen based on my calculations, by January 2027, if we put the would-be double mortgage payment toward the student loans now instead.
This makes sense. If you are going to pay off two loans, you will finish the payoff sooner if you pay off the higher-rate loan first, since you pay the same amount of principal but less interest. Once the student loan is gone, the money which was making student loan payments can go to extra mortgage payments.
Yes, I ran a few scenarios using a snowball and avalanche debt reduction calculator with additional money added in 2021.
I cannot recall where I found it but the link is: https://www.vertex42.com/Calculators/de ... lator.html

LeeMKE
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Re: Opinions for 2018 investment plans - tIRA to ROTH, pay off mortgage 10/1 ARM or student loans

Post by LeeMKE » Sat Jan 13, 2018 1:09 pm

+1 katnyc

You are in exceptionally good shape. My only immediate recommendation was going to be running your two debts through the same calculator you already found.

I would also strongly recommend that you consider doing your own taxes, using any one of the popular tax softwares. They will calculate everything for you, and you'll learn a lot from working through their questions, prodding you for all possible deductions. I used a CPA for years, and finally tried the software one year to match the returns prepared by my CPA. Small business, home office, MegaCorp W2 income, very similar to your situation. I was $.10 different from the return my CPA prepared, but learned several opportunities for deductions I had not prepared for. From then on, I have done my own taxes, and the software today is capable of very complicated circumstances. (Rated *Best Advice Ever* by millennial members of MKE Bogleheads)

Keep Going!
The mightiest Oak is just a nut who stayed the course.

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FiveK
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Re: Opinions for 2018 investment plans - tIRA to ROTH, pay off mortgage 10/1 ARM or student loans

Post by FiveK » Sat Jan 13, 2018 1:26 pm

KATNYC wrote:
Sat Jan 13, 2018 12:51 pm
Yes, I ran a few scenarios using a snowball and avalanche debt reduction calculator with additional money added in 2021.
I cannot recall where I found it but the link is: https://www.vertex42.com/Calculators/de ... lator.html
That is indeed a particularly good calculator for these issues. As a fine point, one should consider the after-tax interest effects, but it's still a nice piece of work. Just reinforcing for other readers with similar issues.

mhalley
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Re: Opinions for 2018 investment plans - tIRA to ROTH, pay off mortgage 10/1 ARM or student loans

Post by mhalley » Sat Jan 13, 2018 1:59 pm

Paying off a low interest mortgage is a tough one. Some say to pay as agreed, but with an arm you might want to convert to a fixed rate loan before interest rates rise. Carrying a mortgage is a personal rather than a financial decision depending on your attitude toward debt. A couple of posts on the issue:
https://www.nerdwallet.com/blog/mortgag ... to-decide/
https://financialmentor.com/investment- ... nvest/7478

KATNYC
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Re: Opinions for 2018 investment plans - tIRA to ROTH, pay off mortgage 10/1 ARM or student loans

Post by KATNYC » Sat Jan 13, 2018 2:05 pm

LeeMKE wrote:
Sat Jan 13, 2018 1:09 pm
+1 katnyc

You are in exceptionally good shape. My only immediate recommendation was going to be running your two debts through the same calculator you already found.

I would also strongly recommend that you consider doing your own taxes, using any one of the popular tax softwares. They will calculate everything for you, and you'll learn a lot from working through their questions, prodding you for all possible deductions. I used a CPA for years, and finally tried the software one year to match the returns prepared by my CPA. Small business, home office, MegaCorp W2 income, very similar to your situation. I was $.10 different from the return my CPA prepared, but learned several opportunities for deductions I had not prepared for. From then on, I have done my own taxes, and the software today is capable of very complicated circumstances. (Rated *Best Advice Ever* by millennial members of MKE Bogleheads)

Keep Going!
Thanks! Yes, we did our own taxes for years for real estate in multiple states & with a K-1 investment. The reason we use a CPA now is due to an audit. We ended up paying the IRS $12K, not bad since they wanted over $22K and tried to call one of our 2 business a hobby and exclude all deductions. We signed off on the $12K after a prolonged process & paid them on the spot and have used our CPA yearly since that time for the same business they tried to call a hobby.

I enjoy handing over everything to the CPA but am planning to make changes for 2019. I like him but he charges $1,000 which I did find worthwhile when we started since there was so much paper with all the real estate in multiple states, 1099s, second business and K1. Now I do more of the work by uploading information to a document transfer system and filling in numbers in the software via an access code. We sold all the real estate assets and dissolved that business so I do think the 2019 taxes will be less labor intensive.

KATNYC
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Re: Opinions for 2018 investment plans - tIRA to ROTH, pay off mortgage 10/1 ARM or student loans

Post by KATNYC » Sat Jan 13, 2018 2:06 pm

FiveK wrote:
Sat Jan 13, 2018 1:26 pm
KATNYC wrote:
Sat Jan 13, 2018 12:51 pm
Yes, I ran a few scenarios using a snowball and avalanche debt reduction calculator with additional money added in 2021.
I cannot recall where I found it but the link is: https://www.vertex42.com/Calculators/de ... lator.html
That is indeed a particularly good calculator for these issues. As a fine point, one should consider the after-tax interest effects, but it's still a nice piece of work. Just reinforcing for other readers with similar issues.
Yes, I was glad to have found it. I wish I could recall who passed on that link.

KATNYC
Posts: 434
Joined: Fri Apr 07, 2017 4:34 pm

Re: Opinions for 2018 investment plans - tIRA to ROTH, pay off mortgage 10/1 ARM or student loans

Post by KATNYC » Sat Jan 13, 2018 2:21 pm

mhalley wrote:
Sat Jan 13, 2018 1:59 pm
Paying off a low interest mortgage is a tough one. Some say to pay as agreed, but with an arm you might want to convert to a fixed rate loan before interest rates rise. Carrying a mortgage is a personal rather than a financial decision depending on your attitude toward debt. A couple of posts on the issue:
https://www.nerdwallet.com/blog/mortgag ... to-decide/
https://financialmentor.com/investment- ... nvest/7478
Very true. We like the idea of being debt free.
With the new tax bill, it doesn't appear we will get much of a benefit from mortgage interest since SALT is capped at $10K. SALT is what would bump us over the $24K new standard deduction plus $8,100 in exemptions that were eliminated for 2018.

We recognize that we could put the extra cash toward investments and have a better ROI versus the 3.375% mortgage.
Since I started this thread, the 401K is already up to $297,334.55. The mortgage payoff v investment plan may change as we get closer to being student loan free.

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