Just got a new job, looking for a bit of advice on what to do

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auggiedoggies
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Joined: Tue Sep 30, 2014 10:16 pm

Just got a new job, looking for a bit of advice on what to do

Post by auggiedoggies » Sat Sep 08, 2018 5:26 pm

Howdy! I recently started a job at a new company, came with a solid raise (about 30%). Just wanted some insight into the situation I'm in, and what I should be doing from an investing standpoint.

29M, wife is also 29. Have a 3 year old child and a new one on the way. Live in a midwestern suburb that's MCOL.

Current income for myself at my new job is 130k with a 15% annual bonus, wife is 55k. I also just finished my MBA, which helped to get this new job.

I expect my income to continue to rise in the future, as I have a solid resume and a top 25 MBA.

Current investments are ~110k in my 401k (Vanguard index funds), ~40k in wife's 401k (cheap index funds through work), and ~20k in Roth IRA (VG index funds). We also have ~5k in a HSA and 2.5k in old company stock.

Debts are 350k mortgage on a house worth 475k (estimate), 28k in student loans, and a total of 27k in car loans at 1.9% interest.


We currently pay about $2400 a month for our nanny. Once the oldest goes to preschool, this will go down significantly.

With my new income, I understand that I won't be able to contribute to a Roth IRA next year. It seems that everyone says the Roth IRA is the best thing ever, but I'm trying to figure out if it makes sense in my situation. If I expect my income to be significantly lower when I want to retire, wouldn't it make sense to contribute to a traditional IRA? Additionally, my new employer currently does not offer a 401k match (although it sounds like it's coming in a few years based on consistent employee feedback) or a HDHP (only one healthcare plan offered, and it's really good, but does not offer access to a HSA).

Should I continue to contribute to my 401k (I'm assuming the answer is yes?). Should I go traditional or ROTH for 401k? Should I go traditional or ROTH for IRA? Anything major I'm missing? I feel like I'm on the right track, but would love some help from the Bogleheads. :sharebeer

mhalley
Posts: 6351
Joined: Tue Nov 20, 2007 6:02 am

Re: Just got a new job, looking for a bit of advice on what to do

Post by mhalley » Sat Sep 08, 2018 6:17 pm

Sounds like your career is on an upward trajectory. I would go traditional ain 401k and Roth for Ira, preserving the possibility of backdoor Roth in the future and giving you tax diversification for retirement withdrawals.

gostars
Posts: 439
Joined: Mon Oct 09, 2017 7:53 pm

Re: Just got a new job, looking for a bit of advice on what to do

Post by gostars » Sat Sep 08, 2018 10:27 pm

auggiedoggies wrote:
Sat Sep 08, 2018 5:26 pm
With my new income, I understand that I won't be able to contribute to a Roth IRA next year. It seems that everyone says the Roth IRA is the best thing ever, but I'm trying to figure out if it makes sense in my situation. If I expect my income to be significantly lower when I want to retire, wouldn't it make sense to contribute to a traditional IRA? Additionally, my new employer currently does not offer a 401k match (although it sounds like it's coming in a few years based on consistent employee feedback) or a HDHP (only one healthcare plan offered, and it's really good, but does not offer access to a HSA).

Should I continue to contribute to my 401k (I'm assuming the answer is yes?). Should I go traditional or ROTH for 401k? Should I go traditional or ROTH for IRA? Anything major I'm missing? I feel like I'm on the right track, but would love some help from the Bogleheads. :sharebeer
Your income will be well above the limit to claim a deduction on a traditional IRA contribution, so your only option will be a nondeductible traditional IRA contribution. You can either leave it there, where any gains it makes will be pre-tax, or convert it into a Roth IRA, otherwise known as a backdoor Roth IRA, where there will be no taxes at all on gains. There are very few situations where nondeductible contributions to a traditional IRA without making a Roth conversion are a good idea, and most of them involve being unable to convert without running into pro-rata issues due to having other deductible contributions in an IRA. It doesn't sound like you have any deductible contributions to an IRA, so that wouldn't apply to you.

At that combined income, I'd guess you're probably going to end up around the top of the 24% tax bracket or bottom of 32%. Traditional 401ks and backdoor Roth IRAs are probably the best option.

Alto Astral
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Joined: Thu Oct 08, 2009 10:47 am

Re: Just got a new job, looking for a bit of advice on what to do

Post by Alto Astral » Sat Sep 08, 2018 10:29 pm

mhalley wrote:
Sat Sep 08, 2018 6:17 pm
Sounds like your career is on an upward trajectory. I would go traditional ain 401k and Roth for Ira, preserving the possibility of backdoor Roth in the future and giving you tax diversification for retirement withdrawals.
+1

billfromct
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Joined: Tue Dec 03, 2013 9:05 am

Re: Just got a new job, looking for a bit of advice on what to do

Post by billfromct » Sat Sep 08, 2018 10:34 pm

You won't be able to contribute to a tax deductible IRA because your income is too high & you are "covered by a retirement plan. The ability to contribute to a tax deductible IRA starts to phase out when your MAGI hits $101k for married filing jointly (MFJ).

The ability to contribute to a regular Roth IRA starts to phase out when your MAGI hits $189k for MFJ.

To keep your MAGI down, you & your wife should max out your tax deductible 401k. That should keep your MAGI under the $189k limit to fund regular Roth IRA contributions.

Does your company or your wife's company offer a Dependent Care Flexible Spending Account (DCFSA)? The DCFSA is funded by pre-tax $'s & can be used for eligible dependent care services like babysitting, Summer day camp, before/after school care, etc. This money can be used for a child under the age of 13. I used this 15 or 20 years ago for my 2 kids from age 5 to about 10 or 12.

I would encourage you to fund your Roth IRAs in order to build some tax diversity in your retirement accounts while you can. I have maxed out my Roth IRA since they became available in 1998. Roth 401ks were not available in my company until about 10 years ago & at my tax bracket & age, it didn't make sense to go the Roth 401k route. If I was in my 20s or 30s, I probably would have split my 401k into tax deductible & Roth contributions. You'll have to run the numbers based on your marginal tax rate.

My retirement accounts are 94% pre-tax/6% Roth. When I start SS & RMDs next year, I will be bumped up 1 tax bracket due to the lack of ability to fund Roth retirement accounts in my younger years.

bill

123
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Re: Just got a new job, looking for a bit of advice on what to do

Post by 123 » Sat Sep 08, 2018 11:17 pm

Childcare is a big drain on your income. With nanny expenses of $2,400 monthly that comes out to $28,800 a year (paid primarily with after-tax dollars). With your wife's earnings of $55K it would seem that after taxes, work expenses, and childcare expenses the household may go almost to the negative based on the childcare situation. However while some people have a personal need to work and so be it, it just seems like it's a significant drain on household income and energy.
The closest helping hand is at the end of your own arm.

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Misenplace
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Re: Just got a new job, looking for a bit of advice on what to do

Post by Misenplace » Sun Sep 09, 2018 2:15 pm

auggiedoggies wrote:
Sat Sep 08, 2018 5:26 pm

With my new income, I understand that I won't be able to contribute to a Roth IRA next year. It seems that everyone says the Roth IRA is the best thing ever, but I'm trying to figure out if it makes sense in my situation. If I expect my income to be significantly lower when I want to retire, wouldn't it make sense to contribute to a traditional IRA? Additionally, my new employer currently does not offer a 401k match (although it sounds like it's coming in a few years based on consistent employee feedback) or a HDHP (only one healthcare plan offered, and it's really good, but does not offer access to a HSA).

Should I continue to contribute to my 401k (I'm assuming the answer is yes?). Should I go traditional or ROTH for 401k? Should I go traditional or ROTH for IRA? Anything major I'm missing? I feel like I'm on the right track, but would love some help from the Bogleheads. :sharebeer
The nanny expenses are temporary, and with your wife working and contributing to her 401(k) plan that puts more money towards your long term goal.

OP, you are in good shape now, I don't think you can assume that your income may be much lower in retirement. They power of compounding could put you in a fairly high tax bracket when you have to take RMDs forty years from now. Also, it is nice to get that money in the Roth early so that it can hopefully start appreciating tax free. But who know what tax brackets are going to be in 40 years, and who knows what your salary will be over the next 30 years. Since nobody knows, I lean towards doing a bit of both. I would advise keep contributing the max to both 401(k)s so as to be able to do the Roth now, and as your income goes up you can switch to the backdoor method (so don't set up any rollover IRAs to avoid the pro rata rule). I suppose I would not do ROTH contributions into your 401k, because you can still do separate Roth IRAs of 11k per year and it's nice to keep them separate.
auggiedoggies wrote:
Sat Sep 08, 2018 5:26 pm

29M, wife is also 29. Have a 3 year old child and a new one on the way. Live in a midwestern suburb that's MCOL.
One item of concern that hasn't been mentioned is insurance. Since you are the primary breadwinner, and you have a second child on the way, I encourage you to get term insurance. At least $1 million for you, perhaps a half a million for your wife. It will be cheap at your age and provide peace of mind for the surviving spouse. Another is to get your estate planning documents in order- wills designating who will take care of your kids should you both pass, who will take care of their inheritance for them, legal power of attorneys and healthcare directives.

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ruralavalon
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Location: Illinois

Re: Just got a new job, looking for a bit of advice on what to do

Post by ruralavalon » Sun Sep 09, 2018 3:09 pm

gostars wrote:
Sat Sep 08, 2018 10:27 pm
auggiedoggies wrote:
Sat Sep 08, 2018 5:26 pm
With my new income, I understand that I won't be able to contribute to a Roth IRA next year. It seems that everyone says the Roth IRA is the best thing ever, but I'm trying to figure out if it makes sense in my situation. If I expect my income to be significantly lower when I want to retire, wouldn't it make sense to contribute to a traditional IRA? Additionally, my new employer currently does not offer a 401k match (although it sounds like it's coming in a few years based on consistent employee feedback) or a HDHP (only one healthcare plan offered, and it's really good, but does not offer access to a HSA).

Should I continue to contribute to my 401k (I'm assuming the answer is yes?). Should I go traditional or ROTH for 401k? Should I go traditional or ROTH for IRA? Anything major I'm missing? I feel like I'm on the right track, but would love some help from the Bogleheads. :sharebeer
Your income will be well above the limit to claim a deduction on a traditional IRA contribution, so your only option will be a nondeductible traditional IRA contribution. You can either leave it there, where any gains it makes will be pre-tax, or convert it into a Roth IRA, otherwise known as a backdoor Roth IRA, where there will be no taxes at all on gains. There are very few situations where nondeductible contributions to a traditional IRA without making a Roth conversion are a good idea, and most of them involve being unable to convert without running into pro-rata issues due to having other deductible contributions in an IRA. It doesn't sound like you have any deductible contributions to an IRA, so that wouldn't apply to you.

At that combined income, I'd guess you're probably going to end up around the top of the 24% tax bracket or bottom of 32%. Traditional 401ks and backdoor Roth IRAs are probably the best option.
I agree.

Traditional contributions to your 401k, plus a backdoor Roth IRA.
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auggiedoggies
Posts: 138
Joined: Tue Sep 30, 2014 10:16 pm

Re: Just got a new job, looking for a bit of advice on what to do

Post by auggiedoggies » Sun Sep 16, 2018 7:16 pm

Thanks for the replies everyone! Couple of quick thoughts:

Regarding insurance, I have 300k through work that they cover, and I added an additional 200k to that. I should probably look at adding that more.


I wasn't aware that the Roth IRA contribution phaseouts were MAGI, that makes a difference. With my annual bonus (should be about 20k) i was worried I would be over this, but sounds like I might be ok?

Wasn't aware that there was an income limit for traditional IRA either, mainly because I've never looked into that.

Appreciate all the help and thoughts!

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