New financial responsibilities - a young couple seeking advice

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Baxxter
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Joined: Tue Nov 05, 2019 6:54 am

New financial responsibilities - a young couple seeking advice

Post by Baxxter » Wed Nov 13, 2019 8:18 am

My new DW and I have had some big life changes in the last couple of years and it’s time to take a hard look at how we’re moving forward.

We purchased a house in a MCOL area in April of 2018. In June of 2019 we got married. We’re both steadily employed with modest/moderate income (household pre-tax income ~110k).

In 2017 DW began receiving inheritance of about $30k/year. When we got married this summer I was brought into this generous inheritance. I have no idea if we’ll continue to receive this gift annually, but it’s been consistent since 2017 and even these few years of receiving it have changed our circumstances greatly.

Upon receiving the gift this year I paid off my remaining student (~12k) and car (~3k) debt. We’ve both maxed out our 401k going forward. But we really have a lot of money on hand that we’re trying to allocate in the most responsible way. Here’s a bit of the situation:

Emergency Fund: 30K
Debt: 213K Mortgage @ 4.375%
Tax Status: Married, filing jointly for the first time for 2019
Tax Rate: 22% bracket federal, ~4.75% state
State: MD
Age: 28
Desired Asset allocation: 15% bonds, 85% stock

The reason I’m posting here (I’ve been reading for a couple of years), is to get a grip on what we should be doing with this money that we have and that will perhaps continue to come through for us year after year. At the moment, the big consideration for us would be having a large down-payment for a home in ~5 years and to be prepared to start a family in ~4 years. Beyond that, retirement is obviously huge – but it may be nice to have some freedom in 10 years or so to make a lifestyle change (start a business, move abroad, etc.)

Current retirement assets
His 401k: $14k – company match is ~4%, fully vested in a couple of years
40% Vanguard Target Retirement 2055
25% Vanguard Mid Cap Index
20% Vanguard 500 Index
15% Vanguard Small-Cap Index

Her 403b: $10k (not sure the funds atm)

Her CDs: $30k @ 2.1%

New annual contributions
$19K his 401k
$19k her 403b

Beyond retirement accounts I have set up a brokerage account with Vanguard. I didn’t really know what I was doing at the time (still don’t), but with extra cash on hand, I thought I had to do something. Assuming that we’re contributing the max to 401k, I thought that a taxable account was my only option for growth.

I put 10k into the brokerage account and bought a mix of Mutals and ETFs:

Brokerage Mutal funds
31% VSEQX
34% VLXVX
Brokerage ETFs
26% VOO
9% BND

The question I have for you all is if we should continue to invest into this brokerage account, or if I should be doing...something else with any additional funds (post-tax income or tax-free gifts)? Paying down the mortgage or continuing to invest in CDs are our options. I’m looking to move about 10-15k from the emergency fund into an account that will gain interest.

One bit of trouble I’m having is understanding the tax situation with this brokerage account, and the liquidity of the funds. If, for instance, we’re looking to build savings for a down payment on a home and are willing to take a risk on having our money in the market for a short period of time (say 5 years) does the brokerage account make sense? It seems like the Boglehead ideology is to pad the emergency fund until it’s sufficient then to focus exclusively on retirement. I think with the 401k maxed out for the next 40-ish years we should be comfortable when retirement rolls around – so how do we invest what we’re looking at in excess of our retirement to have more freedom with our lifestyle if we’re looking for it?

Currently, we’re looking for options for what to do with additional funds that we have after out 401k is maxed out annually.

Looking forward to your responses and happy to answer any additional questions – thank you!
Last edited by Baxxter on Wed Nov 13, 2019 5:03 pm, edited 1 time in total.

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Stinky
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Re: New financial responsibilities - a young couple seeking advice

Post by Stinky » Wed Nov 13, 2019 9:20 am

Baxxter wrote:
Wed Nov 13, 2019 8:18 am
My new DW and I have had some big life changes in the last couple of years and it’s time to take a hard look at how we’re moving forward.

We purchased a house in a MCOL area in April of 2018. In June of 2019 we got married. We’re both steadily employed with modest/moderate income (household pre-tax income ~110k).

In 2017 DW began receiving inheritance of about $30k/year. When we got married this summer I was brought into this generous inheritance. I have no idea if we’ll continue to receive this gift annually, but it’s been consistent since 2017 and even these few years of receiving it have changed our circumstances greatly.

Upon receiving the gift this year I paid off my remaining student (~12k) and car (~3k) debt. We’ve both maxed out our 401k going forward. But we really have a lot of money on hand that we’re trying to allocate in the most responsible way. Here’s a bit of the situation:

Emergency Fund: 30K
Debt: 213K Mortgage @ 4.375%
Tax Status: Married, filing jointly for the first time in 2020
Tax Rate: 24% federal, ~4.75% state
State: MD
Age: 28
Desired Asset allocation: 15% bonds, 85% stock

The reason I’m posting here (I’ve been reading for a couple of years), is to get a grip on what we should be doing with this money that we have and that will perhaps continue to come through for us year after year. At the moment, the big consideration for us would be having a large down-payment for a home in ~5 years and to be prepared to start a family in ~4 years. Beyond that, retirement is obviously huge – but it may be nice to have some freedom in 10 years or so to make a lifestyle change (start a business, move abroad, etc.)

Current retirement assets
His 401k: $14k – company match is ~4%, fully vested in a couple of years
40% Vanguard Target Retirement 2055
25% Vanguard Mid Cap Index
20% Vanguard 500 Index
15% Vanguard Small-Cap Index

Her 403b: $10k (not sure the funds atm)

Her CDs: $30k @ 2.1%

New annual contributions
$19K his 401k
$19k her 401k

Beyond retirement accounts I have set up a brokerage account with Vanguard. I didn’t really know what I was doing at the time (still don’t), but with extra cash on hand, I thought I had to do something. Assuming that we’re contributing the max to 401k, I thought that a taxable account was my only option for growth.

I put 10k into the brokerage account and bought a mix of Mutals and ETFs:

Brokerage Mutal funds
31% VSEQX
34% VLXVX
Brokerage ETFs
26% VOO
9% BND

The question I have for you all is if we should continue to invest into this brokerage account, or if I should be doing...something else with any additional funds (post-tax income or tax-free gifts)? Paying down the mortgage or continuing to invest in CDs are our options. I’m looking to move about 10-15k from the emergency fund into an account that will gain interest.

One bit of trouble I’m having is understanding the tax situation with this brokerage account, and the liquidity of the funds. If, for instance, we’re looking to build savings for a down payment on a home and are willing to take a risk on having our money in the market for a short period of time (say 5 years) does the brokerage account make sense? It seems like the Boglehead ideology is to pad the emergency fund until it’s sufficient then to focus exclusively on retirement. I think with the 401k maxed out for the next 40-ish years we should be comfortable when retirement rolls around – so how do we invest what we’re looking at in excess of our retirement to have more freedom with our lifestyle if we’re looking for it?

Currently, we’re looking for options for what to do with additional funds that we have after out 401k is maxed out annually.

Looking forward to your responses and happy to answer any additional questions – thank you!
Welcome to the Board! Glad that you posted your question.

Congratulations on your marriage. You look like you have a great plan for moving forward.

Several random observations:
1. I think that an 85/15 allocation for your long-term savings at this point in your life is just fine.
2. You mention filing taxes as MFJ in 2020. Is there a particular reason not to do it in 2019?
3. The annual inheritance of $30,000 is a true blessing. You don't indicate as to how many years you might receive it. Unless it is a "perpetuity", I would strongly encourage you to regard this as "found" money, and not to let your spending creep upward so that you need the inheritance money to meet your budget.
4. I'd keep money that you expect to need in 5 years in a safe account. Brokerage money market fund, short-term bond fund, etc. I wouldn't take equity market risk on that.
5. An additional account that you could set up would be Roth IRAs for both you and DW. That would allow you to sock away another $6,000 each in an investment account that will accumulate totally tax free. Beyond that, money could go your brokerage account.
6. Congratulations on getting those nasty student and car loans paid off.
7. I wouldn't pay any more on mortgage right now. Time to pile up cash for what comes next.

Again, congratulations to you and your DW for a solid financial start to your married life.
Last edited by Stinky on Wed Nov 13, 2019 9:33 am, edited 1 time in total.
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lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: New financial responsibilities - a young couple seeking advice

Post by lakpr » Wed Nov 13, 2019 9:27 am

@Baxxter,

Welcome to the forum.

The first thing I see is the inconsistency between your household pre-tax income (which you said is $110k), and the tax bracket (which you said is 24%). Did you make a typo in the household income?

I see no mention of Roth IRAs for either of you in your post. You can easily take $6k each and put them in the Roth IRA. If it is the case that your income makes you ineligible for Roth IRA, you can follow the Backdoor Roth process. Which is: (1) Make a non-deductible contribution to the Traditional IRA, followed by (2) Convert that Traditional IRA to Roth IRA. The MOST IMPORTANT CAVEAT here is that, as of December 31, 20xx year, your traditional IRA balances across all SEP IRA, Traditional IRA, Rollover IRA etc. (basically any IRA that's not prefixed by the adjective Roth) should be zero. Otherwise you get snagged with a "pro-rata" rule and will end up paying more taxes than necessary.

Third, your mortgage rate is VERY HIGH. I see 30 year mortgage rates in the neighborhood of 3.5%, please consider refinancing. With that low balance on the mortgage ($213k), it's almost a given that you are not itemizing, and using standard deduction. So that mortgage loan is costing you 4.375% after tax. With a combined 29% Fed + State tax rates, that's equivalent of earning at least 6.2% before tax, *RISK FREE*. Even at 3.5% rate, it's equivalent of earning 4.92% RISK FREE. Using your inheritance gift and perhaps the brokerage account balances, if I were you, I would attack the mortgage quite aggressively. You can think of paying the mortgage ahead as investing in a bond allocation that's guaranteed to give you 4.9% or 6.2% returns per year.

I did see that you are planning to move to a larger home in approximately 5 years, but the intermediate term bond funds have a duration of 5 to 7 years -- almost your projected horizon before your next home purchase, so it's better in my opinion to "invest" the bond allocation in your mortgage. Do have a beefier emergency fund though, not sure how long $30k will last you, but let it be at least 6 months worth of expenses.

daheld
Posts: 700
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Location: Midwest US

Re: New financial responsibilities - a young couple seeking advice

Post by daheld » Wed Nov 13, 2019 9:43 am

lakpr wrote:
Wed Nov 13, 2019 9:27 am
@Baxxter,

Welcome to the forum.

The first thing I see is the inconsistency between your household pre-tax income (which you said is $110k), and the tax bracket (which you said is 24%). Did you make a typo in the household income?

I see no mention of Roth IRAs for either of you in your post. You can easily take $6k each and put them in the Roth IRA. If it is the case that your income makes you ineligible for Roth IRA, you can follow the Backdoor Roth process. Which is: (1) Make a non-deductible contribution to the Traditional IRA, followed by (2) Convert that Traditional IRA to Roth IRA. The MOST IMPORTANT CAVEAT here is that, as of December 31, 20xx year, your traditional IRA balances across all SEP IRA, Traditional IRA, Rollover IRA etc. (basically any IRA that's not prefixed by the adjective Roth) should be zero. Otherwise you get snagged with a "pro-rata" rule and will end up paying more taxes than necessary.

Third, your mortgage rate is VERY HIGH. I see 30 year mortgage rates in the neighborhood of 3.5%, please consider refinancing. With that low balance on the mortgage ($213k), it's almost a given that you are not itemizing, and using standard deduction. So that mortgage loan is costing you 4.375% after tax. With a combined 29% Fed + State tax rates, that's equivalent of earning at least 6.2% before tax, *RISK FREE*. Even at 3.5% rate, it's equivalent of earning 4.92% RISK FREE. Using your inheritance gift and perhaps the brokerage account balances, if I were you, I would attack the mortgage quite aggressively. You can think of paying the mortgage ahead as investing in a bond allocation that's guaranteed to give you 4.9% or 6.2% returns per year.

I did see that you are planning to move to a larger home in approximately 5 years, but the intermediate term bond funds have a duration of 5 to 7 years -- almost your projected horizon before your next home purchase, so it's better in my opinion to "invest" the bond allocation in your mortgage. Do have a beefier emergency fund though, not sure how long $30k will last you, but let it be at least 6 months worth of expenses.
Why refinance and pay aggressively on a mortgage when you're planning to save for and buy a different home soon?

a_movable_life
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Re: New financial responsibilities - a young couple seeking advice

Post by a_movable_life » Wed Nov 13, 2019 9:58 am

With the double maxed out 401K contributions you should be back in the range to have deductible IRA's for both of you. The space is much smaller at $6000 each. Supercharging these accounts now so that they grow while for the 22-24 years you have child and college expenses as a higher priority may be beneficial. Daycare alone can be 500-1000 a month per child.

Most people under save early, have all their money going to housing, children, etc, and then once the kids are launched use the catchup contributions from age 50 or up to load up the accounts.

If you are planning on staying in the same area, and are interested and handy you may want to consider if the numbers work out to use the first home as a rental. There are a bunch of tax benefits that you will qualify for based on your income. I also do not suggest pre-paying your mortgage (Unless you are paying PMI) and instead saving the money in a taxable account for the next down payment, future childcare expenses, etc.

lakpr
Posts: 3108
Joined: Fri Mar 18, 2011 9:59 am

Re: New financial responsibilities - a young couple seeking advice

Post by lakpr » Wed Nov 13, 2019 10:27 am

daheld wrote:
Wed Nov 13, 2019 9:43 am
Why refinance and pay aggressively on a mortgage when you're planning to save for and buy a different home soon?
Because CD's are yielding 2.1%, after-tax equivalent of 1.5%. By contrast the mortgage after-tax rate is 4.375%.
Whatever dollar amount he throws into the mortgage instead of CDs, he gets 2.875% more bang for his buck.

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Wiggums
Posts: 1968
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Re: New financial responsibilities - a young couple seeking advice

Post by Wiggums » Wed Nov 13, 2019 10:51 am

lakpr wrote:
Wed Nov 13, 2019 9:27 am
@Baxxter,

Welcome to the forum.

The first thing I see is the inconsistency between your household pre-tax income (which you said is $110k), and the tax bracket (which you said is 24%). Did you make a typo in the household income?

I see no mention of Roth IRAs for either of you in your post. You can easily take $6k each and put them in the Roth IRA. If it is the case that your income makes you ineligible for Roth IRA, you can follow the Backdoor Roth process. Which is: (1) Make a non-deductible contribution to the Traditional IRA, followed by (2) Convert that Traditional IRA to Roth IRA. The MOST IMPORTANT CAVEAT here is that, as of December 31, 20xx year, your traditional IRA balances across all SEP IRA, Traditional IRA, Rollover IRA etc. (basically any IRA that's not prefixed by the adjective Roth) should be zero. Otherwise you get snagged with a "pro-rata" rule and will end up paying more taxes than necessary.

Third, your mortgage rate is VERY HIGH. I see 30 year mortgage rates in the neighborhood of 3.5%, please consider refinancing. With that low balance on the mortgage ($213k), it's almost a given that you are not itemizing, and using standard deduction. So that mortgage loan is costing you 4.375% after tax. With a combined 29% Fed + State tax rates, that's equivalent of earning at least 6.2% before tax, *RISK FREE*. Even at 3.5% rate, it's equivalent of earning 4.92% RISK FREE. Using your inheritance gift and perhaps the brokerage account balances, if I were you, I would attack the mortgage quite aggressively. You can think of paying the mortgage ahead as investing in a bond allocation that's guaranteed to give you 4.9% or 6.2% returns per year.

I did see that you are planning to move to a larger home in approximately 5 years, but the intermediate term bond funds have a duration of 5 to 7 years -- almost your projected horizon before your next home purchase, so it's better in my opinion to "invest" the bond allocation in your mortgage. Do have a beefier emergency fund though, not sure how long $30k will last you, but let it be at least 6 months worth of expenses.
+1. I agree.

You also mention having children. Once you max out your retirement savings, you should build up your emergency fund. Especially if your wife will not return to work right away. It will give you more flexibility.

Good luck to you...

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Tamarind
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Re: New financial responsibilities - a young couple seeking advice

Post by Tamarind » Wed Nov 13, 2019 10:56 am

Welcome, OP. You draw a distinction in your post between your brokerage account and "retirement". Given your income and the fact that you can now max your 401ks, it's time to expand your definition of "retirement" account beyond your 401ks.

You should both be maxing out Roth IRAs ($6k each). It won't save you money on taxes now but the money that goes in won't be taxed again.

You can also save and invest in your taxable brokerage account for retirement - just don't invest your emergency fund or money that you must have for spending within 5 years or so. Treat your retirement money in your brokerage account just like your 401k in that you invest it according to your asset allocation and leave it alone.

Since you plan to sell your home soon, I wouldn't pay down the mortgage right now but I might save more in taxable for a down-payment, which I would keep in CDs, money market funds, or short term bonds.

retired@50
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Re: New financial responsibilities - a young couple seeking advice

Post by retired@50 » Wed Nov 13, 2019 11:07 am

lakpr wrote:
Wed Nov 13, 2019 10:27 am
daheld wrote:
Wed Nov 13, 2019 9:43 am
Why refinance and pay aggressively on a mortgage when you're planning to save for and buy a different home soon?
Because CD's are yielding 2.1%, after-tax equivalent of 1.5%. By contrast the mortgage after-tax rate is 4.375%.
Whatever dollar amount he throws into the mortgage instead of CDs, he gets 2.875% more bang for his buck.
I agree that 4.375% seems high given the current interest rate environment. Seek out a refinancing deal and you'll likely be able to lower your payments.

@Baxxter,
The other thing you've done in your accounts that seems odd, is that you've combined target date funds with stock and bond index funds. My understanding of these products is that you're either all in or all out. If you have the ability to juggle a 3 fund portfolio, then do that instead of paying the higher expense ratios of the target date funds. Look into VTSAX, VTIAX, VBTLX, or their ETF equivalents.

Regards,

averagelonghorn
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Re: New financial responsibilities - a young couple seeking advice

Post by averagelonghorn » Wed Nov 13, 2019 11:15 am

I agree with considering it found money. I am unclear if it is +/- 30k total or if each of you got 30k this year.

You already took the first step I would suggest; use it to max out your 401(k)s.

As others mentioned consider also maxing out other tax free/tax deferred options:

Roth IRA -6k each. (Another poster mentioned you might be able to deduct traditional IRAs, check into that; but assuming your 401(k)s are traditional, I like the flexibility of a Roth IRA here...)

Possibly HSA at up to $7100 per family. (If you have access to an HDHP that meets your needs.)

That would total each:
19.5k + 6k + 3550 = 29050 (So to completely max out this space for both of you you've got $58,100 available even ignoring a few other options like iBonds.)

That's a pretty good start even if you can't keep it up forever 5 years with 0 growth (or loss) and you have over 300k in retirement savings, not bad at age 33.... (Save for house down payment, etc from your salaries.)
Again, consider it found money; any year you get it, start with the above as a goal, if the payments stop, reassess and still do as much of the above as possible.

Savings above and beyond that will go in taxable... I'll let others comment on what exactly to invest in; me personally I'm a fan of the 3 fund portfolio as your core....

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Wiggums
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Re: New financial responsibilities - a young couple seeking advice

Post by Wiggums » Wed Nov 13, 2019 11:24 am

retired@50 wrote:
Wed Nov 13, 2019 11:07 am
@Baxxter,
The other thing you've done in your accounts that seems odd, is that you've combined target date funds with stock and bond index funds. My understanding of these products is that you're either all in or all out. If you have the ability to juggle a 3 fund portfolio, then do that instead of paying the higher expense ratios of the target date funds. Look into VTSAX, VTIAX, VBTLX, or their ETF equivalents.

Regards,
Very Good point.

daheld
Posts: 700
Joined: Wed Sep 13, 2017 8:14 am
Location: Midwest US

Re: New financial responsibilities - a young couple seeking advice

Post by daheld » Wed Nov 13, 2019 11:25 am

lakpr wrote:
Wed Nov 13, 2019 10:27 am
daheld wrote:
Wed Nov 13, 2019 9:43 am
Why refinance and pay aggressively on a mortgage when you're planning to save for and buy a different home soon?
Because CD's are yielding 2.1%, after-tax equivalent of 1.5%. By contrast the mortgage after-tax rate is 4.375%.
Whatever dollar amount he throws into the mortgage instead of CDs, he gets 2.875% more bang for his buck.
OP already has a sizable amount in CD's. I can potentially see refinancing if it frees up monthly cash flow that could be invested in 401k/Roth/taxable. However, contributing excess cash to a mortgage when you're actively trying to save money for a different mortgage does not make sense.

lakpr
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Re: New financial responsibilities - a young couple seeking advice

Post by lakpr » Wed Nov 13, 2019 11:54 am

daheld wrote:
Wed Nov 13, 2019 11:25 am
lakpr wrote:
Wed Nov 13, 2019 10:27 am
daheld wrote:
Wed Nov 13, 2019 9:43 am
Why refinance and pay aggressively on a mortgage when you're planning to save for and buy a different home soon?
Because CD's are yielding 2.1%, after-tax equivalent of 1.5%. By contrast the mortgage after-tax rate is 4.375%.
Whatever dollar amount he throws into the mortgage instead of CDs, he gets 2.875% more bang for his buck.
OP already has a sizable amount in CD's. I can potentially see refinancing if it frees up monthly cash flow that could be invested in 401k/Roth/taxable. However, contributing excess cash to a mortgage when you're actively trying to save money for a different mortgage does not make sense.
it's a matter of perspective. The down payment for the next house can come from the sale of the current home (my view) OR through building up savings over the next 5 years (your view). All I am pointing out is that your view has a cost of 2.875% per year on the amount of prepayment to mortgage principal. @Baxxter may or may not feel that 2.875% payment is an acceptable cost to pay for that "liquidity".

Edited to add: I was in the OP's shoes about 20 years ago. I didn't even join Bogleheads at that time. I did have a 6 month emergency fund ($10k in 2000 dollars, if I remember correctly) -- then prepaid the mortgage aggressively after maxing out my 401k and Roth IRA. Wife wasn't working. We did have the notion of buying a new home, but I was never going to take on the responsibility of carrying two mortgages at once. The search for a new home would be on IF AND ONLY IF we were successful in selling the old home.

While the mortgage interest was deductible then, the spread was also much wider, I believe mortgages were in the 8% range and the best CDs were paying 4%.

Trying to say that I am preaching what I did practice.

pkcrafter
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Re: New financial responsibilities - a young couple seeking advice

Post by pkcrafter » Wed Nov 13, 2019 12:01 pm

Baxxter, you are receiving good advice, so I just have one comment...
Current retirement assets
His 401k: $14k – company match is ~4%, fully vested in a couple of years
40% Vanguard Target Retirement 2055
25% Vanguard Mid Cap Index
20% Vanguard 500 Index
15% Vanguard Small-Cap Index

Her 403b: $10k (not sure the funds atm)
All retirement accounts are part of one portfolio when figuring overall asset allocation. Your current 401k choices show a lot of duplication and allocation is <95% stock.

You have to know what is in her 403b to figure allocation and to make sure she is using best options.
Brokerage Mutal funds
31% VSEQX
34% VLXVX
Brokerage ETFs
26% VOO
9% BND
VSEQX, Vanguard strategic equity, is not tax efficient.
VLXVX is TR 2065
VOO is S&P500. It is a good tax-efficient ETF

Using TR funds plus individual funds/ETFs creates unnecessary duplication and additional funds.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

Topic Author
Baxxter
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Re: New financial responsibilities - a young couple seeking advice

Post by Baxxter » Wed Nov 13, 2019 5:04 pm

Wow thank you all - many helpful responses so far. I'll try to address some questions and clarify some details. I have edited the original posting with a few clarifications.
2. You mention filing taxes as MFJ in 2020. Is there a particular reason not to do it in 2019?
Clarified in original post. Filing our 2019 taxes in 2020.
3. The annual inheritance of $30,000 is a true blessing. You don't indicate as to how many years you might receive it. Unless it is a "perpetuity", I would strongly encourage you to regard this as "found" money, and not to let your spending creep upward so that you need the inheritance money to meet your budget.
Exactly. We do regard this as 'found' money, as you say. It is probably likely that we will receive it regularly, but that is outside of our control and not guaranteed, expected or what have you . Whether we receive it or not we live within the means of our salaries.
The first thing I see is the inconsistency between your household pre-tax income (which you said is $110k), and the tax bracket (which you said is 24%). Did you make a typo in the household income?
Clarified in original post - we're in the 22% bracket. I suppose our actual federal rate is quite a bit lower than that.
So that mortgage loan is costing you 4.375% after tax. With a combined 29% Fed + State tax rates, that's equivalent of earning at least 6.2% before tax, *RISK FREE*.
I'm not sure I follow this. Shaving .875% off the mortgage interest to get down to 3.5% seems like it could be a good choice if other considerations are met (break-evens on fees, points and the like). But I'm missing the connection between my income tax rate and my mortgage.
If you are planning on staying in the same area, and are interested and handy you may want to consider if the numbers work out to use the first home as a rental. There are a bunch of tax benefits that you will qualify for based on your income.
This is a consideration. I'm reasonably handy and we may well move within the metro area. That remains to be seen however - we'll wait to see what job opportunities and the housing market looks like. I'm also not familiar with that the tax benefits might be in this situation though - something for me to look into. Good consideration though, thank you.
I also do not suggest pre-paying your mortgage (Unless you are paying PMI)
No PMI on the mortgage.
Given your income and the fact that you can now max your 401ks, it's time to expand your definition of "retirement" account beyond your 401ks.
Noted - I think the issue here in my understanding of the liquidity of the different account types. ie. 401k is penalized if taken before retirement, while a brokerage is comparatively liquid, so doesn't need to be earmarked for retirement per-se. Then again, I don't know much about making those brokerage contributions liquid again...
I am unclear if it is +/- 30k total or if each of you got 30k this year.
It was a 60k gift this year - and would likely be a similar amount going forward. But yes, this is a found money type situation and it does not seem right to presume that we will continue to receive it.
You have to know what is in her 403b to figure allocation and to make sure she is using best options.

VSEQX, Vanguard strategic equity, is not tax efficient.
VLXVX is TR 2065
VOO is S&P500. It is a good tax-efficient ETF

Using TR funds plus individual funds/ETFs creates unnecessary duplication and additional funds.
Thank you - I will take a look at DW 403b allocations and update the original posting when I know. I'm not sure I would recognize a 'tax-efficient' fund if I saw one, is this typically reflected in the expense ratio?


Some of the big take-aways right now:
  • Open (and contribute to) a Roth-IRA (my workplace offers both 401k and Roth-IRA through Vanguard - I need to look more closely at how that contribution works)
  • Look into refinancing the mortgage (folks seem to be split on this, but it's something we had considered - there seems to be a frenzy in the news this week though)
  • Take a closer look at allocations in 401k and brokerage (taxable seems to be the preferred term) to clarify all TR vs. some other allocation

Thank you all again - I hope to put some of this advice to action soon. Please chime in if you have any other ideas.

lakpr
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Re: New financial responsibilities - a young couple seeking advice

Post by lakpr » Wed Nov 13, 2019 5:49 pm

Baxxter wrote:
Wed Nov 13, 2019 5:04 pm
So that mortgage loan is costing you 4.375% after tax. With a combined 29% Fed + State tax rates, that's equivalent of earning at least 6.2% before tax, *RISK FREE*.
I'm not sure I follow this. Shaving .875% off the mortgage interest to get down to 3.5% seems like it could be a good choice if other considerations are met (break-evens on fees, points and the like). But I'm missing the connection between my income tax rate and my mortgage.
Since I made that statement, let me reply.
You are aware that, with Tax Cuts and Jobs Act, the standard deduction went up? For Married Filing Jointly, it is $24,400 for 2019.
As a countermeasure, the SALT (state and local taxes deduction) is capped at $10,000 max and no adjustment to inflation.

So, in order for itemization to be more beneficial, you need to have other deductions worth at least $14,400.
Mortgage interest is one such potential deduction. But 4.375% on $213k principal is only $9318.
You need to have at least $5000 of other deductions (very high medical expenses -- not premiums!, charitable deductions, etc.)
I am assuming you are reasonably healthy ... so no medical expenses.
I may be wrong here, but I am also assuming you don't donate $5000 every year to charity. If you do, I admire you, but I own up to chalking it down as more unlikely than likely.

Even if you DO charitable contributions worth $5000 yearly, it only makes you barely even on the standard deduction vs. itemized deduction balance scale. Only the excess charitable contributions above $5000 mark get the income tax deduction ... and I'd suggest that deduction is more attributable to charity than mortgage interest.

In other words, under the new tax regime, your mortgage interest is being paid entirely out of after-tax money. No tax benefit.
So the interest rate of 4.375% cannot be discounted by your marginal tax rate (as it was done in 2017 and earlier).

Now, what should be the interest rate return be, if you need to earn after-tax 4.375% just to break even?
At 29% tax bracket (which may not be correct as your subsequent posts indicate), that would have been = 4.375% / (1- 0.29) = 6.2%

Now let's say you refinanced. The rate is 3.5% now. Just as above, tbe before-tax investment return should be = 3.5% / (1 - 0.29) = 4.92%.

Do you know of ANY investment out there, that *GUARANTEES* a 6.2% return year in and year out? Or even 4.92% year-in and year-out? Keyword being "guaranteed".

I didn't think so. Investing in stock market makes it very likely that you will beat that 6.2% return, but you cannot guarantee it. But you are in a unique position to capture that return --- prepay your mortgage, even if you are able to refinance down to 3.5%.

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Duckie
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Re: New financial responsibilities - a young couple seeking advice

Post by Duckie » Wed Nov 13, 2019 10:17 pm

Baxxter wrote:I'm not sure I would recognize a 'tax-efficient' fund if I saw one, is this typically reflected in the expense ratio?
Tax-efficient funds are generally stock funds that don't throw out a lot of dividends or distributions. The best are total US stock index funds like VTSAX / VTI and total international stock index funds like VTIAX / VXUS. Bond funds, REIT funds, and target-date funds are NOT tax-efficient and do not belong in a taxable account. See Tax-efficient fund placement.
Open (and contribute to) a Roth-IRA (my workplace offers both 401k and Roth-IRA through Vanguard - I need to look more closely at how that contribution works)
It is unlikely you have a Roth IRA at your workplace. Maybe it offers a Roth 401k. You both would open the Roth IRAs at a custodian like Vanguard, Fidelity or Schwab. These are personal accounts not related to workplace retirement plans.
Take a closer look at allocations in 401k and brokerage (taxable seems to be the preferred term) to clarify all TR vs. some other allocation
List all the options in his 401k and her 403b. We need the fund names, ticker symbols, and plan expense ratios.

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Tamarind
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Re: New financial responsibilities - a young couple seeking advice

Post by Tamarind » Thu Nov 14, 2019 7:16 am

Baxxter wrote:
Wed Nov 13, 2019 5:04 pm
Tamarind wrote:Given your income and the fact that you can now max your 401ks, it's time to expand your definition of "retirement" account beyond your 401ks.
Noted - I think the issue here in my understanding of the liquidity of the different account types. ie. 401k is penalized if taken before retirement, while a brokerage is comparatively liquid, so doesn't need to be earmarked for retirement per-se. Then again, I don't know much about making those brokerage contributions liquid again...
You're right that you can't withdraw from a 401k just any time. You have to wait until you are 59.5 years old under most circumstances.

A taxable investment account (brokerage) can be withdrawn from any time. You pay taxes every year on two things wrt your taxable account:
1) Dividends, interest, and capital distributions. These are determined by the fund or stock you hold and you can't control them except by picking investments that produce less if them. These are why we say that bonds, REITs, and funds containing them are not tax efficient.
2) Net capital gains. This is the difference between the value of a fund or stock when you bought it and the value when you sell it. Over time most investments will gain in value and have "unrealized gains". When you sell a share, you are taxed on the amount of the gain whether you withdrew the money or not. If you have shares with "unrealized losses" you can sell them at the same time as ones with gains and only be taxed on the difference.
You can also save up losses over time which is called "tax loss harvesting" (take a look at the wiki article). If you hold investments for a long time in a taxable account, you'll likely end up with more and more gains, which means you need to plan ahead for when you need the money later so that you aren't surprised by the amount of the taxes.

A Roth IRA has different rules from either a 401k or a taxable account. Like a 401k there are some restrictions on what you can withdraw before age 59.5. You can always withdraw the amount of your contribution without penalty if you must. Like a taxable account, contributions to a Roth IRA don't give you a tax break in the year that you make them. But they have a special benefit. When you withdraw from your Roth IRA, you don't pay income tax on that money. That means you will never pay income tax on the gains in a Roth account. This makes them a very helpful tool for tax planning and it's a good idea to have some of all three: 401k, taxable, and Roth IRA.
Baxxter wrote:
Wed Nov 13, 2019 5:04 pm
Some of the big take-aways right now:
  • Open (and contribute to) a Roth-IRA (my workplace offers both 401k and Roth-IRA through Vanguard - I need to look more closely at how that contribution works)
I don't think your job can offer a Roth IRA or let you make contributions from your paycheck. These are individual accounts, not employer accounts.

That means you and your wife can both contribute to one right away ($12k total for 2019 if you contribute before April of next year!). Head to the Vanguard website and you can open one right now.

Leemiller
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Re: New financial responsibilities - a young couple seeking advice

Post by Leemiller » Thu Nov 14, 2019 7:32 am

I would save the money in an investment account, with maybe a 50/50 split between a CD and an index fund with low turnover (for tax purposes). I would not pay off your mortgage given you will sell in a few years.

You can also contribute to a Roth IRA or regular IRA as other have noted. This would be outside your work. There are also some things we don’t know. For example, perhaps your wife wants to stay home with the kids for an few years. Also, your target home price/ down payment. Finally, we’ve gotten a few, smaller gifts from my in-laws. I’ve been deferential to my spouse regarding the use of those gifts given that they came from his family.

Sandi_k
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Re: New financial responsibilities - a young couple seeking advice

Post by Sandi_k » Sat Nov 16, 2019 9:45 pm

If your wife has access to a 403(b), does she also have access to a 457 plan? That would be another $19k each year that could be stashed away pre-tax...

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