Investing advice for married couple with ~350k income

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jcw
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Investing advice for married couple with ~350k income

Post by jcw » Sun Jan 03, 2016 12:32 am

Hello,

Long time lurker, infrequent poster now looking for some wisdom. I had to grow up sometime and 2015 was the year I did. Life events included marriage and conceiving our first child. Now managing our combined portfolio and primarily trying to figure out what to do.

Current Stats:
[*]Combined Income of roughly $350k before taxes
[*]>200k saved up across all retirements accounts (401k, IRAs, Taxable) following the 3-fund portfolio (50% domestic S&P, 30% International, 20% Bonds) with yearly rebalancing
[*]Rainy Day fund of > $100k currently held in savings account with ~1% interest
[*]We own our home and are paying off a 30 year fixed mortgage.
[*]Saving roughly ~35% of take home pay, not counting equity in home
[*]Maxing out one of our 401ks. One is not being use for lack of good funds.
[*]We are early/mid 30's and do not plan to retire for 35 years.


Questions
[*]Since our rainy day fund is very large, we are considering shifting roughly $50k into a taxable account at Vanguard. Is this the best course of action or are there any additional tax advantages vehicles left to consider?
[*]I'm considering starting a 529 plan but am just learning about it. It seems like the tuition credits are the best as it protects against tuition inflation which has been increasing at a much higher rate than I could safely get over 18 years. We are in CA, so we don't get any tax shelters from this.
[*]At our income, we are phased out of many tax shelters like IRA and mortgage tax shelter. Are there any other ways to tax shield the income?


thanks

DSInvestor
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Re: Investing advice for married couple with ~350k income

Post by DSInvestor » Sun Jan 03, 2016 12:45 am

Consider maxing out the second 401k even if funds are not good. Put the money in the lowest cost investment available and then round out the portfolio in other accounts. If there's a chance of a job change later, you can rollover to a new 401k or IRA and get better funds. The tax savings (Fed and state) on an extra 18K of Traditional 401k contributions are substantial at your level of income.

Assuming no Traditional IRA, Rollover IRAs, SEP-IRA or SIMPLE-IRA, consider backdoor into Roth IRA which is contribution to Traditional IRA followed by a Roth conversion. This works around the income limits that disallow Roth IRA contributions and will give you an extra 5.5K/yr each in tax advantaged space.
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Watty
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Re: Investing advice for married couple with ~350k income

Post by Watty » Sun Jan 03, 2016 1:11 am

jcw wrote:[*]Maxing out one of our 401ks. One is not being use for lack of good funds.
It would have to be exceptionally bad for that to be a good choice compared to investing in a taxable account.

Even then getting any employer match is virtually always worthwhile.

For example if you are in the 33% combined tax bracket then you could put $1,000 into the 401k or pay $333 in taxes and invest $667 in a taxable account.

If the expense ratios in the bad 401K are 2% more than would be ideal then for that $1,000 that is invested you will pay $20 (1000 * 2%) more in expenses than would be ideal.

The saving grace is that you will have an additional $333 invested in the 401k and if that $333 earns just 6% then that would be about $20(333 * 6%) which is enough to cover the excessive costs.

Projecting the saving out into future years gets more complicated because of the ongoing taxes on the taxable account and the advantages of deferring them in the 401k.

That would likely make the bad 401k a lot better choice than the taxable account but still a lot worse compared to a good 401K.

The bad 401K will also stop being an issue when that person changes jobs, if the company improves it, or when that person retires. Even at the person retires at the age of 65 then they may still have 30 years that the money could be rolled out to an IRA and invested in better options.

Bob's not my name
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Re: Investing advice for married couple with ~350k income

Post by Bob's not my name » Sun Jan 03, 2016 6:26 am

jcw wrote:At our income, we are phased out of many tax shelters like IRA and mortgage tax shelter.
As DSInvestor pointed out, you should still be able to do backdoor Roth IRAs. As for deducting mortgage interest, you shouldn't be phased out. The phaseout doesn't even start until AGI $311,300. Your AGI could be $350,000 - $36,000 two 401k contributions - say $5,000 of pre-tax health, dental, and disability insurance premiums - say $2,500 health FSA contributions = $306,500, so about $5,000 under the beginning of the phaseout, and the phaseout is both long (3% slope) and limited (maximum 80%). You're probably in the AMT anyway, which absorbs the phaseout.

afan
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Re: Investing advice for married couple with ~350k income

Post by afan » Sun Jan 03, 2016 8:15 am

The funds would have to be awful to be worse than taxable. Some 401k plans have a brokerage option. You transfer the money to the broker account and buy whatever you want. It is a tiny bit more hassle, but worth it if the plan mutual funds are bad.

It seems unlikely you need that much money in cash. Are you anticipating big expenses? Lots of work on your home? One of you going back to school? Unfortunately, safe liquid investments pay very little return today. You should keep what you really need for emergencies in appropriate investments, which means low yield. Don't reach for yield with riskier assets with true emergency funds. But don't hold more emergency funds than you need.
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FBN2014
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Re: Investing advice for married couple with ~350k income

Post by FBN2014 » Sun Jan 03, 2016 11:01 am

I would also recommend maxing out the second 401K. Are there any stock index funds or short term bond funds available in the 401K plan? Have you put in place life insurance and disability insurance to protect your earning power in case of catastrophe? Other tax deferred plans would include a variable annuity. I particularly like and own the Jefferson National VA - very low cost. Once you've maxed out your 401k and roth IRAs then I would look at tax free accounts that use IRS code 7702 to shelter all gains in the investment.
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goingup
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Re: Investing advice for married couple with ~350k income

Post by goingup » Sun Jan 03, 2016 12:31 pm

Max out other 401K. This lowers your taxable income, as others have noted.

Make sure your funds in the taxable account are tax-efficient. Use index equity funds (not REIT) and muni-bond funds.

starguru
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Re: Investing advice for married couple with ~350k income

Post by starguru » Sun Jan 03, 2016 1:28 pm

Does your employer allow after tax contributions to your 401k? If so you might be able to do a mega-backdoor roth.

Cutting your emergency fund from 100k to 50k seems reasonable, as long as 50k is > 6 months expenses.

Unfortunately though, high wage earners are pretty screwed when it comes to taxes. My wife and I voluntarily have our employer withhold more Federal taxes from each paycheck to lessen the pain in April.

jcw
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Re: Investing advice for married couple with ~350k income

Post by jcw » Sun Jan 03, 2016 5:04 pm

Thanks for the feedback. I forgot about the ability to roll over my 401k when I left. I'll be maxing out my 401k based on the advice here. I started setting it up and I can choose between a traditional 401k and a Roth 401k. Which one should I go for? Based on my research here, seems like since we are in the 33% marginal tax bracket, it's best to go for the traditional 401k. So this is what I've chosen.

To answer some questions above:

- My employer has no matching
- The largest savings was to potentially purchase an investment property
- I knew about the backdoor roth but the mechanics seemed a little complicated as I have a traditional Roth as well. So I was avoiding this until maybe 2017.

Thanks for all the advice. Very helpful!

DSInvestor
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Re: Investing advice for married couple with ~350k income

Post by DSInvestor » Sun Jan 03, 2016 7:43 pm

jcw wrote: - I knew about the backdoor roth but the mechanics seemed a little complicated as I have a traditional Roth as well. So I was avoiding this until maybe 2017.
Do you have a Traditional IRA? If your 401k plan has low cost investment options and will accept inbound rollover from TradIRA, rollover all assets in that Traditional IRA to 401k. This will clean things up considerably and you'd be able to contribute $5.5K to Traditional IRA for 2015, another $5.5K for 2016 and convert all 11K to Roth IRA this year.
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jcw
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Re: Investing advice for married couple with ~350k income

Post by jcw » Sun Jan 03, 2016 10:05 pm

DSInvestor wrote:
jcw wrote: - I knew about the backdoor roth but the mechanics seemed a little complicated as I have a traditional Roth as well. So I was avoiding this until maybe 2017.
Do you have a Traditional IRA? If your 401k plan has low cost investment options and will accept inbound rollover from TradIRA, rollover all assets in that Traditional IRA to 401k. This will clean things up considerably and you'd be able to contribute $5.5K to Traditional IRA for 2015, another $5.5K for 2016 and convert all 11K to Roth IRA this year.
yes i do. That's pretty smart. Our company seems to allow inbound roll overs so I'll inquire about it on Monday. great idea!

DSInvestor
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Re: Investing advice for married couple with ~350k income

Post by DSInvestor » Sun Jan 03, 2016 11:19 pm

jcw wrote:
DSInvestor wrote:
jcw wrote: - I knew about the backdoor roth but the mechanics seemed a little complicated as I have a traditional Roth as well. So I was avoiding this until maybe 2017.
Do you have a Traditional IRA? If your 401k plan has low cost investment options and will accept inbound rollover from TradIRA, rollover all assets in that Traditional IRA to 401k. This will clean things up considerably and you'd be able to contribute $5.5K to Traditional IRA for 2015, another $5.5K for 2016 and convert all 11K to Roth IRA this year.
yes i do. That's pretty smart. Our company seems to allow inbound roll overs so I'll inquire about it on Monday. great idea!

Do you have any IRA basis in your Traditional IRAs? If you've made non-deductible contributions to Traditional IRA in the past, that IRA basis should have been tracked using form 8606. If you have IRA basis, do not transfer that basis to your 401k. Say you have 20K T-IRA with 15K basis. You would not transfer 20K to your 401k. Instead you transfer 5K to 401k leaving 15K in TIRA which isolates your basis. Contribute 5.5K for 2015, 5.5K for 2016 and you'd have 26K TIRA with 26K IRA basis. Convert all 26K to Roth IRA leaving zero balance behind and the conversion will be tax free.
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