Income Restrictions and Long Term Advice

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mattyslice
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Joined: Sun Feb 10, 2019 2:41 pm

Income Restrictions and Long Term Advice

Post by mattyslice » Mon Feb 11, 2019 4:59 pm

Thanks in advance for your help and time. Need some investing and tax advice. I gross $240K a year. Wife grosses $67K a year. We have two young kids. We are over the Roth IRA limits and I am covered by a 401K at work and my wife is covered by a TX pension plan. I am 36 and between all of our cash, Roth IRAs, Trad. IRAs, 401K have a currently have a total of $395K (not including equity in home). Our monthly contributions are as follows:

$1,775 to my 401K – I am in non-qualified plan due to high income. Every February my company moves over max contribution to standard 401K, rest stays in the non-qualified portion which will be taxed if/when I leave the company.

$1,000 a month to both our Trad. IRAs. With E-Trade and all Vanguard funds except for 2. Do not get tax benefit from this.

$800 a month into 529 plans for our boys

$500 a month into investment accounts for our boys for a down payment on their first house (taxable)

$1,000 a month into a Betterment Robo Investing account (taxable)

$1,000 a month into an E-Trade account with 4-5 mutual funds (taxable)

I feel that there has to be a more tax efficient way to build long term wealth. Goal is to have $3.5MM to $4MM by the time I am 62. I love working so I don’t want to retire earlier but life happens (health, layoffs, etc.). Would love to work until I am 65-70 but who knows the future. I also want to leave each kid a $1MM in a trust. What options should I look at? What am I doing wrong? Tax advice? Am I wrong to be leary of whole life?

Thank you.

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Duckie
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Re: Income Restrictions and Long Term Advice

Post by Duckie » Mon Feb 11, 2019 8:50 pm

mattyslice, welcome to the forum.
mattyslice wrote:I am covered by a 401K at work
Does your 401k (the standard portion) allow incoming rollovers? If it does you can roll the pre-tax portion of your TIRAs into the 401k and convert the non-deductible portion to your Roth IRA.
my wife is covered by a TX pension plan.
Often at jobs with a state pension plan there are also optional plans like 403b or 457b. Does your wife have an optional retirement plan?
$1,000 a month to both our Trad. IRAs. With E-Trade and all Vanguard funds except for 2. Do not get tax benefit from this.
Since these TIRA contributions are non-deductible have you both been filing Form 8606 each year to track the basis?
$500 a month into investment accounts for our boys for a down payment on their first house (taxable)
Is this in your name or your boys' names?
$1,000 a month into a Betterment Robo Investing account (taxable)
The problem with a robo account is that it has no idea what your other assets are and when using tax-loss harvesting (which is a major component of a robo account) it can trigger wash sales because it doesn't know what you're doing elsewhere.
Am I wrong to be leary of whole life?
You are not wrong to be leery. In most cases whole life insurance is a bad idea.

ShadesOutWest
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Re: Income Restrictions and Long Term Advice

Post by ShadesOutWest » Tue Feb 12, 2019 12:33 am

@mattyslice You and your wife are making some great money. A few suggestions...
1. Depending on how much you have in the 529 plans and the age of your boys, put as much into them as you can up to the estimated 4 year amount needed for college. For example, if the boys are thinking of going to UT, you may want to plan $25K per year ($100K each). I would do that before any home investment for them. Coming out of college with ZERO debt is awesome alone. Then if you have some extra money in your taxable account, you can gift them money to buy a duplex or triplex. 3% down and they live in one unit and rent the other unit(s) out. Now they are getting an education in property management, real estate and finance.

2. Don't buy mutual funds in a taxable account. Some mutual funds will pay up to 40-50% of their value in capital gains each year. That is taxed at the normal income tax rate, which is likely 22% for you. Do invest in either ETFs. ETF's may pay a dividend, but no capital gains. If you don't like ETF's, buy dividend paying stocks (JNJ, MO, XOM, .... for example). Some blue chip stocks pay a 3.5-4.5% dividend yield. Dividends, if the stock is held for at least 60 days (might be 90) the dividend is considered "qualified" and only taxed at 15%. You can reinvest the dividend usually for no extra cost/commission through your broker. Vanguard has great ETF's (I personally use them and hold 2 ETFs), and TD Ameritrade is another that is great for reinvesting dividend paying stocks.

3. Do either your wife or you have health insurance that allows you to have an HSA? HSA is better than a Roth IRA. Both grow tax free and allow you to take money out tax free. You can use the HSA to put money in for either health care costs or just let it grow and be able to access the money tax free, like a Roth, at age 65.

Topic Author
mattyslice
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Re: Income Restrictions and Long Term Advice

Post by mattyslice » Tue Feb 12, 2019 10:15 am

@Duckie Thank you for your advice. Much appreciated.

1) Great question on the 401K. Need to find out.
2) Yes she does have the option for a 403B. I should put money into that first before taxable accounts right? Stupid question
3) Need to start filing the 8606. Really 2018 is the first year of our huge income lift. I went from being Director of FP&A for a division to running it s the President overnight in November of 2017 so I am doing my taxes for 2018 and had some holy crap moments!!
4) It currently is in my name. Once they have earned income was slowly going to transfer it to Roth IRAs for them
5) I pick the mix of assets in the Robo account. So right now I am 75% stocks and 25% bonds

Topic Author
mattyslice
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Re: Income Restrictions and Long Term Advice

Post by mattyslice » Tue Feb 12, 2019 10:53 am

@ShadesOutWest Thank you for your time and insight.

1. Depending on how much you have in the 529 plans and the age of your boys, put as much into them as you can up to the estimated 4 year amount needed for college. For example, if the boys are thinking of going to UT, you may want to plan $25K per year ($100K each). I would do that before any home investment for them. Coming out of college with ZERO debt is awesome alone. Then if you have some extra money in your taxable account, you can gift them money to buy a duplex or triplex. 3% down and they live in one unit and rent the other unit(s) out. Now they are getting an education in property management, real estate and finance.

= I am going to give each $100K for college and they get what they get. Teach them about value and how to manage their money. They could blow it in a year or make it last through grad school. But they only get $100K. That is $100K more than I got from my parents and I didn't graduate with a single penny of debt. Worked 2 jobs through undergrad and grad and still had a 3.7 GPA. It is possible, just not fun.

2. Don't buy mutual funds in a taxable account. Some mutual funds will pay up to 40-50% of their value in capital gains each year. That is taxed at the normal income tax rate, which is likely 22% for you. Do invest in either ETFs. ETF's may pay a dividend, but no capital gains. If you don't like ETF's, buy dividend paying stocks (JNJ, MO, XOM, .... for example). Some blue chip stocks pay a 3.5-4.5% dividend yield. Dividends, if the stock is held for at least 60 days (might be 90) the dividend is considered "qualified" and only taxed at 15%. You can reinvest the dividend usually for no extra cost/commission through your broker. Vanguard has great ETF's (I personally use them and hold 2 ETFs), and TD Ameritrade is another that is great for reinvesting dividend paying stocks.

= Thanks. Will look into

3. Do either your wife or you have health insurance that allows you to have an HSA? HSA is better than a Roth IRA. Both grow tax free and allow you to take money out tax free. You can use the HSA to put money in for either health care costs or just let it grow and be able to access the money tax free, like a Roth, at age 65.

= No we do not but that is good insight

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Duckie
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Re: Income Restrictions and Long Term Advice

Post by Duckie » Tue Feb 12, 2019 4:04 pm

mattyslice wrote:I pick the mix of assets in the Robo account. So right now I am 75% stocks and 25% bonds
Why do you have bonds in a taxable account when you have room in tax-sheltered?

NotWhoYouThink
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Re: Income Restrictions and Long Term Advice

Post by NotWhoYouThink » Tue Feb 12, 2019 4:30 pm

2. Don't buy mutual funds in a taxable account. Some mutual funds will pay up to 40-50% of their value in capital gains each year. That is taxed at the normal income tax rate, which is likely 22% for you.
Maybe this should read don't buy actively managed mutual funds in any account. In a taxable account they are tax inefficient, and even in a tax advantaged account they are unlikely to perform better than passive funds invested in the same sectors.

For many people a total stock market fund like Vanguard VSTAX is perfect for taxable accounts. No capital gains distributions.

Topic Author
mattyslice
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Re: Income Restrictions and Long Term Advice

Post by mattyslice » Wed Feb 13, 2019 9:34 am

Duckie wrote:
Tue Feb 12, 2019 4:04 pm
mattyslice wrote:I pick the mix of assets in the Robo account. So right now I am 75% stocks and 25% bonds
Why do you have bonds in a taxable account when you have room in tax-sheltered?
@Duckie I guess b/c I am ignorant. What is the best resource to learn how to invest tax efficiently? No adviser I know understands the tax implications very well. The CPAs I know don't understand the investment selection portion...

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Duckie
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Re: Income Restrictions and Long Term Advice

Post by Duckie » Wed Feb 13, 2019 6:22 pm

mattyslice wrote:What is the best resource to learn how to invest tax efficiently?
Tax-efficient fund placement

Topic Author
mattyslice
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Re: Income Restrictions and Long Term Advice

Post by mattyslice » Wed Feb 13, 2019 9:21 pm

@Duckie Much appreciated. Thanks

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emlowe
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Re: Income Restrictions and Long Term Advice

Post by emlowe » Thu Feb 14, 2019 12:22 am

The wiki has lots of good resources

You should read up on BackDoor Roth: https://www.bogleheads.org/wiki/Backdoor_Roth

You should read up on MegaBackDoor: https://www.bogleheads.org/wiki/After-tax_401(k)

And then ask if your 401(k) plan offers after-tax contributions AND in-plan/in-service rollovers

Prioritizing Investments is also helpful: https://www.bogleheads.org/wiki/Priorit ... nvestments

Topic Author
mattyslice
Posts: 15
Joined: Sun Feb 10, 2019 2:41 pm

Re: Income Restrictions and Long Term Advice

Post by mattyslice » Thu Feb 14, 2019 8:53 am

@emlowe Thank you. Very much appreciated

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