A good problem to have

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jriding
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A good problem to have

Post by jriding » Wed Sep 02, 2015 9:46 am

DW and I have a lot of tax advantaged space available. I think we've done a decent job of filling the low hanging fruit. I now find myself deciding between investment categories that aren't so straight forward. In summary:
What we're maxing out each year:
His 401(k)
His Roth IRA (backdoor)
Her 401(a) (mandatory fixed contributions from DW and university)
Her 403(b)
Her Roth IRA (backdoor)
Family HSA (maxed this year, but generally contributions match annual medical expenses and are mostly spent each year)

Question:
1. FireCalc says at my current rate of saving I'll be able to retire at my target age of 55 (11 years). I feel like I've maxed out the "low hanging fruit" tax-advantaged investments and am wondering where I should direct future new savings? I have $500/mo that until recently I was contributing to the 529 college fund. I’d like to know what the Bogleheads community thinks about where this and future savings should be directed. The $500/mo will steadily increase as our incomes increase.
1. Continue contributing to kids (13 & 9) college (Colorado state tax deduction)?
2. 457 (pre-tax)?
3. Mortgage principle?
4. HSA and start building a quasi-retirement portfolio (currently spend the HSA down to near zero each year)?
5. Taxable account?
6. Buy more bikes?

Emergency funds: Six months of expenses
Debt: Mortgage only. 3%. $124,000 balance, paying $400 extra principle each month to have mortgage paid off in 2019. Assessed home value ~$550,000.
Tax Filing Status: Married Filing Jointly
Tax Rate: 25% Federal, 4.6% State(CO)
State of Residence: CO
Age: 44
Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 30% of stocks

Current total portfolio: Mid six-figures

Current retirement assets ~$650,000 (Ferri Core 4)

Taxable
0% cash (not including emergency funds)
2% Vanguard Total Stock Market Index Fund Adm (VTSAX) 0.05%
2% Vanguard Total International Stock Index Fund Adm (VTIAX) 0.18%

His 401k at Hewitt (ticker symbols unknown)
25% US Broad Market Index (?) 0.06%
3% Total International Index (?) 0.11%
11% Total US Aggregate Bond Market Index (?) 0.09%
15% Inflation Protected Index (?) 0.08%
Company match: 6% (up to 6% of annual salary)

His Roth IRA at Vanguard
3% Vanguard Total Stock Market Index Fund Adm (VTSAX) 0.05%
5% Vanguard REIT Index Fund Adm (VGSLX) 0.10%

Her 403b at Fidelity
10% Fidelity Spartan Total Market Index Adv (FSTVX) 0.06%
University match: None

Her 401(a) at Fidelity
5% Fidelity Spartan Total Market Index Adv (FSTVX) 0.06%
11% Fidelity Spartan International Index Adv (FSIVX) 0.12%
4% Fidelity Spartan US Bond Index Fund (FSITX) 0.10%
University fixed contribution: 11%
Employee mandatory contribution: 8%

Her ROTH IRA at Fidelity
5% Fidelity Spartan International Index Adv (FSIVX) 0.12%

Her 457 at CO PERA
0% PERAdvantage 2030 (Blackrock LifePath Index 2030 CB) 0.25%
University match: None

His Pension (not counted in $650,000 retirement asset total)
Current pension forecast says cash value will be $373k in 2026 (date I plan to retire). This of course assumes I stay with my current employer through that date. There are various combinations of lump sum/annuity options.

Current college savings ($93,000) Kids 13 & 9
College Invest Direct Portfolio (Colorado 529)
53% Moderate Growth Portfolio (mix of 4 Vanguard funds) 0.39%
47% Growth Portfolio (mix of 4 Vanguard funds) 0.39%

Contributions

New annual Contributions
$18,000 his 401k ($9,300 match)
$5,500 his backdoor Roth IRA
$18,000 her 403b (no match)
$14,010 her 401a ($5,760 employee mandatory contribution, $8,250 university)
$5,500 her backdoor Roth IRA
$0 her 457 (no match)

$0 529 College (split between two kids)

$0 taxable

~$4,500 HSA (Gets mostly spent each year) through Alliant Bank

Available funds

Her CO PERA 457 (I think the only fund I’d consider is the Target Date 2030 fund because it has the lowest fees and comes in pretty close to my current 70/30 asset allocation)

PERAdvantage Target Retirement Date Funds 0.25%
PERAdvantage Capital Preservation Fund 0.35%
PERAdvantage Fixed Income Fund 0.36%
PERAdvantage Real Return Fund 0.32%
PERAdvantage U.S. Large Cap Stock Fund 0.35%
PERAdvantage International Stock Fund 0.58%
PERAdvantage U.S. Small and Mid Cap Stock Fund 0.60%
PERAdvantage SRI Fund 0.37%

HSA though Alliant CU
0.65% interest rate on “cash” account
Self-Managed investment option $5.95 per month, unlimited free trades in a long list of Vanguard and Fidelity mutual funds.

I’m leaving available fund info out for other accounts since the funds that make up my allocation strategy (Ferri four fund portfolio) are well represented and have low fees.
Last edited by jriding on Mon Sep 25, 2017 3:05 pm, edited 1 time in total.

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jriding
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Re: A good problem to have

Post by jriding » Thu Sep 03, 2015 10:28 am

Bump.

bigred77
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Re: A good problem to have

Post by bigred77 » Thu Sep 03, 2015 10:42 am

Your doing everything right as far as I can see. Really no "wrong" answer as to which of your proposed options for excess cashflow is best.

If your house is on track to be paid off in 4 years (and it's only 3%) I'd just keep the mortgage payments as is.

I'd take the remaining cashflow (500/month + increases going forward) and split it between the 529 plans and 457 plan (assuming you plan to pay for 2 college educations in full (or close to 100%). You could also use that money to beef up cash reserves if you felt the need to.
Last edited by bigred77 on Thu Sep 03, 2015 10:43 am, edited 1 time in total.

bigred77
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Re: A good problem to have

Post by bigred77 » Thu Sep 03, 2015 10:43 am

duplicate
Last edited by bigred77 on Thu Sep 03, 2015 10:43 am, edited 1 time in total.

livesoft
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Re: A good problem to have

Post by livesoft » Thu Sep 03, 2015 10:43 am

I would build up taxable. I think your 529 plans are overfunded.

If for some reason the taxable account grows too large for you, then withdraw some and pay mortgage, but only if the return on taxable after taxes is double the rate of your mortgage.
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itstoomuch
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Re: A good problem to have

Post by itstoomuch » Thu Sep 03, 2015 10:55 am

IMO, May appear that you reasonable are assured you have the nut cracked. I'd do "some" taxable because of favorable tax code in down markets and up markets. Qualified accounts are great in Long-term accumulation holdings but terrible in retirement when you are at or higher tax bracket.
YMMV.
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bigred77
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Re: A good problem to have

Post by bigred77 » Thu Sep 03, 2015 10:59 am

itstoomuch wrote:IMO, May appear that you reasonable are assured you have the nut cracked. I'd do "some" taxable because of favorable tax code in down markets and up markets. Qualified accounts are great in Long-term accumulation holdings but terrible in retirement when you are at or higher tax bracket in retirement.

YMMV.
livesoft wrote:I would build up taxable. I think your 529 plans are overfunded.

If for some reason the taxable account grows too large for you, then withdraw some and pay mortgage, but only if the return on taxable after taxes is double the rate of your mortgage.
Curious why people are suggesting taxable investing when OP states they have additional tax deferred space available. OP hopes to retire early and is currently in the 25% tax bracket, why not take the deduction now and strategically convert to Roth or even take withdrawals to live on at age 55 when they retire?

livesoft
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Re: A good problem to have

Post by livesoft » Thu Sep 03, 2015 11:03 am

bigred77 wrote:Curious why people are suggesting taxable investing ...?
Because it worked very nicely for me.
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windhog
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Re: A good problem to have

Post by windhog » Thu Sep 03, 2015 11:16 am

HSA accounts are unique: untaxed when funded and never taxed thereafter. Some refer to these accounts as stealth Roth accounts.
Why not fully fund these annually and use your excess cash to pay for the medical expenses? Most custodians allow you to choose how the funds are invested (after meeting some sort of account minimum) and the growth over a few decades could be serious. Tax-free money in retirement is always good.

I hope this helps.
Paul

EnjoyIt
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Re: A good problem to have

Post by EnjoyIt » Thu Sep 03, 2015 11:19 am

Tax diversification is important as well. I like having some cash in taxable account.

Grt2bOutdoors
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Re: A good problem to have

Post by Grt2bOutdoors » Thu Sep 03, 2015 11:25 am

Not sure if your 529 plans are overfunded or not - depends on what 4 year state flagship costs in CO. That said, agree with others, I vote to beef up your taxable account, holding low-mid duration fixed income and reinvest the dividends. Can never have enough in accessible funds.
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jriding
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Re: A good problem to have

Post by jriding » Thu Sep 03, 2015 11:27 am

livesoft wrote:
bigred77 wrote:Curious why people are suggesting taxable investing ...?
Because it worked very nicely for me.
I appreciate your suggestion to consider taxable over the 457 and 529 options. itstoomuch makes some good points as to why taxable might be the best option. Since I began reading the BH Wiki and Forums several years ago I've focused on filling all tax advantaged space, following the often repeated phrase (perhaps to a fault), that "once it's gone, it's gone."

So this is a real paradigm shift for me to not direct future savings to the available 457 and 529 space. If I start directing savings to taxable, do I continue aggregating it with my overall retirement allocation? I assume for tax efficiency purposes that taxable funds should only be domestic or international stock? I'm on board with TLH strategies and have read many of your previous posts on this topic.

Thanks so much for the input.

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Re: A good problem to have

Post by Grt2bOutdoors » Thu Sep 03, 2015 11:29 am

Money is fungible, taxable monies could be used to pay for college if necessary.
Hold a 3 fund portfolio in taxable; equity (dom./Int.)and fixed income.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

livesoft
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Re: A good problem to have

Post by livesoft » Thu Sep 03, 2015 11:30 am

I think judicious use of tax-loss harvesting turns a taxable account that is invested tax-efficiently into something very much like a Roth IRA, but without the contribution limits nor any withdrawal penalties.

I would aggregate the taxable account into your retirement portfolio asset allocation as long as the use of the money will occur 10 more years in to the future. It could also be used for college, too, since there are those education tax credits available.
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jriding
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Re: A good problem to have

Post by jriding » Thu Sep 03, 2015 11:31 am

windhog wrote:HSA accounts are unique: untaxed when funded and never taxed thereafter. Some refer to these accounts as stealth Roth accounts.
Why not fully fund these annually and use your excess cash to pay for the medical expenses? Most custodians allow you to choose how the funds are invested (after meeting some sort of account minimum) and the growth over a few decades could be serious. Tax-free money in retirement is always good.

I hope this helps.
Paul
Excellent point. I will have fully funded my HSA this year (~$6,600), but probably average closer to $4,000 most years. But since we're spending it down each year we're definitely not taking advantage of the long term tax exemption. Definitely something I'll consider. Seems like a better option then the 457 and 529.

randomguy
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Re: A good problem to have

Post by randomguy » Thu Sep 03, 2015 11:50 am

a) 529: 93k will probably pay for 5 or 6 years at your state school (lots of assumptions there on market growth versus tuition growth). If you figure you want to pay some of the tuitition in cash to get the AOTC tax credit, you are pretty much fully funded. Now if you think your kids is going to a 40k/yr private school you need more money.

b) 457 if this becomes a ROTH on retirement, it is much better to invest here than taxable.

c) Paying off 3% loans makes zero sense mathematically. But given you have decide to go down that path, sure why not just added another couple hundred it. It really doesn't matter.

d) HSA are free money. You should be maxing them out

e) Taxable is good is only really good for liqudity AND if you have already maxed out the other accounts. It sounds like you will have 15 years to suck money out of tax deferred before worrying about RMDs and the like. Odds are you will be able to do that while keeping your taxes well below your current 25% range.

f) You would have to think about if more bikes makes sense. You only live once and you will never again have the chance to have experiences with your 13&9 year old. You saving something like 75k/yr right now. Given your low asset balances, I assume this is pretty recent (last 4 or 5 years). It also has to be something like 1/3 of your gross pay. A lot comes down to how you would feel about having to work til 60 if we had a poor next 10 years. If that is a fate worth than death, keep trying to max out your savings. If you are willing to deal with a 10% (or whatever you think) chance of that happening, free up some money and spend it on things that would make your life better. Sure in the long run that 2k baseball camp for your kid results in you have 300k less to spend in retirement, but who knows on how much value that camp provided to your kids.

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corn18
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Re: A good problem to have

Post by corn18 » Thu Sep 03, 2015 11:53 am

Does your employer allow after-tax 401k contributions? Those can be handy for mega backdoor Roth's.

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DVMResident
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Re: A good problem to have

Post by DVMResident » Thu Sep 03, 2015 11:56 am

457's have the added advantage of no plenty for withdraws <59.5 years after separating from your employer.

If you're planning retirement in your mid-50's, 457 is a nice way to gain access to the nest egg prior to 59.5 and avoid using 72(t) process. 457 could cover the gaps year between retirement and 59.5.

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jriding
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Re: A good problem to have

Post by jriding » Thu Sep 03, 2015 12:28 pm

tomhole wrote:Does your employer allow after-tax 401k contributions? Those can be handy for mega backdoor Roth's.

Tom
Yes, good point, hadn't thought of this as a way of building an after-tax account. I like the idea of direct deposits from pay check to after-tax account. My employer allows after-tax contributions and one withdrawal (no $ limit) every 12-months. With respect to the mega-back door Roth, as DVMresident mentions, I'm wondering if I need to be thinking about bridging the income gap between 55 and 59 1/2. Money in taxable (or HSA or 457) accounts might make this easier.

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Monk
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Re: A good problem to have

Post by Monk » Thu Sep 03, 2015 12:39 pm

6. Buy more bikes?
Throw out all the good advice you've already received - CLEARLY this is the right answer. :twisted:

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jriding
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Re: A good problem to have

Post by jriding » Thu Sep 03, 2015 12:44 pm

Thanks for the thoughtful response random guy.
randomguy wrote:a) 529: 93k will probably pay for 5 or 6 years at your state school (lots of assumptions there on market growth versus tuition growth). If you figure you want to pay some of the tuitition in cash to get the AOTC tax credit, you are pretty much fully funded. Now if you think your kids is going to a 40k/yr private school you need more money.

My goal is to have enough saved to pay for both kids at a Colorado state school. Since the house will be paid off before the 13 yr old starts college, I can redirect those mortgage payments to college expenses as needed.

b) 457 if this becomes a ROTH on retirement, it is much better to invest here than taxable.
I'm not sure I understand this statement. I didn't know a 457 could become a ROTH, is this the same process as converting Traditional IRAs to ROTH?

c) Paying off 3% loans makes zero sense mathematically. But given you have decide to go down that path, sure why not just added another couple hundred it. It really doesn't matter.
Yes, this is 100% a peace of mind decision. I've read the many BH posts on this topic and decided logic and math doesn't apply to me in this case.

d) HSA are free money. You should be maxing them out
Agreed, I think HSA and/or taxable are front runners right now.

e) Taxable is good is only really good for liqudity AND if you have already maxed out the other accounts. It sounds like you will have 15 years to suck money out of tax deferred before worrying about RMDs and the like. Odds are you will be able to do that while keeping your taxes well below your current 25% range.
Good point

f) You would have to think about if more bikes makes sense. You only live once and you will never again have the chance to have experiences with your 13&9 year old. You saving something like 75k/yr right now. Given your low asset balances, I assume this is pretty recent (last 4 or 5 years). It also has to be something like 1/3 of your gross pay. A lot comes down to how you would feel about having to work til 60 if we had a poor next 10 years. If that is a fate worth than death, keep trying to max out your savings. If you are willing to deal with a 10% (or whatever you think) chance of that happening, free up some money and spend it on things that would make your life better. Sure in the long run that 2k baseball camp for your kid results in you have 300k less to spend in retirement, but who knows on how much value that camp provided to your kids.
Great perspective, thanks for your thoughts on this.

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Re: A good problem to have

Post by jriding » Thu Sep 03, 2015 12:45 pm

Monk wrote:
6. Buy more bikes?
Throw out all the good advice you've already received - CLEARLY this is the right answer. :twisted:
:sharebeer

LeeMKE
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Re: A good problem to have

Post by LeeMKE » Thu Sep 03, 2015 1:12 pm

Echoing what others came up with:

1) Max out HSA and pay medical expenses from cash flow. This is a bonus retirement plan for you.
2) I was expecting to find some IRAs that could be converted to ROTH, but it doesn't look like you have any of that. In future, if something gets rolled over into an IRA due to job change, I'd ask: How far into the 25% tax bracket are you now, and do you expect to remain there after retirement?
If yes, I'd begin conversions each year from IRA to ROTH, using cash savings to pay the taxes.
3. Buy a few bikes and stash half of the remainder in a taxable account.

Congrats! Definitely a good problem to have because you've been prudent over the years.
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sawhorse
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Re: A good problem to have

Post by sawhorse » Thu Sep 03, 2015 10:11 pm

I'd prioritize the 457 over the 403b. Much more useful if you plan to retire before 59 1/2. I'm assuming this is a governmental 457.

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