Talk to me about various saving tools

mtn (Forum Supporter) said:

You can argue this about 1,000 different ways, but I personally would not touch it and I would not roll it over, with a few situational exceptions: 

• You're going to need the money soon (meaning the next 5 years and you won't be both retired and 59.5 years old - see this: https://www.madfientist.com/how-to-access-retirement-funds-early/ )
• You expect your taxes to go up in retirement
• You're currently in the 10% or 12% tax bracket

At the end of the day, do the math. 22% or 24% is a large hit to the capital. I would personally avoid it, but I would also do the math as I DO expect taxes to increase. If you didn't have a Roth already that you are contributing to, I'd look harder at it.

 

 

ProDarwin, Rxreven, others may have different opinions on this. As ProDarwin said, Roth vs. Traditional, there isn't a right answer.

Thanks for the take on it, mtn!  None of those situations apply.  I've got 20+ years till retirement.  The Roth is my "auxiliary" retirement account (my primary one is my maxed 401), I hopefully don't need the money any time soon and if I were to roll it over, it would bump me from the 24 to the the 26% tax on about half of that amount.  So yeah, high penalty.

With regard to Roth vs Traditional, I am a proponent of a blend of the two.  At a certain level of income, your effective tax rate is zero.  Ideally, your Social Security + Traditional retirement funds would take you to that threshold, then you use Roth funds for anything else.  Obviously, it’s impossibly to get the ratio perfect.  At this point, I’m around 25% Roth/75% Traditional, and hoping that works out well.

So to reply to some comments. I don't think I have access to an HSA just an FSA which works differently right? We are insured through my wife's job (teacher). 

As far as 15% of gross with my current job's matching and what I am putting in plus wife's pension plan, we are not far off that. Adding an IRA would certainly get me there. 

So what is the best way to build money for my kids college? This is very important to us. 

Also municipal bonds. Worth looking into? 

FSAs are targeted at either health costs or child care costs or both. Any unused funds at the end of a given calendar year are lost.

HSAs only work for health care but that money is yours forever until you have a qualified expense to reimburse yourself for.

mtn (Forum Supporter) said:

At the end of the day, do the math. 22% or 24% is a large hit to the capital. I would personally avoid it, but I would also do the math as I DO expect taxes to increase. If you didn't have a Roth already that you are contributing to, I'd look harder at it.

I thought the amount you convert is added to your gross income.  So, if you can swing it, you can transfer $45k, pay taxes on it, and now you effectively have a lot more money saved for retirement.  

mfennell said:

mtn (Forum Supporter) said:

At the end of the day, do the math. 22% or 24% is a large hit to the capital. I would personally avoid it, but I would also do the math as I DO expect taxes to increase. If you didn't have a Roth already that you are contributing to, I'd look harder at it.

I thought the amount you convert is added to your gross income.  So, if you can swing it, you can transfer $45k, pay taxes on it, and now you effectively have a lot more money saved for retirement.  

This was my understanding as well. And with a lot of people having reduced income for 2020, it might be as good a time as any to do a Roth conversion.

STM317 said:

mfennell said:

mtn (Forum Supporter) said:

At the end of the day, do the math. 22% or 24% is a large hit to the capital. I would personally avoid it, but I would also do the math as I DO expect taxes to increase. If you didn't have a Roth already that you are contributing to, I'd look harder at it.

I thought the amount you convert is added to your gross income.  So, if you can swing it, you can transfer $45k, pay taxes on it, and now you effectively have a lot more money saved for retirement.  

This was my understanding as well. And with a lot of people having reduced income for 2020, it might be as good a time as any to do a Roth conversion.

This is correct, my post was misleading - I've fixed it. So say your gross income is $100k, if you convert $45k, you have to pay taxes on $145k this year, but the $45k is still intact. 

Having just done a backdoor Roth conversion in 2019, I can confirm that the amount being rolled from the tax deferred account (401k, traditional IRA, etc.) is simply added on as gross income. You'll get a 1099 for it and you will owe taxes on the amount converted.

I am all in on the Roth as my employer does not offer a match on their 401K. While the tax rates on that income now may/may not be more/less than in the future, I take peace of mind in knowing whatever I put in that account and whatever it grows to is mine and not having to worry about complicated income taxes in retirement provides some level of reassurance.

93EXCivic said:

So to reply to some comments. I don't think I have access to an HSA just an FSA which works differently right? We are insured through my wife's job (teacher). 

As far as 15% of gross with my current job's matching and what I am putting in plus wife's pension plan, we are not far off that. Adding an IRA would certainly get me there. 

So what is the best way to build money for my kids college? This is very important to us. 

Also municipal bonds. Worth looking into? 

Best way to build money for kids college is saving for your retirement. That may mean that when college comes around, you reduce your retirement contributions. Read this. 

Think about it this way: You can always take out your contributions to a Roth IRA (after 5 years). I'm not completely versed on the details of that, but at a minimum, if you and your wife (and your child too - if they have income they can contribute) each contribute $6k a year for the next 15 years, that is $180k in contributions you can take out without penalty.

I'm just not a huge fan of 529s. Very restrictive in terms of what you can use it for - I couldn't even use my leftover 529 to pay my wife's federal student loans until maybe a year ago. And they're the very first thing that FAFSA looks at, decreasing the amount of aid your kid may get. If we use one for our kid, it will be to contribute to it each year as it is used for more tax reduction, and that is it. It will never sit there (I'm not sure if that is allowed or not). 
EDIT: What I mean by this is, and this may have changed (I graduated high school in 2008), when I applied at various colleges I also sat in the financial aid office. Every single one of them said I wasn't eligible for any scholarship because I had a well funded 529 plan. They did not happen to look at my parents 401k/403b/IRAs/Pension. Again, that was 13 years ago. Things very well may have changed.

Municipal bonds, I'm honestly not comfortable answering that. I don't have enough background in them. 

(Not quite what you were asking here, we're getting away from the point of the thread) One other thing: People are throwing out 15% and you'll hear guidelines like "You need to have 2x your income saved by age 35 and 5x your income by age 50" and the like. Honestly, it is all BS. None of that actually matters, other than maybe giving you a good place to start. What matters is what you spend now and what you'll spend in retirement. How much do you need to save every year to get there? If I'm 25 and make $200,000 a year, saving $20k a year (and I never increase my salary or savings rate) I'm working until I'm 55. If I make $100,000 a year and save the same $20k, I'm only working until 44. 

If you like playing with this in excel I can send you a few spreadsheets if you want to see it.

mtn (Forum Supporter) said:

Best way to build money for kids college is saving for your retirement. That may mean that when college comes around, you reduce your retirement contributions. Read this. 

Think about it this way: You can always take out your contributions to a Roth IRA (after 5 years). I'm not completely versed on the details of that, but at a minimum, if you and your wife (and your child too - if they have income they can contribute) each contribute $6k a year for the next 15 years, that is $180k in contributions you can take out without penalty.

I just wanted to say thanks, mtn!  You just answered a question I've been trying to articulate for a while.   I think I missed the part where you can withdraw (only your contributions!) from a RothIRA after 5 years, regardless of age...  I thought you had to be 60+ to start withdrawing from it...

I'm going to go look into the details on that, because that's the same problem I've always had with 529s.

Duke said:

ProDarwin said:

Duke said:

In reply to Purple Frog (Forum Supporter) :

I believe the only criticism of insurance was for the idea of whole life insurance as an investment vehicle.

Term insurance is a necessary expense and is recommended by all in this thread, as far as I know.

Eh.  I don't have any life insurance.  I don't recommend it, but I also don't recommend against it.  

It depends on your family situation, risk tolerance, etc.

I'm about to turn 56 and I plan to retire at 58.  Not coincidentally I have a 15 year term life insurance policy that will expire at about the same time.  I will probably not renew it but if I do I will only extend it for another 5 years.

 

The only reason I have one is because it's provided by work. 2x my annual salary. If I died in a car crash going to the store tomorrow, my lady would have ample funds to pull up stakes and move somewhere she wants to be. We'd both like to leave Oklahoma, just not in the cards yet.

In reply to mtn (Forum Supporter) :

I don't think 529 is brilliant tbh either. 

So lets say i max a roth IRA which i should be able to do fairly easily. Do i push some of my extra money into maxing the 401k or other investments? I'd have to see if maxing was doable but I think it is considering the money currently going it. I think i'd need to raise it by 4 or 5%. Or do I go with a second IRA in my wife's name and put money towards that? 

Are financial advisors worth talking to? 

mtn (Forum Supporter) said:

And they're the very first thing that FAFSA looks at, decreasing the amount of aid your kid may get. 

While FAFSA ignores the assets in retirement accounts, that's not a fair assessment. Even when you pull non-taxable Roth contributions, FAFSA looks at that as income. Additional income hits the "Adjusted Available Income" (AAI) at 47%, while assets are at only 5.64%. Thanks to the 2 year look-back, if you pull $20k/yr from Roth, years 1 and 2 will hit AAI in years 3 and 4 by $9400 per year... Totaling $18,400. Meanwhile, the same $80k in a 529 hit AAI in year 1 by $4512, in year 2 by $3384, in year 3 by $2256, and in year 4 by $1128... Totaling $11280. 

There are savvy saver ways to get around some, if not all, of this in both account types. But that's just to say that 529 isn't as bad as you make it out to be. I see it much like Roth vs Traditional... They're not actually competing tools, they're complimentary tools.

Also note that especially if you don't have a Roth 401k available through your employer, but you do have any inclination that early (before 59.5) retirement may be a possibility... You may also be better off keeping your substantially limited Roth contributions for yourself.

93EXCivic said:

In reply to mtn (Forum Supporter) :

I don't think 529 is brilliant tbh either. 

So lets say i max a roth IRA which i should be able to do fairly easily. Do i push some of my extra money into maxing the 401k or other investments? I'd have to see if maxing was doable but I think it is considering the money currently going it. I think i'd need to raise it by 4 or 5%. Or do I go with a second IRA in my wife's name and put money towards that? 

Are financial advisors worth talking to? 

Depends on the fees and the fund options. All else being equal, I'd say your wife's IRA first, then your/her 401k/403b. But I've had some tremendous 401Ks in my career - 3 out of the 4 that I've had, the 401k was cheaper (lower expenses) than any IRA fund I could get, and almost identical funds. 

Are financial advisors worth talking to? Well, that depends. What are they charging? Are they a fiduciary? 

I think for 95% of people, the 401k, IRA, and HSA should be invested in an SP500 or total stock market index fund. It is the simple button, and more often than not, the best bet. VTSAX is the go-to. There ARE fund advisors who will beat the market, but their fees will usually take it down to the market return, or they’re not consistent, or they’re just lucky. There are few true magicians like Warren Buffett… And even he says you should invest in index funds.

This is not to say that a financial advisor is bad, but for me, and likely you, in our station in life, there is no point – and when we get to that point where we want one, it should not be for investment advice (i.e. buy APPL or TSLA or PFE), but tax and legal advice. They should help you keeping the plan together, helping with your tax strategy if you get stock options or RSUs. They shouldn’t be managing the investments. I wouldn't get much, if any value out of it right now. I think at some point in my future, I will, but my financial life is still far too simple for that. 

In reply to mtn (Forum Supporter) :

That is fair enough. Really what I would like is a professional i could talk to once to get advice on a few things/ make a plan. Then i just run with that plan. But I don't know if that exists. 

In reply to 93EXCivic :

You can hire a certified financial planner to help set things up and check in with from time to time. My wife and I are working with one right now and have been reviewing everything from insurance policies, retirement, all the way down to our mortgage (she was able to push my wife into agreeing to refinancing the house [something I couldn't convince her of on my own]).

While I knew we should do refi the house (we had just bought it a year ago, but rates had dropped by almost two points), it took that independent third party to convince her that it was worth the effort. Sometimes that independent voice is needed around our house!

i apologize if this question is answered by mtn's link above, but here's my question:

is there a process for converting 529 to Roth?  i was surprised that my daughter only qualified for $5500 in FAFSA money.  ultimately, we didn't take the FAFSA money because we also needed private loans and didn't want to saddle her with two monthly notes when she graduates.  we have about $30k in a 529.  if i could make that zero, maybe FAFSA money would increase by enough to not need the private loans anymore.  but at this point she'd still have 2 monthly notes because we've used one year of private loans.  grrr, this is confusing.

AngryCorvair (Forum Supporter) said:

i apologize if this question is answered by mtn's link above, but here's my question:

is there a process for converting 529 to Roth?  i was surprised that my daughter only qualified for $5500 in FAFSA money.  ultimately, we didn't take the FAFSA money because we also needed private loans and didn't want to saddle her with two monthly notes when she graduates.

Not answered above. 
 

It is not convertible to anything that I have found. Basically you have to pay taxes and a 10% penalty to get it out if not used for education.

OR you can change the beneficiary to a sibling step-sibling cousin child niece nephew grandchild and probably more, and use it for them. 
 

This may have changed with covid? 

In reply to mtn (Forum Supporter) :

Thanks for the quick reply.  i googled "convert 529 to Roth" right after typing my question above, and found the same answer.

and thanks for sharing your well-developed strategy and understanding of this topic.

I'm paying a fee only feduciary planner for some help with my finances.. The investment advice he gave aligned with what MTN gave in general direction.. Good stuff. 

OK, I'm gonna jump in and ask a couple of questions too...

I anticipate retiring in about 10 years. 

I have the opportunity through my employer to contribute up to $61.5k into deferred comp plans.  Currently cramming in about $38.5k all in traditional tax deferred stuff.  With SWMBO's passing away in 2019 I probably won't be increasing my contributions, but have managed not to cut back on them either.  I also anticipate minimal (if any) cost of living raises or salary increase during my remaining working years.  Also doing $7k annually into a personal Roth IRA. 

My employer has started offering both Roth 401(k) and Roth 457 plans and as I understand it I can contribute to it just like a traditional 401(k) or 457, meaning I could divert up to $26.5k of my $38.5k contributions using the catch-up.  Trying to figure out if I should switch some of my pretax contributions to one of the Roth plans through my employer and if so how much to do that with.  I am thinking of going somewhere in the $5k to $10k range into the Roth plans on top of the $7k going into the Roth IRA.  My thoughts are to "hedge" my tax obligations when I retire, but this is based on fuzzy memory that there are requirements to withdraw all the tax deferred funds by the time you are 80 years old (seems like mandatory to take distributions starting at age 70.5 that will ensure all have been taken by age 80?).

I have a 6 week period (through the end of Feb) to make any such change (until this time next year).

Any thoughts from the folks more financially savvy than I?

AngryCorvair (Forum Supporter) said:

i was surprised that my daughter only qualified for $5500 in FAFSA money.  ultimately, we didn't take the FAFSA money because we also needed private loans and didn't want to saddle her with two monthly notes when she graduates.  we have about $30k in a 529.  if i could make that zero, maybe FAFSA money would increase by enough to not need the private loans anymore.  but at this point she'd still have 2 monthly notes because we've used one year of private loans.  grrr, this is confusing.

There is no such thing as FAFSA money. As I understand it, FAFSA only helps estimate as to what the school *might* offer. Either way, your $30k in 529 only counts as <$1700 against your EFC. Since EFC vs aid offer is not a 1:1 trade-off, and is aparently broken out into ranges, even if you could convert the 529 to Roth it's doubtful that would have changed the aid offer from the school by enough to make it worthwhile. Are you not just using the 529 money in question because it's for a different kid or something?

In reply to secretariata (Forum Supporter) :

You've got a lot going on there, and there's too much unknown at least for me to have much in the way of detailed opinions. However, I'd say that from what little I know of deferred compensation, I probably wouldn't start sticking anything in there until I had max'd every other tax advantaged account out first and still wanted to sock more away. As far as Roth vs Traditional, generally speaking, if the majority of my current retirement funds were in Traditional and I have Roth 401k available, I'd definitely bias my contributions towards (or even entirely) to Roth. Company contributions will always be Traditional still.

In reply to Driven5 :

Yeah, I get it. I may not be using the right terminology. $8.5k of what I'm doing through my employer is a mandatory contribution & employer match. The other $30k is going into Traditional 457 & 401(k) plans.

I also have to pick from 4 vendors offering a total of 92 different funds...most of which are new this year. My fun this weekend.  

Maybe this should be in the "first world problems" thread...

In reply to Duke :

Correct. Term life insurance is the only way to go. Life insurance is meant to replace your income for any one who depends on you, wife, kids, elderly parents, disabled sibling, etc. 

Any life insurance with a savings component is a bad deal. Typically these are whole life, universal, indexed.... You pay extra for savings in the policy. The only way to retrieve this savings money is to either borrow it from the insurance company or close the policy. As an example, lets say someone buys a $100k whole life policy. They pay into the policy for 20 years, building up another $50k in the savings part of the insurance. If this person dies, the insurance will pay the $100k face value of the policy.  The $50k in savings is not paid out. They paid for life insurance and paid extra into a savings account that will never be redeemed.
 

Insurance and investment are two distinctly different financial planning tools. Insurance costs money to protect things and people. Investments make money. 
There is a point when you are effectively self insured. If you have no debt and enough savings to take care of your loved ones then life insurance is not necessary.