What would you do? I need help!

[disneysteve]

Steve - you also need to consider taxes in your calculation. We make a bit more than the poster and our tax bill is about $60K for Federal and State.

True. I didn't count that. So if OP makes 275 and pays 60K in taxes, that leaves 215K compared to 45K minus taxes 6 months ago. Still 5 times as much income or so. Should leave plenty for savings. I agree that accelerated debt repayment counts as savings since it is reducing the total interest that will be paid and once the debt is cleared, that money can be invested.

[creditcardfree]

Even though your income phases you out of SL interest for tax purposes, you can still take a deduction on the home equity loan. Get rid of student loans firstbefore HEL...since there is zero tax incentive in your situation.

Even though you make a great income, it is still important to know where all of your dollars are going. Make sure you start keeping track of all your expenses. That way you can make a concious choice about whether that expense is worth hanging onto in lieu of debt payoff.

[coreys]

Thanks!

Thanks everyone for contributing to my post. I got some really good information from you and I will keep you posted as we make progress. Here are some of my take aways from your responses:

1-Track expenses to get a REAL budget-thanks Jim!
2-Pay off CC Balance
3-Start saving (Im going to put away 3330 per month (this will be 40k a yr)
I will re-evalute this figure every 6 months
4-Pay down student loan debt
5-Increase life insurance policy on hubby

Wish me luck!

[creditcardfree]

Good luck! Every step forward counts, even if you need to revise later.

[Like2Plan]

Even though your income phases you out of SL interest for tax purposes, you can still take a deduction on the home equity loan. Get rid of student loans firstbefore HEL...since there is zero tax incentive in your situation.

The HEL may or may not be deductible at their income level which is most likely subject to AMT. (It depends on what the money was used for. )


The second kind of mortgage interest is called home equity indebtedness. For tax purposes, this is any kind of borrowing against your residence that is not used to acquire, build, or substantially improve that particular residence. Home equity indebtedness includes the typical "home equity line of credit," as well as the cash-out portion of a cash-out refinance, to the extent that the additional borrowing is not used to substantially improve the home. Interest on up to $100,000 of home equity indebtedness is deductible. When a taxpayer becomes subject to the AMT, however, home equity indebtedness deductions must be added back to income. They are not deductible at all for AMT taxpayers.
link to source.
(I will look up the IRS reference later on....)

[coreys]

The HEL may or may not be deductible at their income level which is most likely subject to AMT. (It depends on what the money was used for. )


The second kind of mortgage interest is called home equity indebtedness. For tax purposes, this is any kind of borrowing against your residence that is not used to acquire, build, or substantially improve that particular residence. Home equity indebtedness includes the typical "home equity line of credit," as well as the cash-out portion of a cash-out refinance, to the extent that the additional borrowing is not used to substantially improve the home. Interest on up to $100,000 of home equity indebtedness is deductible. When a taxpayer becomes subject to the AMT, however, home equity indebtedness deductions must be added back to income. They are not deductible at all for AMT taxpayers.
link to source.
(I will look up the IRS reference later on....)

That is news to me. We owe 60k on the 2nd mortgage so I think we should be ok?? Right?

[jIM_Ohio]

That is news to me. We owe 60k on the 2nd mortgage so I think we should be ok?? Right?

If the house value secures all the debt, then it is 100% deductable.

If your house was worth 300k and you had 400k in loans against it, the interest on the 100k the house did not secure would NOT be deductable.

[Like2Plan]

If the house value secures all the debt, then it is 100% deductable.

If your house was worth 300k and you had 400k in loans against it, the interest on the 100k the house did not secure would NOT be deductable.

Jim,
The home value is not the key test here. It is what you used the loan money for. If you borrowed money against your home and used it to buy a car for example, it would not be deductible interest when you calculate the AMT.
The key test is if the money borrowed has to be used to "acquire, build, or substantially improve that particular residence."
As you know, there are different rules for AMT and this is just another area where they sock it to ya when you reach a certain income level.
Alternative Minimum Tax (AMT) Assistant for Individuals

Topic 556 - Alternative Minimum Tax

Instructions for form 6251 (see page 2)

form 6251 Alternate Minimum Tax for Individuals

[Like2Plan]

That is news to me. We owe 60k on the 2nd mortgage so I think we should be ok?? Right?

coreys,
Just to clarify, this is for the AMT calculation. If you used the proceeds of the loan to acquire, build, or substantially improve that particular residence, then it should be deductible even under AMT.

[Like2Plan]

As far as 401k --we are contributing the max that my dh employer will match--currently 6%, they match 3%. My concern is the 401k annual contribution limits, which will be $16,500 for 2009. What happens to the amount over that?? I don't know but I don't want to be paying some kind of tax penalty for this.

I wanted to go into more detail about this.
You should be contributing the maximum allowed by the IRS. If your DH's income is 225,00 and he contributes 6%, that only comes out to 13,500 ( The 16,500 IRS limit applies to your DH's contributions only). Do they take out 401K contributions from his bonus? (My employer does not, but I know each employer has different rules).

There is another aspect that you need to find out about. Most of the 401k plans I have heard about will not give you a match on your contributions after you max out. What does this mean? If you reach 16,500 in November for example, his employer will not take out any more contributions for the remainder of the year (and no contributions= no match).

Some key things to look at: how is your DH paid? Is it monthly or every 2 weeks? If he is paid every 2 weeks, once every 12 years there is an extra pay day (27 instead of 26). If you have calculated his contributions based on 26 instead of 27 he will max out in pay period 26 and not get the employer match in pay period 27.
Does your DH get a raise every year? Do you have a percentage deducted from his pay or is it a set amount. If it is a percentage, then you need to look at adjusting it when he get a pay increase so you don't max out early.

[Like2Plan]

You should look into every tax advantage that you can.
Jim mentioned an HSA. You should price that out and see if you would do better with that than a traditional health ins. (Oddly enough, sometimes the traditional health ins is a better bargin if you are not paying very high premiums in the first place and if you have some health issues).

If you do go with the traditional health ins, there still may be some tax savings. Some employers offer flexible spending accounts for health care costs. They have different rules from the HSA. But, this will save you federal, state, local, medicare and ss taxes on these contributions. The only downside is you must elect how much you are going to spend beforehand and then if you don't spend the money in the year, you lose it. But, you can use the money for many over the counter medications, eye glasses, braces, contact lenses, copays, mileage to Dr. visits, first aid kits, et'c. If you have these expenses anyway, you might as well take advantage.

[Like2Plan]

Retirement Accounts:
As others have mentioned, you are going to need a more robust retirement savings plan. If I had to give a general guideline, it would be a goal of at least 15-20% of your income. Your DH starting out is making a very good income, but I would say his lifetime earning potential is probably pretty doggone good and your goal is to replace income at the end of your income earning stream. That could be quite a bit more than what he is making just starting out.

Some questions: Will your DH be eligible for any kind of pension through his place of work?

You should have your own retirement account. Actually both you and your DH could contribute to a non-deductible IRA. In 2010, you could even convert those IRA's into a Roth because they are removing the income limits on conversions. You would have to pay taxes on the earnings only, so it probably wouldn't be a big amount on the taxes.
Article on Ask the Expert: Demystifying IRA Conversion Rules

income phase out chart for traditional and roths

[Like2Plan]

After you have maxed out on the other types of retirement accounts, you are mostly likely going to need to invest in taxable type savings.

No load mutual funds are generally a good starting point until you've built up some assets (there are lots of different types of mutual funds). The primary reason is it is hard to diversify stocks if you can only buy a couple to start with. And, that ties in with risk. If you have 1 or 2 stocks and they tank, your portfolio value plummits. If only those two stocks as part of a larger mutual fund go down, the loss will be more attenuated.

Maybe down the line you might want to consider indivdual stocks. One of the things that I like about owning indivdual stocks is you control when they are bought and sold (for the most part) and you control the taxable events associated with that. You can pick stocks which provide dividends. For some, this is a strategy for replacing income in retirement. The value of the stock can fluctuate, but you still get that quarterly dividend check. On the other hand, you could pick stocks that don't earn a dividend, but are growth stocks.

I am sure the folks on this board will have more investment recommendations, but the biggest obstacle to overcome is just getting into a pattern of regular saving...