What's next?

[Beccagold]

I was wondering if anyone would like to give me advice

Currently, DH & I are both contributing to our 401ks. DH should come in close to the max, I may be a couple thousand shy of the max. We also have a 6 month EF in an online bank as well as an additional $40k in an online bank. In addition to our 401ks, I have an automatic investment into a mutual fund each month.

Our only debt is the mortgage and a car loan at 1.9%. The car loan made more sense than taking money out of the bank/investments at the time.

Besides upping my 401k contribution, what would you do with the extra money in the online account? It seems to be more than what we would need to have liquid.

[jIM_Ohio]

A few things-

Is there a reason the mutual fund is in a taxable account and not in an IRA?
What tax bracket are you in (15%, 25%, 28%, other)?

Are you eligible for a Roth IRA?


I would consider a Roth IRA if you are eligible- you can put up to 5k in per spouse (so 10k total; 5k per spouse in 2 different accounts).

With the savings, I think 6 months expenses is a good starting point. You might not need "more", but this depends on various factors. For example-

Both you and your wife have 401ks, this tells me you probably work for an employer (and are NOT self employed). If you are self employed I would suggest 6 months expenses is not enough.

How much life insurance do you have? How much do you need? How much do you depend on BOTH incomes? Meaning if one person makes 40k and one makes 80k, if you have 60k of expenses then the person making 40k is VERY dependent on the other spouse but the other spouse is less dependent on the other.

If you have a low amount of life insurance, you have two choices- up taxable investments and cash/ EF amount, or purchase more life insurance.


Overall you are in good shape- probably a B+ or higher, as both 401ks are maxed or close to it. Plus the 6 month EF is a good thing. Biggest issues are Roth IRAs and life insurance.

[disneysteve]

I would start investing that money if it isn't needed in the short-term (less than 5 years). Do you have children? If so, are you putting money away for their education?

I would pay off the car. I'm sure the money in the bank isn't earning 1.9% at this point so get rid of that.

What percentage of income are you currently saving for retirement? If less than 15%, open Roth accounts for each of you (if you are eligible). You can use 10K of that 40K to max those for 2010 and hang onto another 10K to fund them for 2011 after 1/1/11.

[Beccagold]

Thanks for the quick replies! Some answers:

The mutual fund is in a taxable account b/c I was under the impression that if your 401ks were maxed there were no other options.

Tax Bracket - 28%

Roth IRA - Not eligible

Both of us are employed and could conceivably live on the others income without touching savings.

Life insurance - Both have term life through employers. Enough to pay off mortgage if something happens to the other.

No children at this time.

Putting away 18-20% of Gross towards retirement.

Additional info:
I'm 33, DH is 41. Currently trying to get pregnant. Both plan to continue working. Might relocate within the next 2 years. Also, I receive mileage reimbursement greater than my monthly car payment from my employer.

[KTP]

[QUOTE=Beccagold;271871]Thanks for the quick replies! Some answers:

The mutual fund is in a taxable account b/c I was under the impression that if your 401ks were maxed there were no other options.

Tax Bracket - 28%

Roth IRA - Not eligible

QUOTE]

Fortunately you can do a Roth even if you are not eligible. We are also not eligible yet we are contributing $5000 to my wife's Roth account every year.

This only works really well if you do not have any other IRA accounts (the 401K is ok). Just contribute $5000 in december 2010 to a non deductable normal IRA (everyone is eligible for that, even Bill Gates) and on Jan 1 2011 contribute another $5000 to the normal IRA. On Jan 2, convert the normal IRA into a Roth IRA and pay taxes on the interest you have earned on the combined $10,000 (should be about $0.03). Voila, on Jan 2 2011 you have a $10,000 Roth! On Jan 1 2012 you can start up another non deductable normal IRA with $5000 and roll it into your Roth so you will have $15000+ in there (hopefully more if you had a good year with your $10,000 balance.)

For the present time, after 2009 there are no income limits on converting a IRA to a Roth, you just have to pay taxes on any extra money the IRA has earned (but not on the cost basis of the IRA, which is why this works so well). If you already have an IRA with a lot of gains, then this will not work as well because when you convert you will have to pay a goodly chunk of taxes (still could be worth it).

[disneysteve]

If you are thinking about moving, I'd hold onto some cash as you will need it for a down payment and moving expenses.

I would not let the mileage reimbursement influence whether or not you pay off the car. I think those are two separate issues.

Once you have a child on the way, consider opening a 529 account for his/her future education. In fact, you don't actually need to have a child to open a 529 but personally I wouldn't open one just in case something happened and a child never came along.

Get your own insurance. Having coverage through your employer is a nice little perk but you don't want to depend on that. If either of you changes jobs, or you stop working to become a SAHM, you lose the coverage. If your employer decides to cut back and eliminate that benefit, you lose coverage. Term coverage is dirt cheap. Buy your own policies for 8-10 times income.

[Broken Arrow]

Roth IRA - Not eligible

Sooo, you're saying that your combined household income is greater than a MAGI of $167,000? How close are you to this limit after deductions and 401k(s)?

That or you can do the Roth conversion that KTP mentioned. Both spouses are eligible, so you should be able to get about $30k into Roth accounts by 2012.

[jIM_Ohio]

As others have pointed out, make sure you know your AGI on tax return.

Your tax bracket, AGI and gross income are all different numbers.

Gross income is what you take home before paying taxes. If you make 110k and spouse makes 90k, your gross is 200k. If you save 20% of gross, I am assuming you save 20% of this number, 20% of 200k is 40k per year.

AGI is income minus adjustments.
If you grossed the 200k above, you need to take away some adjustments:
1) the 401ks reduce this dollar for dollar- so if you put in 31k into 401k, then 200k-31k=169k
2) other adjustments would include student loan interest, HSA deductions, FSA deductions and a few other less common things.

Once you subtract out your ADJUSTMENTS you have Adjusted Gross Income. Benefits like Roth IRAs are AGI tested (meaning you need to be under a specific AGI to contribute).

Taxable income is your AGI minus deductions. The most common deductions are schedule A items (mortgage interest, taxes, health care expenses). There are lots of others. Personal exemptions are also adjustements ($3650 per person). In general most married couples have at least 19k of deductions (std deduction plus exemptions) and I know we usually get about 20k-30k of deductions on schedule A because of mortgage interest.

If you have 30k of deductions on 169k AGI, you would subtract the 30k from 169k and be left with 139k. This result is your taxable income.


My wife and I gross close to 150k and we are able to get adjustments and deductions into 15% bracket (under 70k)- we also have kids which helps.

[Beccagold]

Good points on the AGI, for the past few years we have been ABOVE it, but after looking over where we should end this year, we will probably be below the limit.

Will there be any issue if we are back above the limit in future years? We also have a tendency to trigor AMT, is this an issue?

[jpg7n16]

What is an approximate 1 month of expenses for your family? You should have a maximum of 6 months expenses held in cash (3-6 recommended). The rest should either go towards your other financial goals (debt reduction, retirement savings, college savings, giving, etc.)

As far as your AGI goes, remember that 401k elections directly reduce your AGI. If you both contribute the max, you lower your AGI by $33k. If you still don't meet the qualifications, that's a very pleasant problem to have.


You usually trigger AMT? What type of tax advantaged vehicles are you using? Do you or your husband get several Incentive Stock Options?

Top Ten Things That Cause AMT Liability

You should likely consider AMT-exempt muni bonds for some portion of the funds that cannot be held in a retirement account.

[Beccagold]

What is an approximate 1 month of expenses for your family? You should have a maximum of 6 months expenses held in cash (3-6 recommended). The rest should either go towards your other financial goals (debt reduction, retirement savings, college savings, giving, etc.)

As far as your AGI goes, remember that 401k elections directly reduce your AGI. If you both contribute the max, you lower your AGI by $33k. If you still don't meet the qualifications, that's a very pleasant problem to have.


You usually trigger AMT? What type of tax advantaged vehicles are you using? Do you or your husband get several Incentive Stock Options?

Top Ten Things That Cause AMT Liability

You should likely consider AMT-exempt muni bonds for some portion of the funds that cannot be held in a retirement account.

I do have 6 months of expenses in an online account. The money in questions is in addition to that and other investments.
I receive bonuses (not as much recently) as well as stock options from my employer. Aside from our 401ks, we probably don't have any tax advantageous investments.

I hope this never came across as a "problem". Just realized I was wasting too much money letting it sit in the bank.

We are very lucky and earn above-average incomes, while living below our means.

I have adjusted our 401ks to ensure they max out for the year. I will look into term-life as well as the Roth options. Any other suggestions are always welcome!

[jIM_Ohio]

As far as your AGI goes, remember that 401k elections directly reduce your AGI. If you both contribute the max, you lower your AGI by $33k. If you still don't meet the qualifications, that's a very pleasant problem to have.

what he said