Where to put extra money?

[tqf258]

I recently accepted a position working overseas on a rotational basis and will be making quite a bit more money for the next 2 years. I am looking for advice on what to do with it pay down debt or save? Here is some background on my finances and what I am currently doing.
Married both 35 with one 14 year old child
Base Salary 115K + bonus of 60k (Company pays taxes on bonus)
Spouse Salary 28k
I put 15% in 401k which maxes out my pretax and company matches 6%. I also have a company covered pension plan.
Spouse puts 15% in 401k and company matches 5%
Total 401K balances combined ~160K
EF $40,000 and saving $2150 per month, in bank savings account
Mortgage 127k at 3.25% 8 yrs left $1500 per month
Rental Property 30k at 3.75% 5 years left $650 (renter pays this note)
Truck 36k 2.49% 5 years left $625 per month
Car 25k 3.75% 2 years left $1085 per month
Credit Card 13k 0% till December $1300 per month
Opened up 529 for my daughter $200 per month
Utilities, insurances, and other monthley expenses including FUN money $2500 per month (which could be reduced)
So I think thats everything...My question is should I keep the EF in bank savings and should I continue to add the $2150 a month to it. I dont have any retirement savings outside of the pension and 401k's but with the high income dont think that I can take advantage of any tax deductions or get into a Roth IRA?
The other option is to pay off some of the debt but with the low rates I'm not sure if thats a good idea at the moment.
Any advice would be appreciated!!

[Petunia 100]

I recently accepted a position working overseas on a rotational basis and will be making quite a bit more money for the next 2 years. I am looking for advice on what to do with it pay down debt or save? Here is some background on my finances and what I am currently doing.
Married both 35 with one 14 year old child
Base Salary 115K + bonus of 60k (Company pays taxes on bonus)
Spouse Salary 28k
I put 15% in 401k which maxes out my pretax and company matches 6%. I also have a company covered pension plan.
Spouse puts 15% in 401k and company matches 5%
Total 401K balances combined ~160K
EF $40,000 and saving $2150 per month, in bank savings account
Mortgage 127k at 3.25% 8 yrs left $1500 per month
Rental Property 30k at 3.75% 5 years left $650 (renter pays this note)
Truck 36k 2.49% 5 years left $625 per month
Car 25k 3.75% 2 years left $1085 per month
Credit Card 13k 0% till December $1300 per month
Opened up 529 for my daughter $200 per month
Utilities, insurances, and other monthley expenses including FUN money $2500 per month (which could be reduced)
So I think thats everything...My question is should I keep the EF in bank savings and should I continue to add the $2150 a month to it. I dont have any retirement savings outside of the pension and 401k's but with the high income dont think that I can take advantage of any tax deductions or get into a Roth IRA?
The other option is to pay off some of the debt but with the low rates I'm not sure if thats a good idea at the moment.
Any advice would be appreciated!!

You and your wife could both be doing "back door" Roths. How? Open a traditional IRA each. Make a non-deductible contribution of 5.5k each. Convert each traditional to a Roth (no income limits to convert). There, you have Roths. Next year, rinse and repeat. This works very well for you as you have no other traditional or Simple IRAs (with deductible contributions) to complicate the process.

You're in a great position to begin investing in Roths and taxable accounts, and I suggest you take advantage. Why? If you decide you want to retire early, you will be in a position to do so. If you want to get in to a different line of work but it pays less, you will be in a position to do so. In your shoes, I would be working towards financial independence. Once you are not relying on your paycheck, you can spend your time any way that you please.

[jpg7n16]

Base Salary 115K + bonus of 60k (Company pays taxes on bonus)
Spouse Salary 28k
I put 15% in 401k which maxes out my pretax and company matches 6%. I also have a company covered pension plan.
Spouse puts 15% in 401k and company matches 5%


I dont have any retirement savings outside of the pension and 401k's but with the high income dont think that I can take advantage of any tax deductions or get into a Roth IRA?

I think you're actually pretty close to the limit, but under it. See the limits here: http://www.irs.gov/Retirement-Plans/...-Make-For-2013

Your earnings: 115 + 60 = 175k
Her earning: 28k
Combined: 203k

This is where most people stop. But the IRA income limit is not based on TOTAL income, but on MODIFIED adjusted gross income (line 38 of your 1040) -- which is after 401k contributions and other adjustments.

See worksheet 2.1 here (scroll down a bit on the page): Publication 590 (2011), Individual Retirement Arrangements (IRAs)
And see what all comes out before line 38 on Form 1040 (some of which is added back per the worksheet): http://www.irs.gov/pub/irs-pdf/f1040.pdf



If you make a combined 203k, and you each contribute 15% to your 401k:

203k * 85% = $172.55k -- which is less than the $178k MAGI threshold for Roth contributions.


Unless you have additional income somewhere, or the $60k is net of tax withholdings, you may be elligibile for a Roth in your own right. Check with your tax advisor just to be sure.

[tqf258]

Thanks Petunia I will look into the IRA to Roth conversion as soon as I get home. All of those things have crossed my mind (retiring early, job change with less pay but more time at home)and that is why I came here asking questions! I forgot to mention in my previous post that I also get my vacation bought back so once a year I will get another 10k after tax roughly, so this money could fund most of the IRA! I thnk I would like to get my EF to 50k (just like the sound of that!) And then I guess start paying down the debt?

jpg7n16, not exacley sure how my taxes will work! There will be some kind of tax equalization done at tax time, but the 60k is the net pay I think. So that will put me over the limit for sure. I am really intersted to see how it all works!

Artwest, thanks good point about the payments! They are high at the moment. When I took this position I increased all my payments, to lower the terms. The house and the rental property have smaller notes but I can pay the extra amount to them comfortably. They are both on 10 yr terms. I pay so much on the CC to pay it off before the 0% is gone. And the car is set to pay off before my assignment ends. I would love to pay off everything but want to make sure its the right way to go since intrest rates are so low.

[Wino]

203k * 85% = $172.55k -- which is less than the $178k MAGI threshold for Roth contributions.

Unless you have additional income somewhere, or the $60k is net of tax withholdings, you may be elligibile for a Roth in your own right. Check with your tax advisor just to be sure.

He said the company will pay the taxes. Usually, that means they "gross up" the amount, so the $60K might be about $75K for tax purposes. I would do the back-door Roth with post-tax dollars as Petunia suggested. $5K is too close to miss out. There may also be OT or miscellaneous income that is not mentioned.

[tqf258]

He said the company will pay the taxes. Usually, that means they "gross up" the amount, so the $60K might be about $75K for tax purposes. I would do the back-door Roth with post-tax dollars as Petunia suggested. $5K is too close to miss out. There may also be OT or miscellaneous income that is not mentioned.

Looking at my paystub it doesnt look like they are "grossing up" i have my standard salary plus the premium pay, minus a hypothetical tax. They have my fed witholding as exempt. I think when they file they pay the lump sum differance to make up what is owed in federal tax. I was told they do a tax equalization so that i am only responsible for tax on my base salary. We will see how that goes.

The other issue with the numbers is i can put 17K and do into 401k, wife puts 15% of 28k or ~4k so add those together 21k even if they dont gross up 203-21=182k which is right at the limit.

Who do you guys suggest to use for the back door Roth?

[Wino]

Looking at my paystub it doesnt look like they are "grossing up" i have my standard salary plus the premium pay, minus a hypothetical tax. They have my fed witholding as exempt. I think when they file they pay the lump sum differance to make up what is owed in federal tax. I was told they do a tax equalization so that i am only responsible for tax on my base salary. We will see how that goes.

The other issue with the numbers is i can put 17K and do into 401k, wife puts 15% of 28k or ~4k so add those together 21k even if they dont gross up 203-21=182k which is right at the limit.

Who do you guys suggest to use for the back door Roth?

The bold is "grossing up." They will pay the taxes on the bonus, but that becomes income, which is also covered in the "grossing up" equation.

Also, you are only exempt on the first $95K, not all of it. You need to have them start withholding, or set aside money for it yourself. I live overseas, as well. Go to the consulate or embassy when you get overseas and get their recommendations for tax preparers. It will run about $2K or so, but the money is well-spent if it keeps you out of prison for tax evasion.

Lastly, if you are working for a US company, you are NOT "tax exempt."

I really suggest you find someone who is familiar with international tax law and have them give you advice.

[tqf258]

The bold is "grossing up." They will pay the taxes on the bonus, but that becomes income, which is also covered in the "grossing up" equation.

Also, you are only exempt on the first $95K, not all of it. You need to have them start withholding, or set aside money for it yourself. I live overseas, as well. Go to the consulate or embassy when you get overseas and get their recommendations for tax preparers. It will run about $2K or so, but the money is well-spent if it keeps you out of prison for tax evasion.

Lastly, if you are working for a US company, you are NOT "tax exempt."

I really suggest you find someone who is familiar with international tax law and have them give you advice.

Thanks Wino, I probably used the wrong terms! I work on rotation 28&28 so none of my income is Exempt. They do withold federal tax from my check just not the traditional way. Its called a hypothetical tax and includes Fed tax and FICA tax all rolled into one.
The company I work for (Major Oil Company) has set me up with Deloitte to handle all of the tax issues both in US and the country I work, so not worried about the prison part!

[Like2Plan]

Is your wife limited to a max of 15% contribution to her 401k or can she contribute more?

[Petunia 100]

Looking at my paystub it doesnt look like they are "grossing up" i have my standard salary plus the premium pay, minus a hypothetical tax. They have my fed witholding as exempt. I think when they file they pay the lump sum differance to make up what is owed in federal tax. I was told they do a tax equalization so that i am only responsible for tax on my base salary. We will see how that goes.

The other issue with the numbers is i can put 17K and do into 401k, wife puts 15% of 28k or ~4k so add those together 21k even if they dont gross up 203-21=182k which is right at the limit.

Who do you guys suggest to use for the back door Roth?

My preference is Vanguard, but Fidelity and T. Rowe Price are good companies too. If you prefer a brokerage account, then any broker who will give you free trades is just fine. What's more important is what you put in your account. Stick with broadly diversified index funds or ETFs. Have a reasonable mix of US stocks, foreign stocks, and US bonds.

You also might increase 401k contributions. You may be limited by HCE rules, but your wife isn't. She could max her 401k.

[tqf258]

Is your wife limited to a max of 15% contribution to her 401k or can she contribute more?

My preference is Vanguard, but Fidelity and T. Rowe Price are good companies too. If you prefer a brokerage account, then any broker who will give you free trades is just fine. What's more important is what you put in your account. Stick with broadly diversified index funds or ETFs. Have a reasonable mix of US stocks, foreign stocks, and US bonds.

You also might increase 401k contributions. You may be limited by HCE rules, but your wife isn't. She could max her 401k.

I think my wife's plan allows 20% as does mine. She can only up her contributions at the beginning of each quarter. So we will raise it next quarter. At 15% my pre-tax max of 17.5k is met, though I could put the other 5% in and it will go to the after tax account.
My current plan after reading these posts is to,
1)Raise her 401k to max allowed by company.
2)Open IRA and convert to Roth IRA at max of 11k.
That would mean retirement savings;401k with company match 22% into mine 25% into wife's
11k per year into back-door Roth Accounts, and my company paid pension. Wife also has a "Pension?" where at the end of each year the company puts 2-3% of her salary into her 401k.
Would it be wise to put the extra 5% in my 401k, use that money to keep building EF, or pay down some of the debt?