Financial Review

[widget86]

Hello,

After perusing these forums, I am hoping to get advice on my current financial situation to see if there is anything worth changing or if it needs any balancing. All suggestions are welcomed.

I am 27, my wife 26. Combined salary is $148,000 including very consistent bonuses (only 8k). Also my wife runs a small business that brings in about 8-10k/year pretax.

Assets:
Cash - 12k (kept a little higher than I would typically, to cover business expenses)
S&P Fund - 132k
401k - 58k (contribute 12% including matches)
House - 322k (2012 purchase price)

Debt:
Mortgage - 256k

On a monthly basis, we generally net about $2-3k. Right now, I have that all going into the S&P fund with Vanguard. My biggest question is do I increase my 401k/roth contribution or do I continue to save money in non tax deferred accounts so that it is more liquid. If it changes your thoughts, we plan on having a few kids in the next 5 years, and would need to budget for daycare and college savings.

Thank you.

[Petunia 100]

You have plenty of liquidity. In your shoes, I'd be maxing 401k and Roths. You can max them and still add to your taxable account, so do it. Do you have Roths now? If not, you still have time to make contributions for 2012.

If you have to cut back on savings/retirement savings down the road when you start a family, you'll be so glad you got off to a great start before having kiddos.

[widget86]

How would that work for 2012? Can I fund an IRA before 4/15 and take that as a deduction? Is there a max, and is it combined with what I have already funded into our 401k in 2012?

Thank you.

[Petunia 100]

Yes, you have until 4/15/13 to make contributions for 2012. Between 1/1 and 4/15 each year, your custodian will ask you to specify which year the contribution is for.

If you are contributing to Roths, you don't deduct the contributions.

For 2012, the maximum IRA contribution for folks under age 50 is 5k. For 2013, it is 5.5k.

At your income level, if you are a "retirement plan participant", then you cannot deduct traditional IRA contributions. Are both you and your wife contributing to your employer 401k plans?

ETA: And yes, IRA contribution limits are separate from 401k contribution limits. You can max both.

[jpg7n16]

Based on the figures you posted, it looks like you only have maybe 2 months expenses set aside in cash. That's a bit low. Typical rec is 3-6 months. In your case, that's likely $15-20k (on the lower side).

Def should do 2 IRAs @ 5k each for 2012, as recommended above.

Does she have a 401k too? Or are you the only one?

How is the 401k invested? Do you have any bond allocation, or are you 100% stocks?


With a $3k/month surplus, you should have no issue budgeting in daycare and college when the time comes.

[widget86]

We are both putting in 12% to our 401k.

I only keep a 10-15k cash balance because the S&P account can be converted to cash in about 48 hours do that acts as an EF.

[Petunia 100]

We are both putting in 12% to our 401k.

Well then, neither of you are eligible to deduct traditional IRA contributions. May as well open Roths.

How are your 401k monies allocated?

[MonkeyMama]

If you've got $2k-$3k extra per month, I'd work on maxing out the retirement funds.

401ks - max is $17,500 per individual. Maybe some specific retirement plan limitations. Why would you do this? For current tax savings. You would not literally need to come up with all that money as there would be a substantial "tax savings" offset.

ROTHs - ROTHs do not have to be used for retirement. General rule is if you have access to a ROTH and you have any money to fund it, FUND IT!! If you never need it, it grows tax free forever. IF you need the liquidity, you can pull out the original contributions at any time while the rest grows tax-free forever. If you could put that entire S&P fund into ROTHs, I would. (Obviously you can't. But I personally think it's inefficient to have cash and investments while not funding a ROTH. ROTHs are not tied up quite like a 401k or a Traditional IRA).

The more you contribute now, the less you will have to later. I'd bulk up the retirement funds. You already have some really nice liquidity. You can always back off the retirement funding later on when you have childcare and college savings to contend with (or when you have a more clear timeline).

Don't get me wrong, you don't want to put everything into retirement and be short elsewhere. But if you don't have any other immediate goals... Babies give you some warning before they arrive.

[widget86]

So if I have no real short term need for the funds in the taxable account, would you suggest removing 20k of it and making a 10k contribution to a ROTH for both 2012 and 2013? I'm still a little bit weary of maxing out my 401k as I cant get back at that money until retirement and I have no idea where my life will take me in the meantime, but I will probably increase it from the 12% it is at now.

The 401k accounts are in "2050 target retirement" accounts since we arent given much flexibility from our employers, and I am pretty certain that it is primarily stocks (if not entirely).

[widget86]

PS. Really appreciate the replies so far. I had no idea you could withdrawal from a ROTH contributions without penalty. Not that I would plan to, but I like having the option.

[BMEPhDinCO]

I would withdraw $21k from the S&P - $10k for 2012 and $11k for 2013 (it went up) and open an account for yourself and your wife (I like targeted funds for this but if you already have those, maybe a mix of index funds).

I also agree with others that you should bump your emergency fund (or murphy's fund or the "oh sh*t" fund or whatever you label it) up to at LEAST 3 months of expenses.

Until you have kids, try and max out the 401k AND the Roths each year - once you have a kid (you get 9 months here to make decisions), reduce the 401k and open a 529 for them.

Also, if you are saving for a house, new car, going back to school, whatever - those need to be separate accounts that you are funding for the time when you need it.

Sounds like y'all are in a great position, best of luck!

[widget86]

I get the emergency fund argument, but the S&P taxable fund I have is converted to cash in 48 hours, so I have more than 6 months expenses right there if I need it. If I need 3-6 months worth of expenses overnight... well I guess I have bigger problems

I think what I will do is raise our 401k contributions to 15% (max allowed by our employers) and fully fund the ROTH. I imagine in a few years I'll start to get phased out for the ROTH eligibility, but I guess it still makes sense to fund it while I can.

With a ROTH, is the general logic to wait until the end of the year to make sure that you are under the AGI ceiling? If I fund 2013 now, and then somehow end up over the ceiling (not likely) can I simply pull it out before tax time?