Thinking about Adjustments to Retirement Savings

[phantom]

My husband and I are both going through pay changes, so I've been thinking that this might be a good time to adjust our retirement contributions. (I got a raise, and he lost his 401k match and got a raise to replace it.) When the dust has settled, he'll be making about $79k, and I'll be making about $67k, for a total of $146k.

Right now, we each put $500/month in our Roth IRAs, which works out since we're still catching up from years when we didn't max our contributions. If we make no adjustments to our 401k contribution rates, I'll be putting in $700/moth in my Roth 401k, and he'll be putting $400/month in his traditional 401k. That's $2100/month total. We currently have $109k in retirement accounts, $85k of that being in Roth accounts of one sort or another.

Additionally, we have $40k saved outside of retirement accounts, to which we add $2100/month. I think of $24k of that as being our emergency fund and the rest as fair game for whatever. We have several home improvement projects that we'd like to put it into over the next few years, and my husband would really like to try investing in a rental property at some point.

My husband and 34, and I'm 31. We have no debt other than a mortgage that we're content to make minimum payments on till it's gone in 10 years. We would like to start having kids some time soon, although we don't know exactly when that might happen. When we do, it's likely one of us will want to cut back on hours to be able to take care of the kids. The whole question of when we'll have kids and how that will impact our income and expenses when we do, puts a lot of question marks in our financial planning.

All of that set up to ask: Should we adjust the balance between what we save in retirement accounts verses what we save outside of retirement accounts? And, should we be saving more in traditional accounts rather than Roth accounts? My husband is a big fan of using Roth accounts and getting paying taxes out of the way now. But, as our income continues to rise and our current taxes with it, I feel like it might be time to start avoiding tax in the present. I'm not really sure how to go about analyzing our options though.

[QuarterMillionMan]

1) Health savings account
2) 529 college savings plan

I'm not sure if starting a 529 without having kids is allowed but something to look into. And a health savings account requires a high deductible health plan. Neither of these applies to me but if I had the opportunity I would take advantage of it.

[snafu]

I don't mean to sound nosy but there are some important facts needed to respond to your questions...
Are you willing to outline the holdings in your 401K and ROTH plans? How do they mesh with holdings in your non retirement portfolios? Is DH's current 401k fully 'vested?' Does your employer offer any matching retirement sums? If you were to contribute 15% of net income to retirement would that upturn your current budget? When you leave employment for maternity, do you get any benefits? Do you anticipate being a SAHM or returning to the workforce sometime in the future?

What is the balance owing on your mortgage at what interest rate? How do your mortgage payments break down Principal to Interest and escrow if applicable?

[MonkeyMama]

All of that set up to ask: Should we adjust the balance between what we save in retirement accounts verses what we save outside of retirement accounts? And, should we be saving more in traditional accounts rather than Roth accounts? My husband is a big fan of using Roth accounts and getting paying taxes out of the way now. But, as our income continues to rise and our current taxes with it, I feel like it might be time to start avoiding tax in the present. I'm not really sure how to go about analyzing our options though.

I think at face value I would leave things as is. The best thing you can do to plan for kids is to have liquidity and flexibility. You are saving heavily to that end, while saving ample sums for retirement. To me, it looks like a good balance.

That said, you may be able to put a lot more to retirement and save substantially more by being more tax efficient. If you instead put $2100 per month to traditional 401ks, I would not be surprised if you saved enough taxes to fund your ROTH IRAs, in addition. I would maybe make this tweak, even if it took some away from your taxable savings.

Given your likely options, I'd do traditional 401k contributions and ROTH IRAs. One bird in the hand is better than two in the bush. I'd take the tax break now, given your income level and tax situation. (But I presume you make too much to take advantage of deductible Traditional IRAs). Tax diversity is also good, because tax laws change very frequently. I wouldn't put all my eggs in one basket. I think it's fine when you are starting out because income should rise with age and then you contribute more to Traditional space over time. I think you are in a good position, but I would not personally choose to only contribute to ROTHs for the long run.

If you have children, you will want to re-evaluate all of the above, at that point. Especially if you experience an income change.

[phantom]

1) Health savings account
2) 529 college savings plan

Our health insurance does not have a high deductible, so I think that means we don't qualify for an HSA, and I know that means we don't have much use for one. As for college savings, I don't even want to think about that till after we have kids. There are too many variables right now.

Are you willing to outline the holdings in your 401K and ROTH plans? How do they mesh with holdings in your non retirement portfolios?

I'm willing to outline what we have, but it will take some time for me to compile the info. We don't have much of an overall plan right now, although I recognize that we really should.

Is DH's current 401k fully 'vested?' Does your employer offer any matching retirement sums?

My husband is not fully vested, but he hadn't been eligible to contribute long before they cut the match, so he'd only lose about $1000 if he quit his job tomorrow. My employer does not do a match.

If you were to contribute 15% of net income to retirement would that upturn your current budget?

We contribute $2,100/month or $25,200/year, which is 17% of $146,000 (which is gross). I'm not sure what net will be since I haven't seen new pay stubs yet, but the percentage of net would be higher. So, I'm not sure what you're asking.

When you leave employment for maternity, do you get any benefits?

Yes, maternity leave is unpaid, but my employer continues to provide health insurance as long as I continue to pay my part. I also get 20 days of PTO/year that I could save up and use during that time.

Do you anticipate being a SAHM or returning to the workforce sometime in the future?

I'm not really sure. My husband and I would like for one of us to stay at home, but we can't quite manage on just one of our salaries, and we both have technology jobs and skills that would get stale with too many years out of the workforce. The tentative plan is for one of us (probably me) to try working part time and/or from home once we have kids. But, we'll have to try that to see how well we can make it work. In any case, I'd like to do what we can now to be prepared to have the option of working less in the future.

What is the balance owing on your mortgage at what interest rate? How do your mortgage payments break down Principal to Interest and escrow if applicable?

We owe $154k at 3.25%. We pay $1450/month, approximately $1000 of that goes to principal and the rest goes to interest. We do not have an escrow, but we set aside $560/month to cover taxes and insurance.

[feh]

That said, you may be able to put a lot more to retirement and save substantially more by being more tax efficient. If you instead put $2100 per month to traditional 401ks, I would not be surprised if you saved enough taxes to fund your ROTH IRAs, in addition. I would maybe make this tweak, even if it took some away from your taxable savings.

+1

At your savings rate, I suggest maxing your 401K contributions.

[phantom]

That said, you may be able to put a lot more to retirement and save substantially more by being more tax efficient. If you instead put $2100 per month to traditional 401ks, I would not be surprised if you saved enough taxes to fund your ROTH IRAs, in addition. I would maybe make this tweak, even if it took some away from your taxable savings.

Given your likely options, I'd do traditional 401k contributions and ROTH IRAs. One bird in the hand is better than two in the bush. I'd take the tax break now, given your income level and tax situation. (But I presume you make too much to take advantage of deductible Traditional IRAs). Tax diversity is also good, because tax laws change very frequently. I wouldn't put all my eggs in one basket. I think it's fine when you are starting out because income should rise with age and then you contribute more to Traditional space over time. I think you are in a good position, but I would not personally choose to only contribute to ROTHs for the long run.

Thank you, this is exactly the sort of advice I was hoping to hear. I'll try running some numbers later to see exactly what would happen if we switched my contributions to a Traditional 401k and possibly upped them.

[Petunia 100]

It's a waste to have all retirement savings in Roths, unless you have significant other taxable income (pension, net rental income, etc.).

Remember, everyone is allowed some taxable income taxed at 0%. For 2013, a married filing joint couple could have 20k of taxable income taxed at 0% (standard deduction 12.2k, plus 2 personal exemptions of 3.9k each). If all of your income came from Roths, you would pass up the opportunity to have 20k taxed at 0%. Why would you want to do that?

The next tax bracket for 2013 was 10%. A married filing joint couple could have had 17,850 of taxable income taxed at 10%. Your marginal bracket is more than 10% now. Based on your income, I'm going to guess that your marginal bracket is 25%. Does it make sense to pay 25% now to avoid paying 10% later? It really doesn't.

Currently, you are not on track to have enough in tax-deferred to fill up your 0% and 10% tax brackets. At a 4% withdrawal rate, a tax-deferred nest egg of 939,500 would provide 37,850 of annual income the first year. So set 939,500 as your minimum target, contribute enough in tax-deferred to reach it, and funnel the rest into Roths.

[BuckyBadger]

I would max out tax advantaged accounts before contributing to taxable accounts earmarked for retirement. I would also keep your 401ks traditional. I think you're punishing yourself by doing so much Roth. You want to hedge your bets about future taxes and give yourself flexibility for future withdrawals, and you're able to do that with your Roth IRA contributions. Plus, it seems like you're "clean" as far as traditional IRAs go, so if your income increases to where you can't contribute directly to a Roth you can still do a backdoor to get some Roth space every year.

[autoxer]

Petunia, Excellent post!

I'm in the same tax bracket and when I realized what you just described, I switched from the Roth 401k back to the traditional. In this income range, I think it's best to max out the traditional 401k, max the roth ira, and put what's left in a taxable account, but I have no aspirations of buying rental property.

[feh]

Petunia, Excellent post!

I'm in the same tax bracket and when I realized what you just described, I switched from the Roth 401k back to the traditional. In this income range, I think it's best to max out the traditional 401k, max the roth ira, and put what's left in a taxable account

This is exactly what we've done for the last 15 years.

[LivingAlmostLarge]

Don't forget when you retire, if you do so early you can convert your 401k tax deferred savings into Roth Contributions up to like $20k a year! So you can still "save" into roths.

[autoxer]

Don't forget when you retire, if you do so early you can convert your 401k tax deferred savings into Roth Contributions up to like $20k a year! So you can still "save" into roths.

You can recharacterize any amount you want, but you have to pay taxes on it. The real magic happens if you keep your needs really low, then you can recharacterize while you are in the lower tax brackets. I think the strategy most people use is to recharacterize enough to fill their current tax bracket without breaking into the next one.

[phantom]

Thanks to all the suggestions to do less retirement savings in Roths, I sat down last night and set up an Excel spreadsheet that would let me play with moving contributions between Traditional and Roth. It looks like we can put an additional $2000 away between now and the end of the year without seeing a decrease in take home pay, if we switch all of our 401k contributions to Traditional. After a lengthy talk about it with my husband, I think that's what we're going to do.

My husband still isn't completely sold on the idea that paying less tax now means paying less tax over our lifetimes. He'd really like to have a bunch of rental income by the time we're ready to withdraw from those accounts, which would mean paying tax on that savings anyway. But, I think I've got him convinced that if tax rates look anything like they do today, it's very unlikely that having saved in Traditional accounts will really make us worse off.

Thanks to LivingAlmostLarge and autoxer for the recent comments about being able to convert to Roths later. I think it's helpful to keep in mind that this probably isn't our last chance to get paying taxes on the money we're saving for retirement out of the way.