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Archive for August, 2008

Investing in Non-Deductible IRA vs Taxable Account for me

August 5th, 2008 at 11:56 pm

Jim_Ohio had a very interesting post about whether high-income earners (above the ROTH limit) should direct money toward a taxable account or a non-deductible IRA. In the comments he asked me a series of questions, so I thought I'd blog a bit about our situation, and maybe if I'm lucky Jim will stop by and give me his take.

Currently DH makes about $130k. I have the choice to work or not -- currently I'm contracting 20 hr/wk and expect to gross about $60k. We'll probably have about $35k in deductions, plus $10k in exemptions. Last year we had $9k in dividends and $23k in capital gains.

Our tax situation this year will be very different from last year, since I only worked for 5 months and didn't start with as many hours. Last year, our AGI was $169k, my business income was $23k, our taxable income was $124k. I'm guessing our marginal tax bracket was 25%, but our effective tax rate was 10.5% federal and 9% state.

1) How much are you investing each year? In the taxable account?
$15,500 to DH's 401k
$13k to DH's ESPP
$4k to DH's traditional IRA
$4k to my traditional IRA
No new money to my taxable account.

The IRA contributions will likely come from selling existing taxable mutual funds rather than new income.

2) how many years to retirement? Is early retirement a desire?
We are almost 38 now, so theoretically 27 years. I'd like the option of retiring at 60, so 22 years.

3) is mortgage paid off? Is their any reason to NOT pay the mortgage off?
The mortgage is a 10-1 ARM that is fixed at 5.125% until 2012. I think it's more advantageous for us to have the mortgage deduction and invest in the stock market instead of paying it off. Also, there is a fair chance that we will want to move to a better school district in 3-5 years time.

4) What choices are available for health care (HSA?), child care (child care account available?) and other less used deductions.
DH has excellent medical coverage, completely employer-funded, so no HSA.
We're currently taking advantage of the FSA health deduction, although I've been burned with it in the past. The dependent care deduction is tricky -- currently the part-time nanny prefers to be on a cash basis. To use the deduction we'd have to set up tax withholding, etc.

Here's our current strategy:

I wait until TurboTax tells me whether we qualify to contribute to a ROTH or not. We qualified for a partial contribution the year that I was not working, or I could take a deduction on a spousal IRA.

When we don't qualify for ROTH, we contribute $4k each to non-deductible IRA.

Now that I have business income, I sell stock in my taxable account to make the maximum contribution to the SEP-IRA to reduce the taxable business income.

One wrinkle -- it's quite possible that we will be in a higher tax bracket in retirement than we are now. I've been playing with the retirement calculators at http://www.hughchou.org/calc/index.html#RET. Our current retirent accounts total $339k, and current taxable accounts total $357k. I asked for $200k income and assumed 10% return. If we save all that for retirement, and don't contribute another dime, the calculator says we're "set for life". If I just look at the retirement balance, and assume we add $24k to it each year, and assume a 10% return, we're still good for a $200k (current dollar) income.

So what do you think, Jim? Am I better off to leave that $8k each year in the taxable account, or move it over to the IRA?

Adding RSS feed to your blog

August 4th, 2008 at 09:00 pm

I just enabled this blog for RSS feed. Feeds are great because you can see at a glance who has added a new entry you might like to read.

Here's how to do it in case anyone else would like to set it up for their blog:

From your blog page, Click on Control Panel, then Widgets, then Feedburner.

Click "create a FeedBurner feed"

Copy the last part of the feed address into the box in step 2. (I missed this step the first time through.)

Click Save

Click Activate

Go back to your blog's main page. In the sidebar should be an orange button labelled XML.

Large purchase throwing my budget for a loop

August 3rd, 2008 at 03:13 pm

I'm sure I'm making our money management more complicated than it needs to be. About twice a month I sit down for an hour or so to get the budget caught up to our spending. We're pretty comfortable financially so I don't have to keep as close an eye on the day-to-day spending as many do, but I like to have a rough idea of where we are so I can pull back the discretionary spending before it gets too out of line. Unfortunately this month I've made a large purchase which, although I know we have the money to cover it, is throwing my accounting system for a loop.

The problem is that I've got the cash money (non-investment) divided up into so many accounts (3 checking, 2 savings, 1 money market), and the budget divided into so many catagories (10 master catagories, 46 line items) that it sometimes gets tricky to confirm that the budget and the total amount of money is in sync. I'm in the process of consolidating the checking and savings accounts, so that should help matters significantly. On the budget I really like having the granularity of all the line items (for instance separate lines for phone, electricity, water rather than a single line for utilities), so I don't think I will change that much.

I use YNAB as my budgeting tool, and while on the whole I highly recommend it, you can't verify at a glance that the register and budget are in sync. They are disconned by design (which is helpful for people snowballing a large cc debt), but if you're not careful the amounts in the budget and the register can get out of sync. I finally set up a spreadsheet where I list all my account balances, add up the budget numbers and calculate the difference. The large purchase is throwing everything off because it ought to be paid for by money that is currently outside the budget software. According to the software I have used up all my primary income for August and am $3k overdrawn.

Currently we have $38k cash in hand, and a $17k credit card bill to pay in full this month ($13k due to the large purchase.) We normally have $10-$12k coming in each month. I need about $7k/mo to cover normal montly outflows. I save $835/mo toward semi-annual purchases, and set aside 40% of my contracting income each month toward taxes.

Currently my budget includes the following balances that absolutely need to stay in savings:
Taxes: $9k
Semi-annual bills: $5k
House/car repair reserve: $1k

I also have $9k earmarked toward near-term goals -- vacation, Christmas, updating the wills.

$4k of cash needs to go to last month's credit card bill, and we will spend our usual $7k this month.

I still haven't decided exactly where the money for $13k purchase is coming from. The original plan was to sell stock from my taxable investment account (currently $350k). But the market's been down and I've been debating about trying to cash-flow it instead, repaying my cash accounts when the market is a little more favorable. DH's ESPP just made a purchase, and the stock is currently on the high side, so another option would be to sell, which would bring in $12k. I don't track the investment account or the ESPP in the budget, so either way would represent an inflow.

I think I have enough on hand to be safe paying the cc bill out of current cash, but I haven't figured out how to represent paying it and then paying the budget back. Loose ends like this really bug me!