I've asked this before a while back, but I am getting married in 2 weeks and want to

[jackster1232002]

Hello all. I am getting married in 2 weeks (get to file as married yay!) and I have a few questions about investing for our retirement.

some details:

Combined annual income last year was 85k; 60k and 25k.

We have a mortgage at 3.75% for 15 years. Currently paid off an equivalent of 1.5 years (I've been doubling our monthly payments so that we will pay off our home earlier, before 2020). Loan is currently at 70k.

I currently Have 30k in a mutual fund (american funds...I know it wasn't the wisest choice, but I was young and I didn't know better).
Currently I have a SEP-IRA plan where my employer contributes and additional 12% to a retirement account currently at 20k.

My fiance has something similar 401-k but she doesn't/hasn't contributed yet. Her employer does contribute 5% (at her age, but will double to 10% when she gets older) of her annual income without her contributing anything.

We have an emergency fund.

No debt except a few thousand in 0% APR CC's that we got to pay off the wedding.

No car payments and no student loans.

We have 20k liquid now.

5 Year Action Plan:

I plan to start a ROTH-IRA in the next couple of months (probably after the honeymoon and the wedding when I know we are more financially stable). We unfortunately won't be maxing this out. Perhaps 100 to 250 a month to start off with.

The home we are in is a HUD home and under the agreement, we have to live here for at least another 18 months. With this in mind at the end of the 18 months I will be renting out the home. For the purposes of this exercise let's say the rent will be $1000 a month after taxes and fees. The town I live in is a college town. My house is relatively close to campus (10 min drive). I do not see vacancy will be an issue if the price is right.

Since I'll be renting out that home I'll be purchasing another HUD/Fannie Mae property (for the sake of easy math let's say 100k). 20% down payment would be paid to avoid POI and to keep interest down. Slush fund of 10k would be set aside for any necessary home improvements as well.

I will also be selling the american fund mutual funds (it's class C... I know another bone head mistake...) within the 5 year time period. When I do this is still up in the air. As the new home purchase in the next 18 to 24 months may have an impact.

Here are my questions:

When should I sell my mutual funds? At the very least I know I need to switch them to Vanguard ASAP just to get lower fees.

Should I sell my mutual funds and max out my Roth IRA? If I do it now I can put 5.5k in 2013 and 5.5k for 2014.

When I sell my mutual funds and reinvest in vanguard mutual funds, when I purchase the 2nd property and need more cash than we have on hand, what penalties would I incur if I sell off a few shares?

Dumb question but I assume when I reinvest it should be A class funds with vanguard?

If one day we do exceed 181k (or whatever the limit for ROTH is at that time), what do we do then? Start a T-IRA?

Please any other financial advice would be very very helpful.
Thank you all.

 

[growing_older]

Dumb question but I assume when I reinvest it should be A class funds with vanguard?

There is no such thing as a Class A Vanguard fund. The Class A, B, C thing is a way to describe how the sales load is paid, upfront, contingent deferred or ongoing. Since Vanguard no-load funds have no sales load, there is no Class A, B C.

The closest thing available is "Admiral Shares" which is Vanguard reduces the already low expense ratio of many funds if you have at least $10,000 in that fund. This is not the same as A, B, C and the ER is already pretty low for all share classes.

 

[jackster1232002]

Ah... I just read up on it and it makes sense. Yes I'll be moving to admiral funds from the American Funds class C.

Any thoughts on the rest of my 5 year plan?

 

[Animorph]

If one day we do exceed 181k (or whatever the limit for ROTH is at that time), what do we do then? Start a T-IRA?

Please any other financial advice would be very very helpful.
Thank you all.

Once your taxes hit the 25% bracket consider adding more to 401k, even if that means using "your" money in your spouse's account. Same thing for SEP IRA if possible, but I haven't used one. At that point you need to check what your tax rate will be in retirement when pulling out RMD's. If your future marginal tax rate is equal to or less than your current rate, continue maxing out Roths. If you have after-tax savings, put it into Roths. If your tax rate is higher than it will be in the future, use your 401k/SEP IRA to defer current taxes and take the money out later when your taxes are lower. But you should have plenty of time before you need to think about that.

After your combined income hits the Roth contribution limit you need to use the "backdoor Roth" scheme. Contribute to a non-deductible IRA and convert quickly to a Roth. Effectively the same as a normal Roth contribution, but with an added step to get around the income limit. The big gotcha with that is that you have to pool all similar IRA accounts in your own name when calculating the Roth conversion tax basis. So you will want to avoid creating traditional IRA accounts. I don't think a SEP IRA would count towards that, but you'll have to check.

 

[panacea]

I actually would not rush to replace your American Funds if you own A shares. You've already paid the upfront commission and although the expense ratios are a bit higher they are well below average. Compare the long-term returns (5, 10 and 15 years) net of fees and depending on the particular funds you own, you may be surprised.

Yes, when you make too much money to qualify for a Roth, you can still do nondeductible Traditional IRAs.

 

[panacea]

Once your taxes hit the 25% bracket consider adding more to 401k, even if that means using "your" money in your spouse's account. Same thing for SEP IRA if possible, but I haven't used one. At that point you need to check what your tax rate will be in retirement when pulling out RMD's. If your future marginal tax rate is equal to or less than your current rate, continue maxing out Roths. If you have after-tax savings, put it into Roths. If your tax rate is higher than it will be in the future, use your 401k/SEP IRA to defer current taxes and take the money out later when your taxes are lower. But you should have plenty of time before you need to think about that.

After your combined income hits the Roth contribution limit you need to use the "backdoor Roth" scheme. Contribute to a non-deductible IRA and convert quickly to a Roth. Effectively the same as a normal Roth contribution, but with an added step to get around the income limit. The big gotcha with that is that you have to pool all similar IRA accounts in your own name when calculating the Roth conversion tax basis. So you will want to avoid creating traditional IRA accounts. I don't think a SEP IRA would count towards that, but you'll have to check.

I'm 99% sure the SEP-IRA would mess up the backdoor Roth. But maybe DW could still do it.

 

[jackster1232002]

I actually would not rush to replace your American Funds if you own A shares. You've already paid the upfront commission and although the expense ratios are a bit higher they are well below average. Compare the long-term returns (5, 10 and 15 years) net of fees and depending on the particular funds you own, you may be surprised.

Yes, when you make too much money to qualify for a Roth, you can still do nondeductible Traditional IRAs.

thanks. But they are C shares, thus me wanting to sell them soon.

 

[panacea]

Oops- sorry missed that important piece of information. In that case I don't blame you!

 

[jackster1232002]

Once your taxes hit the 25% bracket consider adding more to 401k, even if that means using "your" money in your spouse's account. Same thing for SEP IRA if possible, but I haven't used one. At that point you need to check what your tax rate will be in retirement when pulling out RMD's. If your future marginal tax rate is equal to or less than your current rate, continue maxing out Roths. If you have after-tax savings, put it into Roths. If your tax rate is higher than it will be in the future, use your 401k/SEP IRA to defer current taxes and take the money out later when your taxes are lower. But you should have plenty of time before you need to think about that.

After your combined income hits the Roth contribution limit you need to use the "backdoor Roth" scheme. Contribute to a non-deductible IRA and convert quickly to a Roth. Effectively the same as a normal Roth contribution, but with an added step to get around the income limit. The big gotcha with that is that you have to pool all similar IRA accounts in your own name when calculating the Roth conversion tax basis. So you will want to avoid creating traditional IRA accounts. I don't think a SEP IRA would count towards that, but you'll have to check.

I can't contribute to the SEP-IRA it is 100% employer contributed only. If I could contribute more into it I'd max it out. As far as my spouse's 401k, we are limited to 2 or 3 options. Also I am not sure the employer does any type of matching since the employer already does the 5% contribution without us having to put any money in.

From what I understand because my spouse and I do not contribute and moneys towards the retirement funds through our employment, we can go ahead and put the full 5.5k into ROTH IRA. Just want to know if I should sell out my mutual funds and invest fully in it now. And the rest into an admiral fund through vanguard.