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On my way...I think
Old 07-08-2016, 11:15 AM   #1
Confused about dryer sheets
Join Date: Jul 2016
Location: Phoenix
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On my way...I think

Hello all! I'm a 42 year old ex-teacher. I left teaching because of the red tape, but now jokingly call myself retired. My husband is a 40 year old software engineer or developer or something. We have two daughters, 10 and 15 years old, but since they're both in school all day, I spend a lot of my time plotting early retirement for my hubby. I do have specific questions and I'm not sure if this is the place for them, but I'm already here so I'll keep truckin'.

I have what I think is a pretty solid plan for hubby to retire by age 55. We're currently maxing out 2 IRA's every year (currently at about $53k total) and putting almost $18k annually into his 401k (currently $71k). We got a late start in the early retirement game, but I think we can make our goal. We're also planning on having the house paid off by then (owe about $122k right now) and we can live frugally once our leeches...I mean daughters...are out of the house.

Here's where things get a little sticky. We get a check for $5k from my mother in law every month. Thanks to the lifetime family gift tax exemption (or whatever it's called), this money is tax free. We've been putting it into a personal investment account, using Vanguard's total stock and bond index funds, and we're up to about $80k in that account. We never asked for the money from my mother in law and don't want to count on it, but we have every reason to believe it will continue coming in. With the extra money from MIL, I think hubby will be set to retire at age 50. The way I figure it, even if we have to spend a bit of that money on emergencies, we can invest an average of at least $4k a month. At a 7% return, that should give us $750k or more. Since we would have the 401k and IRA's just sitting there compounding for the next 9.5 years, I don't think we'd mind drawing down the principal on our $750k personal fund a bit before being able to access the retirement accounts. Plus, it's likely that the monthly $5k from MIL would continue during early retirement or, God forbid, we would receive a hefty inheritance at some point. So many if's though, which is why I keep up the payments to the 401k and IRA's. If the money from MIL dried up today, we would still have a solid footing.

So here's my question. Since the money from MIL is tax exempt, would it make more sense for us to sock all the money we possibly can into hubby's 401k and the HSA, and then use the money from MIL for living expenses? Our tax bill would be lowered significantly now, but later we would lose the flexibility of having money in a personal account and would have to navigate ways to withdraw retirement funds early. Is the tax savings now worth the inflexibility later? And am I thinking of this all wrong, would it not save us anything in taxes after all? I think I do okay with finances, but taxes absolutely boggle my mind. Plus relying on the money from MIL in any way makes me nervous, but it might be worth it if the tax savings made sense. Or should I just leave well enough alone?

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Old 07-08-2016, 11:39 AM   #2
Confused about dryer sheets
Join Date: Jul 2016
Location: Phoenix
Posts: 2
Haha, well there's something to be said for research. I've answered my own question. I was looking at the $53k maximum total contribution for 401k's and was using that in my question. We put in $13k currently and hubby's employer contributes the other $5k. I know the max we can personally put in is $18, and max with employer contributions is $53k, but I thought I read somewhere that there is a way to personally continue contributing up to the $53k. Now I can't find that, so I guess I misunderstood. Never mind my last paragraph above

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Old 07-08-2016, 12:00 PM   #3
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I have not had the opportunity to use it myself, but if his plan allows it, you can make after-tax contributions to top the 401k off. Here is an overview from a morningstar writer: Should You Make Aftertax Contributions to Your 401(k)?

Because I've not used it, I've not really thought through all the tax implications. I know that it has been discussed fairly extensively on Bogleheads.

Note that your M.I.L. is legally obligated to file a reporting return with the IRS for gifts to a single person in excess of 14,000 a year. That reduces her Estate Tax exemption....
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Old 07-08-2016, 12:16 PM   #4
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I'm having trouble following your original post. Could you clarify or clean it up a little?

For example annual W-2 income

Money from family

current debts
projected future expenses..and current expenses
college funding for daughters...

I've happy to give my advice but not if I have to scratch my head trying to figure out your numbers.. This is basic info you will need to do any meaningful future planning.
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Old 07-08-2016, 12:44 PM   #5
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I haven't done the math but my initial reaction is your plan sounds tight. Have you figured in college costs? With 4 people in the household, your MIL can gift up to $56k per year (if $14k per person) without worrying about gift tax complications.
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Old 07-09-2016, 06:07 AM   #6
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One thought to consider is-if your MIL were to need costly long term care and exhaust her assets, there is a 5 year lookback(read clawback) of gifts, so you could be required to pay for her stay in a nursing home up to the amount of money she gave during that five year period. In other words the state would not pay for her stay up to the number of months it would take to exhaust that sum. Hopefully though, her assets are so great that she would not exhaust her assets in five years for a nursing home stay. Other than this concern it seems as though maxing your pretax plans with your husbands income and then investing the excess in taxable accounts (after addressing your DD's education needs) would be prudent. If the funds suddenly dried up you would not have placed yourselves in an untenable situation. Has your DH spoken with his mother about her financial situation in detail and her ability/intentions for this transfer of wealth?

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