What to do with raise?

[madcityacct]

Hi everybody. Thanks for providing the forum. First post - so here goes:

I'm about to receive an 11K raise. Given the following scenario - what would you do with the $$?

33, Married, wife 27, one 2 year old child. Current combined NET income 72K.

ASSETS

• 50K in cash savings (add ~9K per year)
• 50K in 403B (all contributions provided by employer, 5,300/yr)
• 2K in DW's 401(k) (100% match to 3%, 50% for the next 2, funded to match)
• 27K in my ROTH (FFNOX, contribute 5K/yr)
• 4K in DW's ROTH (YACKX, contribute 5k/yr)
• 23K in taxable IRA (FBALX, no contributions)
• 4K in Deferred Comp plan (emerging markets, contribute 1K/yr)
• 4K in taxable Vanguard acct (VWINX)
• 4K in sons 529 plan (contribute 1,500/yr, others have gifted money)

DEBTS

• 162K on 3% interest mortgage(family loan). Already prepaying $550/month. About 10 years left at this rate.

Thanks for any advice. Let me know if you have any additional questions!

 

[travelover]

Max out 403 (b) to match
Max out Roth
Max out 403(b) to limit
Contribute to a taxable account invested in equities index fund (Like Vanguard Total market)

What I wouldn't do is escalate my lifestyle. Many of us got here because we pretended that we never got those raises and diverted them to investments.

 

[bizlady]

You don't say if your income is yours or you and your wife. Especially, if all yours, get 6-8 months of expenses in savings. Make sure you have adequate life insurance for both of you. Then ditto to the above post.

 

[chris2008]

When you have received the first payment of the raise I would recommend to spend some of it to celebrate with DW. Think of a nice evening at a theater play, movie or dinner.
Not to establish a new lifestyle but to celebrate that you 2 are making progress.

 

[landonew]

You don't say if your income is yours or you and your wife. Especially, if all yours, get 6-8 months of expenses in savings. Make sure you have adequate life insurance for both of you. Then ditto to the above post.

He has $50k in cash savings.

 

[Ed_The_Gypsy]

You don't say if your income is yours or you and your wife. Especially, if all yours, get 6-8 months of expenses in savings. Make sure you have adequate life insurance for both of you.

.
+1

In addition, make sure you have good disability insurance. You are much more likely to become unable to work than to die. This will take some research. Talk with an independent broker. Maybe two. Find one you feel good talking to.

Take a SMALL treat. A simple dinner out has the same impact as an expensive dinner.

Then, pay off the debt.

 

[ziggy29]

What's a "raise"?

Seriously, though, the most important thing (IMO) is to avoid the "lifestyle creep" that comes with a sudden increase in income. Put most of the after-tax increase away on "autopilot" into savings and investments before it ever hits your checking account.

 

[madcityacct]

Thanks everybody. Didn't think about disability insurance. I'll have to look in to that - they offer it at work.

Guess the rest of it boils down to invest it or pay down the mortgage. (and I've read those threads!)

 

[seabourne]

Would there be a tax event if you roll your taxable IRA into a Roth? might be good use of the funds (I've never used either, so I'm not sure of the rules or ramifications, but your tax-protected earnings in the IRA would be rollable?)

Diability insurance with a child is a good idea. beyond that I'd look at adding funds to the 403b perhaps if you like the choices, and to the taxable investment account otherwise.

 

[ziggy29]

Would there be a tax event if you roll your taxable IRA into a Roth?

There would be no tax consequences on the contributions already taxed. Any appreciation that has not been taxed would be taxed at the time of conversion.

So if you made $20K in taxable IRA contributions and the account is now worth $30K, a Roth conversion would trigger tax on the $10K in appreciation (which has never been taxed).

If the taxable IRA's current balance is less than the amount of after-tax contributions, then there would be no tax liability as I understand it.