Halftime adjustment

[laurence]

Hey everyone. I turned 40 recently (DW just turned 39) and my goal is to retire at 55. Quick snapshot:

Wife and I both have climbed our respective ladders about as far as they will go, I'm in negotiations over a Director position in a megacorp and our combined income figures to clock in at ~$300k once that happens. 3 girls, 10, 7, and 4, oldest with special needs (Down Syndrome, high functioning). We are fast approaching our first big milestone of $1 million nw combined INCLUDING primary residence equity (hey, have to start somewhere). The struggle right now is....where do we put the money? We are getting pretty heavily taxed. Right now we are maxing our 401k plans, but otherwise we've been pretty well phased out of deductions, AMT the past two years. First world problems, our income was $100k less a few years ago. Right now we have:

~$400k mortgage on primary residence @3.5% - it's San Diego, it's really not an extravagant house, really.
~$250k mortgage on rental property @4.5% which is a townhouse next to the university we rent to college girls, it runs slightly cash flow positive.
No other debts.

I'm not sold on 529 plans, but I'm also loath to deal with after tax brokerage accounts/investments what have you for all the tax events. Do I pay off the rental? Every six months my wife gets a check from stock plan/profit sharing thing at work for $8-$10k. We also just stopped having a full time Nanny which will save us almost $2k a month as well, so just trying to figure out the best place to park the positive cash flow. Thanks!

 

[pb4uski]

My experience is if you have high W-2 income you just suck it up and take it on the chin. Other than maxing out 401k, HSA, backdoor Roth (if you can) there is not much you can do. Taxable savings and preferential tax rates on equity results was about all I had available to me other than 401k and HSA.

But... now that the IRS will allow people to roil after-tax 401k balances into a Roth, that may be a good play. If you're planning to retire at 55 you'll probably want a good dose of taxable savings as well to carry you from ER to 59 1/2.

No that I'm retired the one thing I think I underappreciated while I was working was to have diversification in tax attributes (taxable, tax-deferred and tax-free) as well as asset class diversification. It worked out well for us but more due to luck than planning.

 

[laurence]

Good point, I need to have some assets that won't incur income tax when I withdraw. So suck it up and get $100k in a non-tax sheltered account is a good medium term goal. Embarrassingly we only have the standard emergency few months living expense fund in regular savings right now. The investment property cleaned us out as we bought it less than two years ago.

 

[Dash man]

Have you done an estate plan? You may want to set up a special needs trust for your oldest to ensure their needs are met.
I also suggest you bite the bullet on an after tax brokerage account and learn how to deal with the tax issues. There are advantages to having after tax money rather than relying totally on retirement accounts that will affect your taxes when RMDs are required or health insurance is purchased before Medicare. You can invest in tax efficient funds or pick individual growth stocks to minimize taxable events, but it's really not all that difficult to manage. It's no harder to deal with stock/fund tax issues than it is rental properties.
It would also be prudent to build up your emergency fund to at least a one year level of expenses and a cushion for your rental property expenses. Personally, we have five years of expenses in cash or CDs so we can ride out a market crash, but we still have significant stock investments and rentals and are a bit older than you.

 

[Gatordoc50]

When the kids are old enough, employ them in your rental business. Pay them enough to fund their Roth. Obviously, you do not want to do anything that would interfere with your oldest daughters benefits so be careful there. Fund back door Roth for yourselves. Keep excellent records of your rental business expenses and carry forward your passive activity losses for future use.

 

[jerome len]

I'd think about a special needs trust for your oldest daughter. You could, I think, place a term life policy in it in case anything happens to you. We have a family member that is in the same situation; many parents, affluent grandparents, do this type of trust.

 

[ArkTinkerer]

"Back Door Roth" if your plan allows. HSA if possible.
If you enjoy and have time for more rentals they take your taxable income down in the early years via depreciation even if they have positive cash flow. BUT (big but there!) as you should already know its work and added stress, not a passive investment.

 

[rodi]

Howdy neighbor.

I agree with the backdoor Roth advice. Also - Roth contributions can be pulled out for qualified educational expenses - similar to a 529... so it can be used like a 529.... but also to fund the gap between retirement and tapping the tax deferred accounts. Flexibility is nice.

It can be challenging to max out savings and get ahead in an area where consumption is so much part of our culture. (SoCal). Don't buy into the new high end car every few years, expensive vacations purchased on credit, and decking the house out to compete with the neighbors. It's so easy to get tempted into that mindset. Working in Sorrento Valley I saw new grad engineers buying BMW's within a year of starting their first job - insisting that they deserved to live in Carmel Valley with a 3% down payment.... pretty soon their stuck. No possible way to get ahead. I went the counter-culture alternative of driving a beater car and not upgrading the house/neighborhood... and retired at 52. It's possible. But I know, from first hand experience, how tempting it is to spend a lot and feel like that is the only path because that's what everyone else is doing.

Max your savings through whatever vehicle you can - 401k, backdoor Roth, taxable accounts, extra mortgage principle... then spend time not at work enjoying your kids.

I also agree with the estate plan suggestions. I was very pleased with our estate attorney if you want her info. (She's located in Mission Valley.)

 

[laurence]

Rodi, please PM me your attorney info, this is definitely on our short list, we agree with all here, and our friends who we met through the Down Syndrome support group have already done so.

Backdoor Roth, I'm going to have to look that up because I'm not sure what that means. Anybody got a quick explanation? Thanks everyone, We'll be socking DW stock checks into our savings account and putting anything extra in there as well, that's the easy first step.

 

[Alan]

A backdoor ROTH is where you contribute to a non-deductible IRA (anyone can do that, no income limitation) then immediately do a conversion to a ROTH.

This works with little or no taxes due unless you already have significant before-tax money in your IRA's.

 

[rodi]

A backdoor ROTH is where you contribute to a non-deductible IRA (anyone can do that, no income limitation) then immediately do a conversion to a ROTH.

This works with little or no taxes due unless you already have significant before-tax money in your IRA's.

Yes - although I think there is a restriction about the number of traditional IRAs you have - you can't have multiple - so you need to consolodate any separate IRAs or rolled IRAs. At least that's what I remember... I never did it.

 

[rodi]

laurence - check your PM.

 

[Alan]

Yes - although I think there is a restriction about the number of traditional IRAs you have - you can't have multiple - so you need to consolodate any separate IRAs or rolled IRAs. At least that's what I remember... I never did it.

I don't know if there is a restriction on the number of IRA's you can have before doing a ROTH conversion on one of them (there could well be), but you do have to total up all the IRA's you had at the end of the tax year, and report the total basis. Then the amount that is taxed from the IRA you do the conversion from is apportioned according to the total basis and total before-tax values in all the IRA's.

 

[ProspectiveBum]

This works with little or no taxes due unless you already have significant before-tax money in your IRA's.

Wish I'd understood this before rolling an old 401k into a traditional IRA last year.

DW should still be able to do it, which will help some.

 

[MichaelB]

I'm not sold on 529 plans, but I'm also loath to deal with after tax brokerage accounts/investments what have you for all the tax events. Do I pay off the rental? Every six months my wife gets a check from stock plan/profit sharing thing at work for $8-$10k. We also just stopped having a full time Nanny which will save us almost $2k a month as well, so just trying to figure out the best place to park the positive cash flow. Thanks!

If your objective is to accumulate long term / multi-generational wealth, after tax accounts work. Broad market ETFs and some Vanguard funds keep the taxable income to a minimum and the cost basis will adjust when the primary account-holders pass on.

Also, as Rodi pointed out, keeping a lid on spending. This is challenging when income increases but is the real key to wealth accumulation.

 

[Alan]

Wish I'd understood this before rolling an old 401k into a traditional IRA last year.

DW should still be able to do it, which will help some.

Fortunately I was aware of this when I retired, but it is very easy to forget about it. I didn't like the 401k limited options I had but the only IRA I did have was a deductible IRA with a large basis so I held off rolling over the 401k until the following tax year, after I'd done the ROTH conversion.

 

[Brat]

My Mother funded a special needs trust account for a grandchild through ARC Oregon. The administration fees were very modest, particularly when compared to the cost of establishing your own. California appears to have a similar programs. Were I you I would contact Special Needs Trust Foundation in San Diego. Mother funded that account at her passing as a provision of her revocable living trust.

 

[laurence]

My Mother funded a special needs trust account for a grandchild through ARC Oregon. The administration fees were very modest, particularly when compared to the cost of establishing your own. California appears to have a similar programs. Were I you I would contact Special Needs Trust Foundation in San Diego. Mother funded that account at her passing as a provision of her revocable living trust.

Thanks for this tip, Brat. And thanks all, I had heard about the Roth conversion but wasn't familiar with the term, I'll look into that further.

As far as spending goes, this is the largest, most expensive house we'll ever own, and the hope/plan is to have the mortgage paid off right about retirement time. While the interest rate is super low, I'd like to have it done to reduce cash outflows in retirement. May rethink it if 10% T-bills return.

 

[rodi]

As far as spending goes, this is the largest, most expensive house we'll ever own, and the hope/plan is to have the mortgage paid off right about retirement time. While the interest rate is super low, I'd like to have it done to reduce cash outflows in retirement. May rethink it if 10% T-bills return.

I hear you on the expensive house thing. My situation was slightly different. We're older and knew for a fact that DH would be retiring around know. We planned on me retiring at 55 (I retired last year at 52). So we got a 15 year mortgage in 2003 and made extra principle payments on it. We refi'd in 2009, also 15 year - but kept making the previous payments. The goal was to have the mortgage gone by the time we retired. We diverted some money that would have gone to taxable accounts to extra mortgage payments. For us, it worked out... and as we got closer to retirement we accellerated the pay down even more... The benefit of that is that our spending shrunk correspondingly.... and that pulled in the retirement budget... which meant we needed less of a nest egg of investible assets to retire early.... Win win! But all of this was done in a zero interest rate environment... hard to have conservative investments that had the same payback.

Congrats on hitting the career jackpot - you and your wife have a nice income stream... So if you set your minds to it you can retire in 15 years.

 

[laurence]

I hear you on the expensive house thing. My situation was slightly different. We're older and knew for a fact that DH would be retiring around know. We planned on me retiring at 55 (I retired last year at 52). So we got a 15 year mortgage in 2003 and made extra principle payments on it. We refi'd in 2009, also 15 year - but kept making the previous payments. The goal was to have the mortgage gone by the time we retired. We diverted some money that would have gone to taxable accounts to extra mortgage payments. For us, it worked out... and as we got closer to retirement we accellerated the pay down even more... The benefit of that is that our spending shrunk correspondingly.... and that pulled in the retirement budget... which meant we needed less of a nest egg of investible assets to retire early.... Win win! But all of this was done in a zero interest rate environment... hard to have conservative investments that had the same payback.

Congrats on hitting the career jackpot - you and your wife have a nice income stream... So if you set your minds to it you can retire in 15 years.

Turning 40 was like hearing the bells ring midnight at Cinderella's ball. I feel like time is quickly running out to make our financial goals for 55. Even with the house paid off, San Diego is expensive.

 

[Ed_The_Gypsy]

My Mother funded a special needs trust account for a grandchild through ARC Oregon. The administration fees were very modest, particularly when compared to the cost of establishing your own. California appears to have a similar programs. Were I you I would contact Special Needs Trust Foundation in San Diego. Mother funded that account at her passing as a provision of her revocable living trust.

Wow, Brat!

That is seriously important information for a few folks. Would it be possible to put your post in the stickies?

Ed
12 hours left in Baku

 

[MichaelB]

Wow, Brat!

That is seriously important information for a few folks. Would it be possible to put your post in the stickies?

Ed
12 hours left in Baku

Hey Gypsy Ed, enjoy that last half day..

Perhaps we can put that link and post in the FAQ section.

 

[Brat]

Absolutely make my post and additional info a sticky. Keep in mind that the grantor may need to establish the SNT account before passing, at least that is what my Mother did. It may depend on the requirements of the pooled trust selected. The ARC of Oregon SNT establishment was funded by the Fred Meyer Trust about 10 years ago. I remember that the maintenance fee was modest. A pooled trust is managed conservatively, so they say. Folks on this forum who are considering that route and have more than one option (the beneficiary must live in the state where the trust is established) may want to look at a fund's holdings.

 

[laurence]

Absolutely make my post and additional info a sticky. Keep in mind that the grantor may need to establish the SNT account before passing, at least that is what my Mother did. It may depend on the requirements of the pooled trust selected. The ARC of Oregon SNT establishment was funded by the Fred Meyer Trust about 10 years ago. I remember that the maintenance fee was modest. A pooled trust is managed conservatively, so they say. Folks on this forum who are considering that route and have more than one option (the beneficiary must live in the state where the trust is established) may want to look at a fund's holdings.

Brat, thank you so much, just emailed the link to my wife. This board continues to pay off!