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 Post subject: Should I max out all tax deferred accounts?
PostPosted: Thu Dec 06, 2012 8:53 am 

Joined: Tue Oct 20, 2009 11:43 am
Posts: 26
I have been a frequent visitor to this site for years and have used what I learned for a lot of my personal finance decisions. However, I have a specific situation that is somewhat unique to me and I am torn about how to proceed.

Simply put, should I be maxing out all of my tax-deferred account options?

Background:

* Age 33, Wife age 31
* I'm self-employed (make roughly $170,000 per year give or take) with a SEP IRA account with Vanguard with about $95,000. The max I will be able to contribute for 2012 is roughly $33,000.
* My wife is a teacher (makes $50,000 per year) in NYS with a very generous pension and retiree medical plan (although the retiree medical plan is not nearly as a sure thing as the Pension is). The pension plan will replace roughly 60% of the average of her 3 highest paid years if she works until age 55.
* My wife has a 403b plan she can contribute towards (no match) and I believe the max for 2012 is $17,000. There is currently only about $6,000 in this plan. We haven't contributed to this account in years because I have yet to max out my SEP IRA and I beleive my investment options are much better than in her 403b plan.
* My wife is currently pregnant with our first child.
* I have $15,000 in an emergency fund.
* Just bought a newly constructed house with 20% down and have a mortgage of about $270,000. No other debts (no student loans, cars are paid for- mine is a 2012 and hers is a 2008 and we plan on owning each for 10 years). The house is a little pricey but since it is brand new from a quality builder we won't have to do any renovations (at least for 15+ years) and the maintenance should be relatively inexpensive compared to the 1960's home we moved from.

Basically I am wondering if I should be maxing out both my SEP IRA ($33,000) and her 403b (17,000) each year? I believe we make to much for a ROTH IRA or a Trad IRA. Part of me hates to lock up all of that money in a retirement account but at the same time I don't want to lose out on an opportunity to invest for retirement if it makes financial sense to do so.


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 Post subject: Re: Should I max out all tax deferred accounts?
PostPosted: Thu Dec 06, 2012 9:02 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
Do you want to retire? Are you a pessimist or an optimist? When do you want to retire?

What is the point of saving?

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Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Should I max out all tax deferred accounts?
PostPosted: Thu Dec 06, 2012 9:24 am 

Joined: Mon Nov 01, 2010 5:15 pm
Posts: 1151
Quote:
Basically I am wondering if I should be maxing out both my SEP IRA ($33,000) and her 403b (17,000) each year? I believe we make to much for a ROTH IRA or a Trad IRA. Part of me hates to lock up all of that money in a retirement account but at the same time I don't want to lose out on an opportunity to invest for retirement if it makes financial sense to do so.

Sounds like you are in fine shape. If I were you, I would max out those accounts.


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 Post subject: Re: Should I max out all tax deferred accounts?
PostPosted: Thu Dec 06, 2012 9:34 am 

Joined: Tue Oct 20, 2009 11:43 am
Posts: 26
Bichon Frise wrote:
Do you want to retire? Are you a pessimist or an optimist? When do you want to retire?

What is the point of saving?


Yes I would like to retire by age 55...sooner if possible or at least be financially independent by then. I enjoy work but I would like to have the option to pursue other interest (volunteer, travel, etc.).

I guess I am more of a pessimist when it comes to money and long-term job stability. I worry that something will happen that will make me not able to provide for my family and now that I have a child on the way I think about it even more. My ultimate goal is to be financially independent so that I can be free of these worries...I may still end of working but it would be nice to know I would be set if something happend to my income stream.

My gut reation is to max out all tax deferred accounts and then save as much as possible in taxable accounts but I am not sure locking up that much money in tax deferred accounts makes sense or not.


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 Post subject: Re: Should I max out all tax deferred accounts?
PostPosted: Thu Dec 06, 2012 9:54 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
cusetownusa wrote:
Bichon Frise wrote:
Do you want to retire? Are you a pessimist or an optimist? When do you want to retire?

What is the point of saving?


Yes I would like to retire by age 55...sooner if possible or at least be financially independent by then. I enjoy work but I would like to have the option to pursue other interest (volunteer, travel, etc.).

I guess I am more of a pessimist when it comes to money and long-term job stability. I worry that something will happen that will make me not able to provide for my family and now that I have a child on the way I think about it even more. My ultimate goal is to be financially independent so that I can be free of these worries...I may still end of working but it would be nice to know I would be set if something happend to my income stream.

My gut reation is to max out all tax deferred accounts and then save as much as possible in taxable accounts but I am not sure locking up that much money in tax deferred accounts makes sense or not.


I've shared this quote many times here before, but it bears repeating. "Growth for growth's sake is the ideology of cancer."

It's important to have goals. And a plan to achieve those goals. I'd start working on one of these with your spouse and you can answer the questions for yourself rather than take advice from random people on the internet.

http://www.bogleheads.org/wiki/Investment_Policy_Statement

BTW, assuming you have no other IRA funds, the ROTH IRA is available to you and your wife. Not sure how the SEP-IRA plays in.

Most people here will tell you to save as much as you can. And that is very vague and ambiguous. There are 2 ends to the spectrum: 1) Run as fast and long as you can until you keel over, 2) take a step out of the gate, get distracted and never take another step. I think it is important to find a balance or happiness today and happiness down the road. This means, do some traveling now, do some volunteer work now, but make sure you are working towards your future goals as well. Buy the nice house (which you have done), etc. No sense punishing yourself now, just to die 6 months after you "retire."

This all works into your investment plan obviously, and as time goes on, things get tweaked and priorities change.

Good luck.

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Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Should I max out all tax deferred accounts?
PostPosted: Thu Dec 06, 2012 10:32 am 

Joined: Fri Jun 25, 2010 3:06 pm
Posts: 81
It depends on what you want to do with the money. You are in a high tax bracket so putting it away in tax deferred accounts makes sense. However, if you want to expand your business, that would be another way to invest. Basically, maxing out the retirement account should be your default action if you have no other plan. But if you have another plan you can follow that instead.

Also, pay of the home as fast as possible. Once the mortgage is paid off you'll have more money than you know what to do with even after maxing out retirement accounts.


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 Post subject: Re: Should I max out all tax deferred accounts?
PostPosted: Fri Dec 07, 2012 10:42 am 
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Joined: Wed Sep 23, 2009 9:01 am
Posts: 5356
You seem to be in pretty good shape. And I don't see anything fundamentally wrong with what others have said.

I think if it were me I'd pay a good $1000-$1500 extra per month toward the mortgage IF the rate is more than 4%. If the rate is less than that I would start stashing that same $1000-$1500 a month in a quality bond fund (non-leveraged, intermediate term) to offset the mortgage balance. If you do that and only earn 4% return you'll have more than the mortgage balance in 10 years or less. At that point you can decide whether to just pay off the mortgage or use it as an arbitrage by paying the mortgage payment from the interest you get on that account.

I'd also suggest you start saving some additional money in taxable accounts. Part of that is based on a basic belief that I have that tax rates are headed higher in the future even if not next year. You are in a high tax state as well.

I don't know what your budget/cash flow situation looks like but I think doing both of those things above AND maxing out the tax deferred accounts (or nearly) is possible, though likely a stretch. Maxing the TD accounts takes $50000 in top line income or about $30000 after considering the tax benefit (assuming 40% total rate). Another $18000 each for mortgage prepay and taxable investing puts you at $66000 savings on $225,000 income. That's a little high but feasible. (Our total savings on around the same income this year has been about $62000.)

I'd also caution that you want to look closely at your wife's 403(b) before committing too much to it. SOME 403(b) plans are so bad they are almost abusive. Make sure you understand the fees and restrictions.

It's also important to know whether your wife will continue to work. You said she is pregnant with your "first" child. If you plan to have more and she plans to stay home with them, there is little point in talking about her pension and putting this plan in place because your income will be lower and her pension will not be there. Similarly, if she will be working but you'll be paying for day care on a half dozen younguns...well, there won't be cash for funding much of anything. (No value judgement here, just making sure you don't get yourself into a plan that you can't realistically follow through on.)

Good luck.


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 Post subject: Re: Should I max out all tax deferred accounts?
PostPosted: Fri Dec 07, 2012 11:49 am 

Joined: Tue Oct 20, 2009 11:43 am
Posts: 26
Thanks everyone...your input has been helpful. Bichon, I will be putting together a formal plan with my wife...thanks for that link.

ABout the 403b...that was my concern as well. The 403b plan for NYS teachers is controlled by the Union and it is notoriously bad. A few years back they got in trouble for receiving kickbacks from ING so that ING got to be the preferred provider...unfortunately for the teachers the fund options all had a fee of at least 3%. I have been trying to find a low cost index fund option but it is a pain to get fee information from her 403b advisor. Until I find something I like I would rather not put our money there.

My mortgage rate is below 4% so I will take your idea and set up a bond fund...once this fund reaches the value of the mortage principal I will decide then if it is worth paying off. Right now we have been living off of my income and putting her's into an online savings account...I may start putting this into a bond fund. Our monthly budget cash flow has plenty of cushin in it to allow this.

Luckily we have family (parents) nearby (within a few miles) that said they would watch our baby so this will save a ton on childcare. My wife may take off a half a year though while the baby is little so we will just have to suspend our "mortgage pre-pay account" contributions during that time.


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 Post subject: Re: Should I max out all tax deferred accounts?
PostPosted: Fri Dec 07, 2012 12:23 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
You should be realistic about whether your wife will go back to work or not. You should also approach the topic carefully with your wife, as very few modern day american women like to be told to do anything when it comes to their career. BUT, just from observations, many women say they want a career and want to continue to work, but a significantly smaller number continue to say so once their first child pops out. And my guess is, even more, would opt to stay at home with the baby if they could more or less maintain their current lifestyle, even if it means delaying the retirement plan(s) of their spouse. But, some also find value in going to work, and there is nothing wrong with that either.

Just be prepared for that. As I have watched numerous friends who thought they wanted to have a career throw it to the wayside for the children. My personal favorite was my friend who wanted to be a lawyer and her husband worked hard to put her through law school doing construction. Once the first kid came, he was back to doing construction.

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"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Should I max out all tax deferred accounts?
PostPosted: Fri Dec 07, 2012 12:50 pm 
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Bichon Frise wrote:
BTW, assuming you have no other IRA funds, the ROTH IRA is available to you and your wife. Not sure how the SEP-IRA plays in.


He said their combined income is $170,000+$33,000=$203,000 which is greater than the contribution limit. I suppose they might be able to do some kind of backdoor rollover or something if that's what you mean.


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 Post subject: Re: Should I max out all tax deferred accounts?
PostPosted: Fri Dec 07, 2012 12:57 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
DoingHomework wrote:
Bichon Frise wrote:
BTW, assuming you have no other IRA funds, the ROTH IRA is available to you and your wife. Not sure how the SEP-IRA plays in.


He said their combined income is $170,000+$33,000=$203,000 which is greater than the contribution limit. I suppose they might be able to do some kind of backdoor rollover or something if that's what you mean.


yes, that is what I meant. Also, why I specified that they can have no other IRA (or will have to do a conversion pro-rata) and that I don't know if a SEP-IRA messes it all up. It being a "backdoor" roth.

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Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Should I max out all tax deferred accounts?
PostPosted: Fri Dec 07, 2012 1:12 pm 
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Joined: Wed Sep 23, 2009 9:01 am
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Bichon Frise wrote:
DoingHomework wrote:
Bichon Frise wrote:
BTW, assuming you have no other IRA funds, the ROTH IRA is available to you and your wife. Not sure how the SEP-IRA plays in.


He said their combined income is $170,000+$33,000=$203,000 which is greater than the contribution limit. I suppose they might be able to do some kind of backdoor rollover or something if that's what you mean.


yes, that is what I meant. Also, why I specified that they can have no other IRA (or will have to do a conversion pro-rata) and that I don't know if a SEP-IRA messes it all up. It being a "backdoor" roth.


Yep. That's what I thought you meant. I was just trying to look that up but can't really find a clear answer. SEP-IRAs are IRAs...except when they are not. I do know that I used to have a SEP-IRA but when it was rolled over to a new custodian it automatically became a plain old IRA so I'm guessing that they are the same except that a SEP-IRA has different contribution limits.


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 Post subject: Re: Should I max out all tax deferred accounts?
PostPosted: Fri Dec 07, 2012 1:21 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
I actually suspect that a SEP-IRA would not tangle anyone up in doing a "backdoor" Roth, as far as the pro-rata rule is concerned, if one truly can roll it over to a tIRA. Where you would most likely get tangled up is if you are able to contribute to any other IRA at all if you contributed to a SEP-IRA in the same year.

All speculation at this point. I may find the will power to look it up...

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Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Should I max out all tax deferred accounts?
PostPosted: Fri Dec 07, 2012 1:24 pm 

Joined: Fri May 04, 2012 2:23 pm
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Seems the answer to the SEP-IRA and another IRA in the same year is a yes. Sorry, I'm not too familiar with SEP-IRA's as I have never (and hopefully never will) used them.

http://fairmark.com/forum/read.php?2,27648

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Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Should I max out all tax deferred accounts?
PostPosted: Fri Dec 07, 2012 1:37 pm 

Joined: Fri May 04, 2012 2:23 pm
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Looks like my suspicion about SEP IRA's not tangling you up in a back door roth is wrong. If the OP makes a contribution to a non-deductible IRA, they will have to convert it pro-rata along with all other IRA's, SEP included.

Seems like he could do a solo 401k and roll the SEP IRA into the solo 401k and then be in the clear though....

http://thefinancebuff.com/the-backdoor-roth-ira-a-complete-how-to.html

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"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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