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Where to save the “extra” money?

April 20, 2021

In looking at our projected spending, income, and savings for the year, there was a sum that is not yet allocated to a goal. It is on the order of $15k.  I presumed we’d save it, but didn’t yet have an immediate place to save it. There are a few options here.

  • a) Accumulate cash? Comforting and the default option if I do nothing else – but not really necessary.
  • b) Follow my savings priorities and go for megabackdoor Roth.  Yes, probably, just have to get over the hump of figuring this out. In fact, we already had prioritized this over the pre-tax 403b, but I hadn’t actually implemented it.
  • c) Fund a 529?  Limited benefit to this over the above option, but it really does feel good to do it.
  • d) Accelerate the last few remaining big house projects, which include windows and a fresh coat of paint.

My vote was for option b, T’s vote was for option d.  Then Sarah posted this food for thought about Roth versus traditional, and option e was added to this list:

  • e) Change some of our already planned pre-tax savings to Roth, and pay the additional taxes.  Additional taxes on $19,500 are about $6,500 (Federal 24% + state 9.3%).  

This also brought up the issue that we need somewhat significant Roth contributions in order to pull off my idea for college savings. We’ve always somewhat assumed we’d ramp up college savings when full time daycare years were over, and also, that we probably could cash flow much of college (because it is cheaper than daycare!) if we don’t retire early…  so this isn’t a huge issue. Still, starting earlier is always better, and cash flowing college is not compatible with keeping early retirement as a viable option.

My immediate reaction to option e at $19,500 and 6,500 was “yuck!’. Our decision making is somewhat limited by having no real plan for what we are trying to accomplish.  What are we going to do with our life, in terms of retirement? Again, we have options and ideas, but no plan.

1) Move to a low cost area and retire early, traditional FIRE.  We have no serious plan to do this, but like to think it is an option. If this was our true plan, then dumping everything pre-tax is the right option… But we still need to have funding for the first 5 years.  We have money 457bs that we could access, but would pay normal income taxes on. We have a small amount of Roth contributions – maybe one year’s worth of expenses.  

2) Save until we can RE here  Retiring early here is possible, but will take a significant amount of additional time since it takes a relatively large budget for things like property taxes. A high yearly budget makes some of the “typical” fire strategies for tax advantages work differently. I have not sorted out exactly how, but I’m positive we’ll pay WAY more taxes than the “no taxes!” strategies some can pull off.

3) We both work until normal-ish retirement age.  It is reasonably likely that one or both of us will work until a normal retirement age. We like our jobs and they are rewarding, and earning income makes living in this area easy.  I don’t usually have a huge desire to RE, but I want that option to be there. And we could easily change our mind. In this case, the tables tip towards spending on things now, particularly things that we will enjoy, and trying to improve life that way.  (Will we really get much enjoyment out of new windows, though?)  This also raises the issue of Required Minimum Distributions if we keep on saving.  I always assumed that if I was old and complaining about having to pay too much in taxes, then it basically meant things have worked out for us, and it is fine. That is kind of an unsophisticated point of view, I guess, but it is easy to make this a future-me problem.

4) One of us has a career that ceases to “work” in the next 10 years and decides to RE.  My job is the less stable of the two, but who really knows?  If just one of us works in the future, we could potentially save post-tax money at a slightly lower income.  Probably not significantly less – we are talking 22% bracket instead of 24% bracket. This is really not a big thing, except that our savings power would drop significantly and we’d be less likely to end up with huge excess sums in retirement.

5)  We pull up roots and abandon this country for a life elsewhere. I don’t really want or expect to do this – but it could be preferable to staying at some point.  The main thing in this scenario is that I would regret investing in our home.  These aren’t superficial improvements, but it is really hard to think they’d have a significant impact on home sale price.

After writing all of that out, it seems obvious that funding more post-tax money should take priority over some of the pre-tax savings, even if we do choose to do windows this year too. Most of these paths lead to this answer. It will give us more tax flexibility, at minimum.

This is not the answer that I want to come to, though it is not a surprise.  I had somewhat assumed we could ramp up the after-tax portion of our savings when daycare expenses dropped off. I vaguely thought we could use a 72(t) to take care of any oversaving in the pretax accounts, if needed.  Maybe that is still a fine plan, but more tax diversification seems very desirable. I have not really considered tax impacts of RMDs in any detail.  I’m going to think about it a bit longer, but really, I already made this decision in 2018 and just have not yet pulled the trigger.

Savings Priorities (from 2018 and still today):

  1. Mandatory pensions savings (pre-tax) that we can’t opt out of
  2. 457b pre-tax retirement savings. I still find the 457b to be a very compelling option.
  3. $12k/year in college savings via backdoor Roth.
  4. Mega backdoor Roth IRA up to some TBD amount, then 403b/401k up to some other TBD amount.  This is where we balance tax savings now with accessibility of principal and tax savings later. Filling in the TBDs is key, but paying taxes in this administration is less painful than paying them in the previous administration.
  5. Taxable investment or mortgage prepayment
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