IRA limit...how to save more...retirement fork in the road...

[NICUfello]

This website over the years has really helped me with houses, finance, etc, and looking for a bit more wisdom going forward, as I feel I have come to a fork in the road.

• No Credit card debt
• No car notes
• No student loans

PROPERTY DEBT:

• 637,000 mortgage left on primary home
• 202,000 left on rental property 1 (montly rent $2700)
• 280,000 left on rental property 2 (monthly rent $2400)

SAVINGS:

• Maximizing 401k, 18,500 + company match
• Maximum backdoor ROTH
• 529c contributions
• Fidelity (my company retirement account) offers "after tax," $5500 is the non deductible IRA, should I contribute there? OR
  
• Where else to put monthly savings (Vanguard account)?

NEED ADVISE GOING FORWARD:

I am not sure how one figures out how much they need in retirement. If one has no mortgage, I imagine 5,000-7,000 a month in retirement is enough to live a normal middle class life with travel?

My situation is I am debating on buying 2 more rental properties in the next 3 years. I can get someone else to pay off the mortgage by the time I retire. If I can get $3600 rent on two more properties, my math is, with everything paid off at retirement, my total rental income from 4 properties will be: $8700 per month.

Reason I am in the fork in the road is, if I DON'T buy 2 more rental properties, I can instead pay off the loan on my primary home ($637K balance).

I am not sure if I can see the bigger picture. But I am writing here, as the board has great minds, and hoping someone else can look at my above situation, and provide some thoughts/feedback/advice.

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[NITRAS]

A back-door ROTH involves a non-deductible IRA and converting to ROTH. I don't think you can do both. Personally, I'd rather just open up a lower turnover mutual fund and pay some taxes.

You have a ton of mortgage debt. I'd aggressively move towards paying off those mortgages before buying more. Lots of people when broke in 2009 trying to get rich on OPM.

 

[NICUfello]

A back-door ROTH involves a non-deductible IRA and converting to ROTH. I don't think you can do both. Personally, I'd rather just open up a lower turnover mutual fund and pay some taxes.

You have a ton of mortgage debt. I'd aggressively move towards paying off those mortgages before buying more. Lots of people when broke in 2009 trying to get rich on OPM.

Thank you kindly for your response. My initial thought was paying off my own mortgage as aggressively as I can. Only reason I am in the "fork" is, say I pay it off in 6.5 years, and then I am debt free (high monthly cashflow at that time), and I can buy the 2 properties I desire at that time.

The 6.5 years, wouldn't it be smarter to buy the additional rental properties now, so I have 6.5 years of others paying the mortgage on those two properties?

Appreciate your feedback.

 

[mvenus929]

Thank you kindly for your response. My initial thought was paying off my own mortgage as aggressively as I can. Only reason I am in the "fork" is, say I pay it off in 6.5 years, and then I am debt free (high monthly cashflow at that time), and I can buy the 2 properties I desire at that time.

The 6.5 years, wouldn't it be smarter to buy the additional rental properties now, so I have 6.5 years of others paying the mortgage on those two properties?

Appreciate your feedback.

Except you don't know what's going to happen in the next 6.5 years. Maybe you run into an issue with your tenants and have to fork over the mortgage on your rental properties while waiting for that issue to be resolved (my mom has had up to 2 rental properties in the past, and is looking to sell one of them because she ran into the issue of her tenants not paying rent, but not being able to evict them right away).

 

[dpmd]

What are your current mortgage rates and could you afford all of the mortgage payments at present without any rent coming in? Would the answer to the second question change if you get the properties you are considering?

 

[NICUfello]

What are your current mortgage rates and could you afford all of the mortgage payments at present without any rent coming in? Would the answer to the second question change if you get the properties you are considering?

3.625 primary

Rental 1 3.7
Rental 2 3.4

I can afford all 3 mortgage payments currently, with no income coming in.

Buying two additional properties, I won't be fully able to afford mortgage on those, if I include the above 3 as well. If I buy two new ones, and all are empty, I would be able to afford 70% of the mortgage.

 

[NICUfello]

Absolutely we have no idea why will happen in the next 6.5 years. Thus me picking the brains of you guys, and appreciating the help and a different point of view.

Paying 125K off a year lets say in my primary mortgage to pay it off, versus putting that money in the stock market. That is the question? As in is paying off my mortgage (3.6%), make sense, vs investing that in RE or stock market.

Except you don't know what's going to happen in the next 6.5 years. Maybe you run into an issue with your tenants and have to fork over the mortgage on your rental properties while waiting for that issue to be resolved (my mom has had up to 2 rental properties in the past, and is looking to sell one of them because she ran into the issue of her tenants not paying rent, but not being able to evict them right away).

 

[dpmd]

Absolutely we have no idea why will happen in the next 6.5 years. Thus me picking the brains of you guys, and appreciating the help and a different point of view.

Paying 125K off a year lets say in my primary mortgage to pay it off, versus putting that money in the stock market. That is the question? As in is paying off my mortgage (3.6%), make sense, vs investing that in RE or stock market.

Maybe pay off the rental over a year and a half which eliminates a mortgage payment then getting your new properties so you are in a position where you could better afford everything to lower your overall risk? Though that changes your profit on the rental of course. Taxable investment account is another choice but that is more a long term thing.

 

[NICUfello]

Maybe pay off the rental over a year and a half which eliminates a mortgage payment then getting your new properties so you are in a position where you could better afford everything to lower your overall risk? Though that changes your profit on the rental of course. Taxable investment account is another choice but that is more a long term thing.

Yeah that is also something I thought.


Basically my main thoughts are, if I buy more properties with large downpayment (payment that would go towards paying of primary mortgage), I can have next few years, to get those properties or invest in after tax accounts.

Essentially trying to see long term, if it makes more sense in getting into market or rentals and get that additional stuff going, before paying off my primary mortgage....

That is the fork in the road. What is most beneficial long term...... as I am thinking more retirement....


Appreciate the thoughts as always

 

[doc05]

Absolutely we have no idea why will happen in the next 6.5 years. Thus me picking the brains of you guys, and appreciating the help and a different point of view.

Paying 125K off a year lets say in my primary mortgage to pay it off, versus putting that money in the stock market. That is the question? As in is paying off my mortgage (3.6%), make sense, vs investing that in RE or stock market.

If you're at 3.6% fixed rate, probably will be better off keeping the mortgage as you will get a higher return with stocks. Do you derive any real tax benefits with your current setup?

 

[NICUfello]

If you're at 3.6% fixed rate, probably will be better off keeping the mortgage as you will get a higher return with stocks. Do you derive any real tax benefits with your current setup?

Thank you

Only tax benefit is the 401k max.

Any advice or changes you would suggest ?

 

[BorntobeDO?]

I don't like unnecessary risk for what would probably be a small gain (buying those two rentals now). The deal of the century happens every week, there will be other fish out there. I say you pay off the cheapest one, so you can get to the point were you can afford to have all your properties sitting vacant (or if unlucky occupied but not paying). My family has owned many rentals, and unfortunately evictions do happen, and they take a while. I would never want to be in a spot where I needed the rental income or I wouldn't be able to pay my bills.

 

[doc05]

Thank you

Only tax benefit is the 401k max.

Any advice or changes you would suggest ?

Not sure what advice you're looking for.

By tax benefit, I meant your investment properties.

If you're only investments are 401k/backdoor roth, that won't be enough $ saved/invested. And you will get past the usefulness of the 529 plan fast, depending upon your kid(s)' ages. Does your employer offer a 457 plan? Or just put $ in a taxable account ?

 

[dpmd]

Not sure what advice you're looking for.

By tax benefit, I meant your investment properties.

If you're only investments are 401k/backdoor roth, that won't be enough $ saved/invested. And you will get past the usefulness of the 529 plan fast, depending upon your kid(s)' ages. Does your employer offer a 457 plan? Or just put $ in a taxable account ?

The nice thing with the rentals is you get to take depreciation on it in addition to all the other expenses so you might have positive cash flow but a loss on taxes.

 

[redfish955]

Build a one year nest egg. Just stick the money into a safe mutual fund or something. You don't want to put yourself in a situation in which you lose everything if you get into a wreck, break a leg, or something.

 

[NICUfello]

I don't like unnecessary risk for what would probably be a small gain (buying those two rentals now). The deal of the century happens every week, there will be other fish out there. I say you pay off the cheapest one, so you can get to the point were you can afford to have all your properties sitting vacant (or if unlucky occupied but not paying). My family has owned many rentals, and unfortunately evictions do happen, and they take a while. I would never want to be in a spot where I needed the rental income or I wouldn't be able to pay my bills.

Thank you kindly. That does make sense. I am first in my family doing it, thus all the advice I can get the better, especially from people like you who have had previous experiences.

 

[NICUfello]

Not sure what advice you're looking for.

By tax benefit, I meant your investment properties.

If you're only investments are 401k/backdoor roth, that won't be enough $ saved/invested. And you will get past the usefulness of the 529 plan fast, depending upon your kid(s)' ages. Does your employer offer a 457 plan? Or just put $ in a taxable account ?

Oh I apologize, for misunderstanding.


1) Investment property tax advantages are only the mortgage interest deduction, depreciation, and I show lots of "losses" .

2) I had 403 previously, but currently employer DOES NOT offer a 457.

3) Kids ages are 3 and 6.

4) Aside from 401k/Backdoor, my only other EMPLOYER offer is taxable fidelity IRA.

I definitely realize 401k/Backdoor IS NOT enough for me to retire on. Thus my thread. Aside from investment property income, should I just do Vanguard taxable or Fidelity taxable through work?

 

[NICUfello]

Build a one year nest egg. Just stick the money into a safe mutual fund or something. You don't want to put yourself in a situation in which you lose everything if you get into a wreck, break a leg, or something.

Thank you. Currently have 9 months of living expense socked away in a money market fund.

 

[NITRAS]

Thank you kindly for your response. My initial thought was paying off my own mortgage as aggressively as I can. Only reason I am in the "fork" is, say I pay it off in 6.5 years, and then I am debt free (high monthly cashflow at that time), and I can buy the 2 properties I desire at that time.

The 6.5 years, wouldn't it be smarter to buy the additional rental properties now, so I have 6.5 years of others paying the mortgage on those two properties?

Appreciate your feedback.

When you retire, you will want a paid for house, some paid for rentals, and a pile of investments. This lowers your risk substantially as well as your cost of living. When the market has a down year, you can depend more on the rental income. This will allow you to more aggressively invest your Mutual funds to ultimately get a better rate of return.

How do you want to get there?

You could highly leverage yourself with $1.7M, hope you have good tenants who pay, and large expenditures don't put you in a negative cash flow situation.

On the opposite spectrum. You could pay off your house, then both the rentals, and then save up and buy more rentals with cash. This would be a lot slower.

I would try and figure out how many years of work you have left, how much disposable income you have to invest and make decisions from there. Personally, investments that eat money don't sound fun.

For the first 6 years of a 15 year mortgage will pay off about 30% of the balance at the cost of 25% of initial amount in interest assuming 5% interest. With a 30 year mortgage 9.9% at the cost of 28% of initial balance in interest payments assuming 5% interest.

Hope you figure it out. Good luck.

 

[NICUfello]

Thank you.
Your posts have really helped.

I do hope to to have a paid off house before retirement. How I want to get there and what my next 6-7 years are like and what I do is the most key to the equation.

I have about 26 years of working left.

I have some thinking to do and some more numbers to look over..and see what is the best situation going forward

When you retire, you will want a paid for house, some paid for rentals, and a pile of investments. This lowers your risk substantially as well as your cost of living. When the market has a down year, you can depend more on the rental income. This will allow you to more aggressively invest your Mutual funds to ultimately get a better rate of return.

How do you want to get there?

You could highly leverage yourself with $1.7M, hope you have good tenants who pay, and large expenditures don't put you in a negative cash flow situation.

On the opposite spectrum. You could pay off your house, then both the rentals, and then save up and buy more rentals with cash. This would be a lot slower.

I would try and figure out how many years of work you have left, how much disposable income you have to invest and make decisions from there. Personally, investments that eat money don't sound fun.

For the first 6 years of a 15 year mortgage will pay off about 30% of the balance at the cost of 25% of initial amount in interest assuming 5% interest. With a 30 year mortgage 9.9% at the cost of 28% of initial balance in interest payments assuming 5% interest.

Hope you figure it out. Good luck.

 

[redfish955]

I would build an after tax account for taking care of your kids. You could be looking at 600k if they both decide to be doctors or dentists. If they don't go that path you are allowed to annually gift them money that is tax free. I'm not sure if the actual amount but I believe it's around 20k. They could use that for maxing a 401k and Roth IRA through their twenties.

 

[NICUfello]

Excellent advice

What would you recommend ?

Vanguard after tax account ?

I would build an after tax account for taking care of your kids. You could be looking at 600k if they both decide to be doctors or dentists. If they don't go that path you are allowed to annually gift them money that is tax free. I'm not sure if the actual amount but I believe it's around 20k. They could use that for maxing a 401k and Roth IRA through their twenties.

 

[Stroganoff]

4) Aside from 401k/Backdoor, my only other EMPLOYER offer is taxable fidelity IRA.

I'm not following. An IRA is tax-advantaged by definition, so I'm not sure what you mean by "taxable fidelity IRA." It's more likely that your workplace 401(k) is offered by Fidelity, and Fidelity is just also marketing their other offerings to you. Also, IRAs (with the exception of SIMPLE and SEP) typically have nothing to do with your W2 employer at all: They're done on your own.

Aside from investment property income, should I just do Vanguard taxable or Fidelity taxable through work?

Your workplace has really nothing to do with you setting up a taxable investment account somewhere. That's completely under your ownership and control. But to answer your question, by all means set up a taxable investment account and throw in as much as you are willing to. You named two of the top choices, and invest according to your Investment Plan Summary and desired Asset Allocation, and be mindful of Asset Location as some funds are better kept in tax-advantaged accounts, and others are more ideal for taxable accounts due to their tax efficiency.

Excellent advice

What would you recommend ?

Vanguard after tax account ?

I have retirement accounts at both Vanguard and Fidelity and recommend both. It's really up to your personal preference where you go with. There are other good places as well. Schwab comes to mind. Maybe E*Trade. Vanguard is known for their low-cost index mutual funds (and ETFs), so they're my top choice to open a taxable account. Fidelity traditionally wasn't in the low-cost index fund game and focused on expensive actively managed mutual funds and stock trading, but they've introduced more low-cost, passively managed index funds in recent years to compete with Vanguard. Customer service wise -- if you ever have to call -- Fidelity mops the floor with Vanguard in good customer service.

Edit: If you don't want to do-it-yourself, there's a hybrid approach to passive and active investing: roboadvisors. One that comes to mind is Betterment which looks interesting in that they invest in Vanguard ETFs and can do a lot of the Tax Loss Harvesting for you. So you get the best of both worlds: passive investing with Vanguard ETFs with a more hands-off approach since they do all the rebalancing and work for you. If you're OK with their small fee, it may be an option since it's more hands-off than doing it yourself.

 

[Stroganoff]

If they don't go that path you are allowed to annually gift them money that is tax free. I'm not sure if the actual amount but I believe it's around 20k.

$15,000 gift tax limit for 2018.

Frequently Asked Questions on Gift Taxes | Internal Revenue Service

 

[redfish955]

There are supposed to be some pretty good tax loop holes involving kids and trusts. I'm not too familiar with them but that is something I would look into. I think essentially if you gift your kid 15k today and it grows to 30k their tax footprint will be tiny compared to your footprint. I would find someone to go over the benefits of a trust with you.

 

[NICUfello]

There are supposed to be some pretty good tax loop holes involving kids and trusts. I'm not too familiar with them but that is something I would look into. I think essentially if you gift your kid 15k today and it grows to 30k their tax footprint will be tiny compared to your footprint. I would find someone to go over the benefits of a trust with you.

Thank you. I will contact a trust attorney and get more info.

 

[NICUfello]

I'm not following. An IRA is tax-advantaged by definition, so I'm not sure what you mean by "taxable fidelity IRA." It's more likely that your workplace 401(k) is offered by Fidelity, and Fidelity is just also marketing their other offerings to you. Also, IRAs (with the exception of SIMPLE and SEP) typically have nothing to do with your W2 employer at all: They're done on your own.

I apologize for not being clear. My employer, aside from my 401k (through Fidelity), seems to give me the IRA option through Fidelity. It is post tax money, with a $5,000 limit per year, is my assumption?

When I put money into my 401K through Fidelity, the "contribution" screen shows me pretax (401k), and post tax (IRA 5K limit). That is how I understand it.

Or is there no "limit" on the post tax by Fidelity? If so, I can save more money there. Seems like I need to call Fidelity to clarify.

Your workplace has really nothing to do with you setting up a taxable investment account somewhere. That's completely under your ownership and control. But to answer your question, by all means set up a taxable investment account and throw in as much as you are willing to. You named two of the top choices, and invest according to your Investment Plan Summary and desired Asset Allocation, and be mindful of Asset Location as some funds are better kept in tax-advantaged accounts, and others are more ideal for taxable accounts due to their tax efficiency.


I have retirement accounts at both Vanguard and Fidelity and recommend both. It's really up to your personal preference where you go with. There are other good places as well. Schwab comes to mind. Maybe E*Trade. Vanguard is known for their low-cost index mutual funds (and ETFs), so they're my top choice to open a taxable account. Fidelity traditionally wasn't in the low-cost index fund game and focused on expensive actively managed mutual funds and stock trading, but they've introduced more low-cost, passively managed index funds in recent years to compete with Vanguard. Customer service wise -- if you ever have to call -- Fidelity mops the floor with Vanguard in good customer service.

Edit: If you don't want to do-it-yourself, there's a hybrid approach to passive and active investing: roboadvisors. One that comes to mind is Betterment which looks interesting in that they invest in Vanguard ETFs and can do a lot of the Tax Loss Harvesting for you. So you get the best of both worlds: passive investing with Vanguard ETFs with a more hands-off approach since they do all the rebalancing and work for you. If you're OK with their small fee, it may be an option since it's more hands-off than doing it yourself.

Thank you kindly. This really helps.

End of this week, I will then either open a Vanguard account, with post tax earnings, or put more money into the post tax Fidelity that is already set up. I will check which is cheaper option, for the low cost.


Thank you

 

[Raryn]

$15,000 gift tax limit for 2018.

Frequently Asked Questions on Gift Taxes | Internal Revenue Service

Per person. And paying expenses on their behalf (at least tuition) doesn't count against that.

That is, a married couple could give anyone, child or not, $30k every year without reporting it to the IRS. On top of that, they could pay that person's education expenses. If the recipient is married, increase that to $60k (Dad gives $15k each to husband and wife, Mom does the same).

 

[Stroganoff]

I apologize for not being clear. My employer, aside from my 401k (through Fidelity), seems to give me the IRA option through Fidelity. It is post tax money, with a $5,000 limit per year, is my assumption?

When I put money into my 401K through Fidelity, the "contribution" screen shows me pretax (401k), and post tax (IRA 5K limit). That is how I understand it.

Or is there no "limit" on the post tax by Fidelity? If so, I can save more money there. Seems like I need to call Fidelity to clarify.

Seems like Fidelity is just marketing to you via your employer. IRA isn't really tied to an employer at all unless it's something like SIMPLE/SEP. Since you're already maxing out a Roth IRA ($5500/year for yourself, $5500/year for spouse?), there's nothing more you can do to contribute to any IRA.

Unless we're both misunderstanding, and what Fidelity is actually saying with this $5000/year "after tax" option is actually not an IRA but is part of your 401(k) plan, then yeah, max that out! If your 401(k) offers both the regular pre-tax salary deferral of $18,500/year + after-tax $5000/year, that's all under the 401(k) limit of $55,000/year total.

 

[NICUfello]

Seems like Fidelity is just marketing to you via your employer. IRA isn't really tied to an employer at all unless it's something like SIMPLE/SEP. Since you're already maxing out a Roth IRA ($5500/year for yourself, $5500/year for spouse?), there's nothing more you can do to contribute to any IRA.
.

That makes sense. Yes I am currently maxing out spouse and me.

Unless we're both misunderstanding, and what Fidelity is actually saying with this $5000/year "after tax" option is actually not an IRA but is part of your 401(k) plan, then yeah, max that out! If your 401(k) offers both the regular pre-tax salary deferral of $18,500/year + after-tax $5000/year, that's all under the 401(k) limit of $55,000/year total.

I am not sure if the "after tax" is part of the 401k plan. I will call and confirm this week, and post back here.

I took a picture of the contribution screen, but unable to attach it so far, for your viewing. Sadly I don't come close to the 55K a year. I wish I did I do 18,500 and employer gives me about 10K or so.

 

[ThoracicGuy]

That makes sense. Yes I am currently maxing out spouse and me.



I am not sure if the "after tax" is part of the 401k plan. I will call and confirm this week, and post back here.

I took a picture of the contribution screen, but unable to attach it so far, for your viewing. Sadly I don't come close to the 55K a year. I wish I did I do 18,500 and employer gives me about 10K or so.

That's a fantastic match. We get 0.25% match up to a max employee contribution of 6%. Essentially if we max out the 401k (which we never get to do because of some stupid non-discrimination testing), we'd get a match of around $4500.