Naked With Cash is an ongoing series at Consumerism Commentary in which readers share their households’ finances with other readers. These participants benefit from the accountability that comes from tracking their finances publicly and the feedback of the four expert Certified Financial Planners (CFPs).
This year, we have four participants who will share their financial reports, exposing the results of their financial choices. Each participant is paired with one of our Certified Financial Planners. The experts will provide insight and guidance that will help our participants take their finances to the next level by the end of 2014. Learn about this year’s participants and experts.
Together, Laura and Leon make more than $123,000 a year. They have $44,000 in student debt. They max out contributions to tax-advantaged retirement accounts and hope to begin aggressively paying down debt. They are 28 years old and have no children, but they plan to start a family sometime. Laura has been concerned about their recent financial apathy as a couple, and the two are ready to shake things up. (Read last month’s update.)
After reading Laura and Leon’s comments, you can read commentary from Roger Wohlner, CFP. Roger Wohlner appears courtesy of The Chicago Financial Planner.
Laura and Leon’s Net Worth Statement
Laura and Leon’s Income Statement
Comments and analysis from Laura
From December to January, our net worth increased by quite a bit more than usual. This was largely due to the fact that Leon got an extra paycheck this month and my employer paid 2013 401(k) matching contributions. I also ended up traveling a lot for business though the month — which likely kept our day-to-day expenses down as well.
A notable milestone is we now have about $6,170 total in our Health Savings Accounts. This is significant because our current high-deductible health plan has an annual maximum out-of-pocket limit exactly at $6,100. This means that even if we had a major health crisis, all our medical bills for the year would be covered with tax-free dollars. The only thing that might change is if we choose to reimburse ourselves for a handful of prescriptions and doctor bills we pay for with regular post-tax dollars. We’re not hurting for cash right now, so I’m leaning toward just leaving it there to invest. I figure we’ll use the money for medical purposes eventually anyway.
Tax season is always an interesting time of year. It seems like every year we’ve been married has had a completely different combination of incomes, deductions, credits, and so on. We’ve had mortgages, student loans, investments, stimulus credit, one job, and two jobs — but never anything consistent from year to year yet.
The result has been that I have no idea what to expect on our return until we’re punching all the information into TurboTax. My hunch, though, is that we’re generally doing poorly at tax planning because we have always had tax refunds that were surprisingly large. Some of our refunds have even been in the thousands of dollars. I’m gradually getting better at tweaking what I can, but until we fall into a consistent pattern year-to-year, I don’t expect to become an expert any time soon.
2013 was the first year we both had incomes for the whole year and I expect that to put us in the middle of the 25% bracket. The only steps we took to decrease our liability were to maximize our contributions to our HSA and contribute the minimum amount to our 401(k)s to receive the maximum match from our employers. Admittedly, these steps had more to do with taking advantage of the benefits of the accounts (investing our HSA and taking advantage of our employers’ matches) than specifically trying to reduce our taxes.
This brings me to a question I have about allocating our money. Right now we are contributing the maximum to our Roth IRAs with post-tax money but we are not even close to maxing out 401(k)s. I like the advantages of a Roth IRA (taking out our principal if we needed it, fixing our liability while taxes are at relatively historic lows, controlling which funds we invest in, etc.), but I can’t help but wonder if it would make more long-term sense to pull back on our post-tax retirement savings in favor of pre-tax contributions while we are in a relatively high bracket. We discussed this a little bit in the comments section of December’s report, but I was wondering if anything since then has tipped us one way or the other.
Feedback from Roger Wohlner, CFP
As far as tax planning goes, it is difficult in your situation with changes from year-to-year. I would suggest this: once you put your information into TurboTax, and see where you stand in terms of a refund or paying in, you can take a stab at looking at 2014 in comparison to 2013. Check to see if things might be similar. If not, consider where the differences might lie. If the two years look similar, you can adjust your withholding up or down to try to get closer to where you need to be. You might also take another look at this mid-year and adjust accordingly.
The Roth vs. 401(k) question in part depends upon the quality of the 401(k) plan’s investment line-up and the level of expenses. Assuming both are good, certainly contributing to the 401(k) on a pre-tax basis will help your income tax situation. It is a good thing at your age to save via both methods in order to diversify your tax situation down the road when you retire. Nobody knows what tax rates will be by then, but this way you will have some options down the road.
The HSA is a great vehicle. As you said, you can cover the out-of-pocket on a major health situation and this is another form of savings. One never knows how your situation may evolve over time.
Feedback from Luke Landes
Even if you had a normal paycheck month, your cash flow would still be in a fantastic position.
I like the idea of taking advantage of at last some Roth-type investments now, even though you are in a higher tax bracket now than you might expect you would be in retirement. As Roger mentioned, it’s impossible to know the future of tax laws and tax rates, so taking advantage of a variety of vehicles today can help you hedge your tax bets in the future. I like to follow this list of retirement investing priorities to make the most of tax benefits as well as investing opportunities.
You’re aggressively paying down your student loan bills. That’s fantastic.
Last month in the discussion you wrote about some of your goals — eventually having one of you stay at home with kids, providing for education, and financial independence. At your ages and at your salary levels, this is all possible. For staying at home with kids, consider a separate savings or short-term investing account your “income replacement fund.”
I like to separate the various goals into different accounts so everything is labeled and set aside for specific purposes. This way, if you have to “borrow” from one account to handle another, the transfers have meaning and can affect your choices. For example, you might not think twice if you’re transferring money from your general savings to pay for a vacation, but if you have to transfer money from your “children’s education” fund to pay for your vacation you may make a different decision.