Paralysis by analysis.

[Mr. Thirsty]

I'm just getting into investing money by myself. To give you some background...

Stage of Life: Spouse is a dentist and owns a dental practice. We are in our mid 30s. We save about $150-250k/year. We live frugally and in a rural area.

Social Situation:Married 4 kids ages 11,9,7,5.

Annual Income: 650k filling jointly

Net Worth: Rough estimate 1.3M-1.6M

Tax Bracket: our state tax is around 4.5% but you can guess federal.

State of residence: West

Insurance Policies:

Term life for both of us. 2M for spouse 750k for me.

Debts:

8k-auto loan

No other debts.

Assets:

401(k)- $130k with American Funds.

Personal [email protected] 4.5%--We loaned my BIL money to pay off his student loans (he is in a derm residency) -I know lending to a family member is a bad idea...we feel comfortable doing this)

IRA-$12k-I need to move this to somewhere else the fees on this investment suck.

$324k- cash--I know we need to invest but in what?

$24k- in a savings account for our kids. Needs to be in a 529.

$18k- HSA account

$190k-house

$200k-Office building

$650k-Dental practice +/-100k

Questions:

1. If I wanted to switch our 401(k) over to vanguard would that be a good idea?

2. Are back door roth IRAs worth it for us?

3. Should I just take our cash and put it into Vanguard funds? Is this a tax efficient idea?

4. Are 529 plans the way to go still? Doesn't AZ have a good plan? Why wouldn't we just invest it in their names and they can do whatever they want @ 18?

5. Any advice in general?

[Faithful Steward]

Mr. Thirsty wrote:

2. Are back door roth IRAs worth it for us?

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Yes. In order to max out your tax-advantaged contribution capacity, your options would be to make non-deductible Traditional IRA contributions and leave the money in the Tradditional IRAs so you would pay taxes on a portion of your withdrawals when taking distributions at retirement or to convert those contributions to Roth IRAs and never pay taxes on distributions at retirement. Unless you enjoy paying taxes, the choice should be obvious.

However, you would either need to pay the taxes to convert your existing IRA or roll it into your 401(k).

By the way, you guys are killing it! Keep up the great work.

[q-school]

2)yes

3)definitely a lot of cash.  not as much as me, but i'm a bit of an outlier here and in a different place in life.  you guys are doing great, and just by saving you will have FI at a relatively young age.  i would think you have your emergency fund, debts covered, get money into vanguard index funds.  i would argue that you are young enough that you don't need a lot of bonds, but i concede that you have accumulated plenty of wealth and may want to diversify.  congrats!

4)asset protection, tax free growth (not taxed when taken out), ability to transfer, possible state tax breaks.  it could be argued that the 529s offer some of the greatest tax benefits there are.

 

you post is interesting (to me) because most dentists i know who own their own practice have a sharp cpa that advises them on stuff like backdoor roth and 529s.  they own vacation homes that they take their hygienists to so they can write off expenses and move stuff over the line.  they are sharp with deductions.

good luck!  great job so far!

[Dicast]

For 529 figure out the minimum need for college and shoot for that number. You can put anything else in taxable and pull from that later if needed.

You should let your BIL refinance to something better than Sofi when he finishes residency.

Cash...wow. Pay off auto loan. And then invest per your IPS. If 80/20, just drop it in 80/20.

I think you all are doing great and should be sitting very well in the future (you already are). Age and net worth wise you are ahead of myself by a good margin. If you want FIRE I think you are on the right path. If no plans to retire early you could probably loosen up a bit.

[Mr. Thirsty]

q-school wrote:

2)yes

3)definitely a lot of cash.  not as much as me, but i’m a bit of an outlier here and in a different place in life.  you guys are doing great, and just by saving you will have FI at a relatively young age.  i would think you have your emergency fund, debts covered, get money into vanguard index funds.  i would argue that you are young enough that you don’t need a lot of bonds, but i concede that you have accumulated plenty of wealth and may want to diversify.  congrats!

4)asset protection, tax free growth (not taxed when taken out), ability to transfer, possible state tax breaks.  it could be argued that the 529s offer some of the greatest tax benefits there are.

Thank you for your response/ advice. I'll look into them. I just want to be sure that they don't have a ton of fees. Also, should my kids chose a different path than college/scholarship I want them to have options to use this money in other ways.

you post is interesting (to me) because most dentists i know who own their own practice have a sharp cpa that advises them on stuff like backdoor roth and 529s.  they own vacation homes that they take their hygienists to so they can write off expenses and move stuff over the line.  they are sharp with deductions.

We do have a sharp CPA. We have good write offs. We pay around 6-12k/year just for tax filings business and personal. He was the one that set us up with the american funds acct. (which we aren't real happy with). One example-We rent the building to ourselves and hire our kids to clean it and pay them through the building's LLC.

good luck!  great job so far!

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See quote box for response.

[Mr. Thirsty]

Dicast wrote:

For 529 figure out the minimum need for college and shoot for that number. You can put anything else in taxable and pull from that later if needed.

You should let your BIL refinance to something better than Sofi when he finishes residency.

Cash…wow. Pay off auto loan. And then invest per your IPS. If 80/20, just drop it in 80/20.

I think you all are doing great and should be sitting very well in the future (you already are). Age and net worth wise you are ahead of myself by a good margin. If you want FIRE I think you are on the right path. If no plans to retire early you could probably loosen up a bit.

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Thanks for your help.

The auto loan I think is at 0.9% or maybe 0. I will talk with me SO and see if its worth it to pay off. You're probably right.

I know we are fortunate. I didn't want to sound smug or boastful. I am just humbly asking for advice and I thank you for it.

[Jaqen Haghar MD]

Ha, ha!  Good work sir.  Your situation and earning potential put you in a sweet spot.

Protection:  Decent term life policies(check), and umbrella liability policy, and disability policies.

Emergency:  Decide what you want for an emergency fund to weather a bad storm.  I like a big fat one, but opinions vary from 2 months expenses to 2+ years.  Put that in a high yield savings, MM, or CDs like Ally bank.

Death Contingency Plan:  A plan to make sure those kids make out OK, if one or both of you get hit by a dump truck tomorrow.  More specific than the insurance and a pile of money.  IDK Trust?  Valar morghulis.

College fund for the kids:  529 it.  They may want to spend it on heroin at age 18.

Compound Growth: Fill up the 401K and move to Vanguard and index away.  Roll in any IRAs if you can, or convert to Roth.  Open a taxable account and do the same in Vanguard with tax efficient investments.  Backdoor some Roths.  Back up the truck and fill er up.  Somewhere on here is a list of simple portfolios "better than yours".  Do one of those.  Kill all loans, if just for simplicity. Expect a market crash at some point along the way and chose accordingly.  Keep at it.

Other streams of passive income with diversity:   Rental property to other real estate?  I feel like you already have a handle on this.  You also have that loan to family  :|

Health and Happiness:  Make sure you are making time for this.  You are riding the gravy train. Don't let it run you over.  Make sure you are staying in shape and having the time to be happy and watch the kids grow.  Take time to nurture your marriage.

[Hatton]

You are doing great!  Jaquen makes some good comments.  I would transfer the 401k to Vanguard.  You are paying loads and higher ER with American Funds.  American Funds breakpoint where you stop paying loads is $1mill.  Pay off the car.

[Tangler]

American funds, gross, yuck, yes transfer out of that and into VG

[q-school]

I realize it is probably kosher if the cpa recommends it, but can we really pay five year olds for cleaning? That seems to me to be really taking a fine tooth comb to tax code and no offense might be why some feel like rich people don't pay their share.

Anyhow, welcome!

[djohnflatfeecfp]

Congrats on all the solid work.  Some thoughts and questions with #5.

• Have you done your estate planning?


• You have four minor children and I assume there is a plan for them if something happens to the both of you, but I have to ask.


• On those lines, what happens to the loan to your BIL if something happens to you?


• Is there a buyer arrangement for the practice, again, if something happens to your spouse?  It is hard to tell if dental practice is the only income source for the family and if you are pulling income from there too.

The estate planning topics are a lot less fun than the investment ones.  I have a feeling you have already tackled them but it wasn't mentioned and it is a core component of financial planning, not just investment management.

And make sure you check out the 529 Plans are Superior thread.  ENT Doc did a great job compiling information on various 529 plans.  You definitely want to be using these and the backdoor Roths.

[Gas_Doc]

djohnflatfeecfp wrote:

Congrats on all the solid work.  Some thoughts and questions with #5.

• Have you done your estate planning?


• You have four minor children and I assume there is a plan for them if something happens to the both of you, but I have to ask.


• On those lines, what happens to the loan to your BIL if something happens to you?


• Is there a buyer arrangement for the practice, again, if something happens to your spouse?  It is hard to tell if dental practice is the only income source for the family and if you are pulling income from there too.

The estate planning topics are a lot less fun than the investment ones.  I have a feeling you have already tackled them but it wasn’t mentioned and it is a core component of financial planning, not just investment management.

And make sure you check out the 529 Plans are Superior thread.  ENT Doc did a great job compiling information on various 529 plans.  You definitely want to be using these and the backdoor Roths.

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Link to ENT Doc's 529 post for simplicity.

[ReFinDoc]

Paid by W-2 or 1099?

Enough Disability Insurance?

Defined Benefit Plan.

Start a low dividend, muni bond heavy taxable fund with your cash. A taxable fund gives you more options than a Roth like gifting, step-up basis.

Assets protected?

Wow, your taxes must be huge.

Start a 529 for all kids. You can shift beneficiaries around later. Get the State tax deduction now if meaningful.

Don't pre-pay your loans. Tax deductible interest is very useful to you.

Maximize your business expenses.

You really are killing it. Good work.

 

[Faithful Steward]

q-school wrote:

I realize it is probably kosher if the cpa recommends it, but can we really pay five year olds for cleaning? That seems to me to be really taking a fine tooth comb to tax code and no offense might be why some feel like rich people don’t pay their share.

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While deducting cleaning by a 5-year old might be viewed as risky by some; if your kids have great smiles, there is absolutely no question that paying them as models for your practice's advertising (brochures, etc.) is not a risky way to shift some income to your kids. As always, run this past your accountant, just to be safe.

[Faithful Steward]

ReFinDoc wrote:

Don’t pre-pay your loans. Tax deductible interest is very useful to you.

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Here's a different perspective on this advice. Don't keep debt just for the tax deductible interest savings. I know it's a common practice, but sometimes conventional wisdom is not so wise. Here's why:

If you have a mortgage payment of $1800/month and, at the end of the year, you will have paid tax-deductible interest of $7,200, at the 39.6% marginal tax bracket, that deduction will save you $2,851.20 in Federal income tax (I'll leave state income tax out of the conversation due to variability by state). While that sounds good, if you dig deeper, you'll realize that you just sent the bank $21,600 to avoid sending Uncle Sam $2,851.20!

So, if you can afford to pay of a mortgage that you are keeping just for tax purposes, you should do so. And, the good news is, you can still avoid sending Uncle Sam $2,851.20 each year by writing a check for $7,200 to your favorite charity - instead of sending checks totaling $21,600 to your mortgage lender.

I know some on the forum will still favor keeping the debt, especially at today's low rates, and investing rather than paying down debt - figuring that they can earn more by investing the money that would have gone toward paying off the mortgage. I won't argue that math.

But, sometimes good financial planning is about more than math ... more than money, even! For some, good stewardship is important and eliminating debt is part of good stewardship.

So, ReFinDoc, please don't take this as criticism. It's just a different perspective that some people might have on the situation.

[Mr. Thirsty]

q-school wrote:

I realize it is probably kosher if the cpa recommends it, but can we really pay five year olds for cleaning? That seems to me to be really taking a fine tooth comb to tax code and no offense might be why some feel like rich people don’t pay their share.

Anyhow, welcome!

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We haven't started paying the youngest child yet. This year I imagine we will start. The breakdown so far has been 11-$5k, 9-$4k and 7-$3k.The kids do menial tasks around the office. Mostly pull weeds etc.

I disagree with your comment about not paying our fair share. I paid over $200k in personal taxes last year. If its within the tax code I'm all for using it. Its the expert advice I am paying for. Its a pretty standard as my own father used this when I was a kid.