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advice for next steps?

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  • advice for next steps?

    I've read, and re-read many of the posts on WCI + forums.  Here is our situation - would appreciate any feedback:

    Age: mid 30s, have been out of residency for 2 years now

    Salary: 190K / year (general primary care; wife stays home with kids)

    Current investments:

    1) 403b: T.Rowe Price Index 2045 PARLX: ~ 50K (I am maxing out yearly, 18.5K)

    2) 529s: Vanguard Aggressive Age-Based Option: ~3500K in each (investing 250 per month in each)

    Questions / Comments:

    1. Assuming we can save more than 24,000 this year (max 403b + 3000 in each 529) - where should this money go? Is it worth it to figure out how to do a backdoor Roth? If not a backdoor Roth do I open a general investment, taxable account?

    2. Our monthly expenses are rough between mortgage, car notes, student loans (about 260K in debt, on year 5 of PSLF ), and preschool..

    3. I worry that just putting in the 18K in the 403b isn't enough...


  • #2
    At your income level I don't even think you would need to do a backdoor. The MFJ income limit for full contribution is 183,000 which you should be at after deductions etc. I've never done a backdoor roth but a regular one is trivial to set up.

    If you still have money left over after that then put it in a taxable account.


    • #3
      Depending on cashflow, I'd prolly stop contributing to 529s until the loans are less, car loans gone, and you're maximizing retirement accounts.

      Def do roth iras x 2 (you can do spousal roth ira) before starting a taxable. 18K yearly probably isn't enough. You'll have to make some projections and plug into a compound interest calculator to get an idea of how much you'll need to sock away.


      • #4
        I would prioritize Roth IRA's for you and your wife over 529 plans.  Roth's can be used to cover education expenses as well (although I wouldn't recommend using them for this purpose) and you only have a limited amount you can contribute to a Roth in a given year.  Plus they are much more flexible since you don't have to worry about overfunding a Roth like you do with a 529 plan.

        I would also utilize a Backdoor Roth so you can contribute the full amount.  The contribution limits are phased out at $186,000.

        You can also fund education with 529's, Roth IRA, debt, etc, so it isn't as critical to put everything into a 529 to cover the cost of education.


        • #5
          Got it. I've hesitated paying off the car loans because interest rates seem so low:

          1. Car 1: 13K left to pay off (interest rate is 2.4% so currently paying approx 300 in principal, 25 bucks in interest per month)

          2. Car 2: 42K left to pay off (interest rate is 2.3%) - this is new. Yes, I'm totally aware that this is a bit higher than ideal - but - the last car I bought lasted me 17 years)... so I'm the kind of person to buy and keep for a very very long time.

          3. Mortgage: 484K remaining (30year mortgage, 3.3%) - property tax is high so this is tough.

          The question I have is:

          1. Assuming no contribution to 529 this year, do I try and max the 11K in the Roth IRA?

          2. And, assuming 11K can go in to the Roth IRA, do I try and pay off the car notes asap? I mean, I have enough in savings that I could pay off Car 1 right now, and an additional 10K or so I can put in towards car 2.  I just feel that if the interest rate is so low, shouldn't I be putting that money into investments?

          Thank you!


          • #6
            I wouldn’t rush to pay down your car loans. Particularly if it is going to deplete your emergency cash. It’s personal preference, but 2.3% is a reasonable rate so I would rather invest with excess cash than reduce your car loan. My priority would be Max Roth, then pay down auto loans, and last 529 plans assuming you have sufficient emergency cash.


            • #7
              Any opportunity to moonlight? I feel like you have too much greater than 2x income, 60k in car loans, 260k in student loans, you didn't mention any credit cards. You're trying to leverage debt, invest for retirement, save for college, pay down student loans etc. If you can moonlight I'd solidify your emergency fund, fund your 401k, stop the 529 and pay off those cars asap despite the interest rate. Between those two vehicles you're probably paying 700-900 per month? That 700-900 per month would max out two backdoor roths for you and your wife. Just my 2 cents.


              • #8
                Hmm.  Could def be better :/

                Can you make more money, moonlighting and such?

                If you're salaried at $190,000, and you contribute $18,500 to 403(b) pretax, then your AGI is low enough to do a full contribution directly to Roth IRA.  Otherwise the backdoor Roth is actually very easy.

                You bought too much car for your earnings, sad to say.  Yes, the interest rate is low, but it's higher than the 0% you should have had.  It's there, so it's fine just to pay the minimum on it if the alternative is a tax-advantaged account like a Roth IRA, but if you have filled all your tax-advantaged space, then I'd pay this.  Usually I wouldn't recommend that since you won't accrue that much in finance charges, but based on your other situational info (mortgage > 2x gross income, saving < 20% gross income, car loans, not maximizing tax-advantaged space, needing to rely on PSLF with 6 years left), I think you might need to pay a bit of attention to your perspectives regarding income, saving/investing, and debt.

                Do you have emergency funds?

                I wouldn't count your 529 savings as savings per se.  You can't take them out for anything but education.  I'd just call that planning for a consumption expense.  So to that point, you're still only saving 10% of your gross income.  That's not really going to let you retire particularly early or well, if those are your goals...I would try to maximize a Roth IRA with $11,000 a year which would put you right around 15% of gross income; better, but not fantastic.

                Your property tax is not tied to how much is left on your mortgage note; it's tied to what your house appraises for.  Paying down your mortgage would not help your property tax, although imo you do have a bit too much mortgage.  You must be in a high cost-of-living area.

                I'm sorry I don't have more positive things to say :-( thank you for posting on the site; I hope we've been supportive and helpful.


                • #9
                  I agree with everyone else-put the 18.5k in the 403b and then put 11k in a roth IRA for you and the spouse. Still only brings retirement savings to 29.5k and I think you need to be putting closer to 40k/year (20% of gross income) into retirement accounts. I'd drop the 529 contributions now as well, you really can't afford that. The reality is that you've spent too much on housing and cars. Have you guys considered selling the house and renting until you are in a better financial position? Selling the new car and buying a used toyota or honda in cash? Continue with PSLF and hope that pans out.

                  I spent the past year working very part time after having our second child so our income this year was pretty close to yours. We have no car payments and a mortgage on a house that was only 365k. No other debt. And while we did perfectly fine, I would be pretty stressed out financially if we had to do that every year so I imagine that with your much higher debt burden things are not easy for your family. Hence my recs . . . I think in the end you will be fine, but you guys probably need to make some big changes to secure your future.


                  • #10
                    Thanks for all the feedback, truly appreciated. I'll be a bit more specific below:

                    1) Major Debts (an update, had typed in wrong salary info by mistake, it is 180K / year, not 190).

                    Car 1: 325/mo (13K left; 2.4%); Car 2: 615/mo (42K left, 2.3%, just bought)

                    Loans: 1200/mo (>260K debt but more than half way through PSLF, all certified thus far)

                    Mortgage: 3200/mo (484K left principal)

                    2) Comments:

                    - We pay off credit cards monthly, no other debt, no payment plans for anything else and luckily we have a rock solid emergency fund, so at least set on that.

                    - We do live in a super high cost area, sadly.  We could move out about 45 mins north or south, but then face challenges regarding public schools / commute.  I   understand the feedback on the car, again, in my head because I kept my last new car for 17 years, I was able to justify getting a car I wanted knowing it'll be the car for me for the next decade and then some)..

                    3) Plans (thanks for all comments thus far):

                    - will max out 403b this year (18.5K)

                    - will put 11K in the Roth IRA for spouse & I for sure (I can open one at Vanguard and pick a target date fund, I know not sophisticated but will work for now)

                    - will drop the 529 contribution this year and immediately pay off at least one car.

                    Thank you all again.