Can I be doing more for my child later in life?

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mzvarner
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Can I be doing more for my child later in life?

Post by mzvarner »

I hope I posted in the correct sub forum. I tried to include as much pertinent information as I could

Since I stumbled across this forum and the simple investment philosophy, my wife (36) and I (32) have established an emergency fund, paid off our car loans, and refinanced our home. This mortgage is our only debt and we pay extra each month in hopes of paying it off sooner than later. We are trying to follow the investment prioritization to the best of my current understanding. We each contribute (Edit: more than minimum, but less than max of $19,500[/b]). My employer offers an HSA which I have been funding, but plan to prioritize fully funding annually starting next year. Our income puts us pretty close to being ineligible for ROTH iras (EDIT: so we are further increasing our contributions closer to the annual maximum).

We have a 2 year old and would like to set her up to be "better off than we were". We have opened a 529 plan that we contribute to monthly. We live in Washington state where there is no tax incentive for a 529.

1. A custodial ROTH sounds ideal, but at 2, she doesn't have any earned income. It looks like we could gift her an annual contribution? If a ROTH is not an option for her what are my other options? I could open a brokerage account and then gift this to her at a later date, but I am having a hard time comprehending the tax implications for a) us if we do an annual gift b) gift her an account later in life.

2. Edit: I do not have a family plan HSA, as my wife has her own insurance. My max contribution is $3200 a year. I will plan accordingly to increase my 403b contributions

3. If we are eligible for ROTHs, my plan is to prioritize funding my wife's first because I have the luxury of a triple tax advantaged HSA. Only once both her ROTH and my HSA are fully funded, would I fund a ROTH for myself.

Thanks for your patience in the long winded questions. Any guidance is appreciated.

Edit: from the responses received, it appears I have been picking and choosing what parts of the "investment prioritization" I want. We need to reassess and prioritize maxing out our respective 401k/403b/ HSA before opening ROTHs, 529, extra on mortgage.
Last edited by mzvarner on Wed Oct 27, 2021 11:28 pm, edited 1 time in total.
SailorJack02
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Re: Can I be doing more for my child later in life?

Post by SailorJack02 »

1. I’d focus on your own savings right now, with some 529 that gets you to your planned college expenses.

2. Family plan is when the HSA account holder is covered by a high deductible health plan that covers the spouse as well, when filing jointly. Is this your insurance?

3. You can always fund via a back door contribution as needed. I agree that the HSA is the priority because of current year savings.
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Wiggums
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Re: Can I be doing more for my child later in life?

Post by Wiggums »

You can gift some money to your child, but at some point the money is taxed at the parents rate. This is known as the kiddie tax. The tax applies to dependent children under the age of 18 at the end of the tax year (or full-time students younger than 24) and works like this: The first $1,100 of unearned income is covered by the kiddie tax’s standard deduction, so it isn’t taxed. The next $1,100 is taxed at the child’s marginal tax rate.Anything above $2,200 is taxed at the parents’ marginal tax rate. If your child also has earned income, say from a summer job, the rules become more complicated. See IRS Publication 929.

In terms of any IRA for the child, they must have earned income, and the definition of earned income by the IRS is clear. If you grow your portfolio, your child will ultimately benefit in the long term.
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bloom2708
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Re: Can I be doing more for my child later in life?

Post by bloom2708 »

If your income is high enough to hit the income phase out then you need to be putting more in pre-tax 401ks.

Minimum to get the match won’t cut it.

The best thing to do is save more for your retirement. That means having a goal of filling 401ks and Roths and HSA each year.

Then 529, taxable and extra mortgage payments.
aristotelian
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Re: Can I be doing more for my child later in life?

Post by aristotelian »

You don't need a special account. Keep saving for yourself and maxing "retirement" accounts to take full advantage of tax benefits available to you. At some point in the future if you end up with extra wealth you can gift some to your child. Of course, paying for college and helping child graduate debt free will give them a huge boost in life.

Any money that you are comfortable putting in the child's name can go in a UTMA custodial account. You get a small deduction up to $1050 but the money must go to the child when they are of age. If the child gets a large gift check in their name UTMA is a good option.
JDave
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Re: Can I be doing more for my child later in life?

Post by JDave »

It will REALLY help your child if you save enough for your own retirement so that you don't have to ask her for financial help when she's an adult.
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Re: Can I be doing more for my child later in life?

Post by 6bquick »

JDave wrote: Wed Oct 27, 2021 8:45 am It will REALLY help your child if you save enough for your own retirement so that you don't have to ask her for financial help when she's an adult.
+1

Got a mother-in-law on the edge. more than a few less-than-pleasant conversations with the wife could have been avoided had MIL heeded this advice.
If your outgo exceeds your income, your upkeep will be your downfall
aristotelian
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Re: Can I be doing more for my child later in life?

Post by aristotelian »

Wiggums wrote: Wed Oct 27, 2021 5:27 am You can gift some money to your child, but at some point the money is taxed at the parents rate. This is known as the kiddie tax. The tax applies to dependent children under the age of 18 at the end of the tax year (or full-time students younger than 24) and works like this: The first $1,100 of unearned income is covered by the kiddie tax’s standard deduction, so it isn’t taxed. The next $1,100 is taxed at the child’s marginal tax rate.Anything above $2,200 is taxed at the parents’ marginal tax rate. If your child also has earned income, say from a summer job, the rules become more complicated. See IRS Publication 929.

In terms of any IRA for the child, they must have earned income, and the definition of earned income by the IRS is clear. If you grow your portfolio, your child will ultimately benefit in the long term.
Just to be clear, the gift itself is not taxed, just earnings from funds that are in a child's name. There is no gift/estate tax up to $11M lifetime. Above $15k gifts have to be reported on a tax form but they are not taxed.
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calmaniac
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Re: Can I be doing more for my child later in life?

Post by calmaniac »

98% of "doing more for my child" is teaching them and providing them the best environment to be an independent happy emotionally fulfilled and resilient person as an adult. All the $$ in the world will not give them that. Easy to think about the money and numbers, but the other stuff is a much more important.
"Pretired", working 20 h/wk. AA 75/25: 30% TSM, 19% value (VFVA/AVUV), 18% Int'l LC, 8% emerging, 25% GFund/VBTLX. Military pension ≈60% of expenses. Pension+SS@age 70 ≈100% of expenses.
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Re: Can I be doing more for my child later in life?

Post by sailaway »

calmaniac wrote: Wed Oct 27, 2021 9:03 am 98% of "doing more for my child" is teaching them and providing them the best environment to be an independent happy emotionally fulfilled and resilient person as an adult. All the $$ in the world will not give them that. Easy to think about the money and numbers, but the other stuff is a much more important.
The other 2% is making sure you don't become dependent on them. This is also known as putting on your own oxygen mask first.
Katietsu
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Re: Can I be doing more for my child later in life?

Post by Katietsu »

I will echo the comments to prioritize saving for yourself right now. If you are in a strong place, you will be able to help your child later.

I suggest that you might benefit from posting about your particulars. I think there are some things that this community could help you with.
runner3081
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Re: Can I be doing more for my child later in life?

Post by runner3081 »

We started a UTMA for our daughter. We match whatever she puts in from holiday gifts and have been giving her the entire $250 child tax credit, each month to put in there.

This is above and beyond a 529.
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BolderBoy
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Re: Can I be doing more for my child later in life?

Post by BolderBoy »

JDave wrote: Wed Oct 27, 2021 8:45 amIt will REALLY help your child if you save enough for your own retirement so that you don't have to ask her for financial help when she's an adult.
This can't be emphasized enough.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
Ramjet
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Re: Can I be doing more for my child later in life?

Post by Ramjet »

Focus on your savings and maybe you will be able to give them part of their inheritance while you are still around
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calmaniac
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Re: Can I be doing more for my child later in life?

Post by calmaniac »

sailaway wrote: Wed Oct 27, 2021 9:15 am
calmaniac wrote: Wed Oct 27, 2021 9:03 am 98% of "doing more for my child" is teaching them and providing them the best environment to be an independent happy emotionally fulfilled and resilient person as an adult. All the $$ in the world will not give them that. Easy to think about the money and numbers, but the other stuff is a much more important.
The other 2% is making sure you don't become dependent on them. This is also known as putting on your own oxygen mask first.
Point well taken. That is outside the 99% confidence intervals of my retirement plan, but you are right in that is not the case for many Americans. That said, sometimes us BH'ers can lose track of the bigger picture beyond the money and numbers.
"Pretired", working 20 h/wk. AA 75/25: 30% TSM, 19% value (VFVA/AVUV), 18% Int'l LC, 8% emerging, 25% GFund/VBTLX. Military pension ≈60% of expenses. Pension+SS@age 70 ≈100% of expenses.
sailaway
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Re: Can I be doing more for my child later in life?

Post by sailaway »

calmaniac wrote: Wed Oct 27, 2021 10:21 am
sailaway wrote: Wed Oct 27, 2021 9:15 am
calmaniac wrote: Wed Oct 27, 2021 9:03 am 98% of "doing more for my child" is teaching them and providing them the best environment to be an independent happy emotionally fulfilled and resilient person as an adult. All the $$ in the world will not give them that. Easy to think about the money and numbers, but the other stuff is a much more important.
The other 2% is making sure you don't become dependent on them. This is also known as putting on your own oxygen mask first.
Point well taken. That is outside the 99% confidence intervals of my retirement plan, but you are right in that is not the case for many Americans. That said, sometimes us BH'ers can lose track of the bigger picture beyond the money and numbers.
I never heard the term sandwich generation until a few years ago, but my grandparents moved in with us when I was in high school, so I had a front row seat. 30 some years later, I am in the peanut gallery while my mom helps her sister negotiate declining health and limited funds. We are fortunate that both of us have parents who are well placed, even continue to save because SS + pensions is more than they generally spend. Unfortunately, between us only one of our siblings followed suit. Two have expressly said they have no retirement savings at all - the same two who generally lack resiliency skills, so yeah, that ought to be fun...
J295
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Re: Can I be doing more for my child later in life?

Post by J295 »

Love it that you’re so proactively thinking of your child/family.

The way we handled it was to invest and save in our name, and not have anything in the name of the kids except for their Roth Ira that they created when they started earning some income in high school (we would provide a match, so that if they earned $3000 they would put in $1500 and we would put in $1500).

We chose not to do 529 or make investments in their name, because we didn’t want substantial amounts in their name in case it would have been a negative in terms of FAFSA/scholarships. It ends up that was irrelevant, because one could run really fast and the other could quickly answer all the questions on the test, so two out of the three head full scholarship to college. Lucky for sure from the parents perspective financially. 😃. However, notwithstanding that I would do it the same and have suggested to our kids that they do it the same for our grandchildren.

Remember this also when you save enough in your name, you can start making gifts to your children whenever you desire. We are in our early 60s in our kids in the early 30s, and we have made them periodic substantial gifts. There are a lot of things you can do for your kids with your own money over the years, like private school tuition, sports camps, band camps, weddings, vacations, etc.

Finally, I have no angst if you decide to do it differently, just giving you the perspective that we chose. Again, so cool to see you being so proactive for your child/family.
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illumination
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Re: Can I be doing more for my child later in life?

Post by illumination »

From what is being described here, I don't think legacy and estate type considerations should be the focus. If something like a Roth can't be funded and only the minimum of employer match is being made at work, those need to be addressed first.

For 99% of people here, you can gift whatever you want to your children later in life. And you'll have control. It might not be the absolute most tax efficient way to handle things, but you're also giving up a lot of other tax advantages by "not" fully taking advantage of retirement accounts. You don't want to be dependent on your children to float your retirement.
cashheavy18
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Re: Can I be doing more for my child later in life?

Post by cashheavy18 »

If you haven't already, please take a look at how to prioritize investing:

https://forum.mrmoneymustache.com/inves ... msg1333153

Once you've maxed out all tax advantaged space and are secure in your own retirement goals, then you can think about how to help your child.

Instead of opening a UTMA account now for your child, you can always gift shares from your taxable down the road.

This is the approach we're taking; in 2021 we (each parent) can give $15k to each of our children - we are gifting shares of appreciated stock.
cashheavy18
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Re: Can I be doing more for my child later in life?

Post by cashheavy18 »

duplicate
Last edited by cashheavy18 on Wed Oct 27, 2021 10:56 am, edited 1 time in total.
J295
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Re: Can I be doing more for my child later in life?

Post by J295 »

sailaway wrote: Wed Oct 27, 2021 9:15 am
calmaniac wrote: Wed Oct 27, 2021 9:03 am 98% of "doing more for my child" is teaching them and providing them the best environment to be an independent happy emotionally fulfilled and resilient person as an adult. All the $$ in the world will not give them that. Easy to think about the money and numbers, but the other stuff is a much more important.
The other 2% is making sure you don't become dependent on them. This is also known as putting on your own oxygen mask first.
Well put. I naïvely default to assume that this is the way most people parent, because it’s all I’ve ever seen and done… But I know it’s not the case so it’s good to state it so clearly.
bhough
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Re: Can I be doing more for my child later in life?

Post by bhough »

I put $25/month in my kids savings account, a treasury direct plan for them and a brokerage account at vanguard. Then I show them the balances. They ignore this 95% of the time. Occasionally one will look at them and compare. I think $75/month between these two accounts is the most I'd do (if I were you) outside of a 529 and your own retirement. It is instructive to see the different ways they get paid from these investments.
b
KlangFool
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Re: Can I be doing more for my child later in life?

Post by KlangFool »

OP,

1) Do not contribute to 529.

2) Max up all your tax-advantaged accounts: 401K, HSA, Roth IRAs.

3) Any money beyond that, invest in your taxable account. 100% stock in your taxable account for tax efficiency.

4) When your kid has some earn income, contribute to their Roth IRA.

5) When your kid started college, spend from your taxable account and max up your tax-advantaged accounts. This effectively move money from your taxable account to the tax-advantaged accounts.

KlangFool
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Eagle33
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Re: Can I be doing more for my child later in life?

Post by Eagle33 »

There are loans available for college, but not for retirement income.

If you are travelling living with a child or someone who requires assistance, secure your mask on financial future first, and then assist the other person.
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mzvarner
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Re: Can I be doing more for my child later in life?

Post by mzvarner »

SailorJack02 wrote: Wed Oct 27, 2021 4:00 am 2. Family plan is when the HSA account holder is covered by a high deductible health plan that covers the spouse as well, when filing jointly. Is this your insurance?

HSA is for me, Wife is covered by her own insurance. So I can only contribute the $3200, not the $7200.

3. You can always fund via a back door contribution as needed. I agree that the HSA is the priority because of current year savings.

I have seen this mentioned, and vaguely understand that you open an IRA then somehoe convert it too a ROTH?
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mzvarner
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Re: Can I be doing more for my child later in life?

Post by mzvarner »

KlangFool wrote: Wed Oct 27, 2021 11:42 am OP,

1) Do not contribute to 529.

Can you elaborate? Is this because we have not maxed our potential of Investment Priorities prior to opening a 529, as suggested by you #2 point? Im going to modify the original post for clarity. The other points make since to me.

KlangFool
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mzvarner
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Re: Can I be doing more for my child later in life?

Post by mzvarner »

cashheavy18 wrote: Wed Oct 27, 2021 10:55 am If you haven't already, please take a look at how to prioritize investing:

https://forum.mrmoneymustache.com/inves ... msg1333153

Once you've maxed out all tax advantaged space and are secure in your own retirement goals, then you can think about how to help your child.
Neither of our parents taught us the value of saving, hints why we are learning and asking for advice in our 30's. But better late than never.

That being said your response reminds me of a saying my father used to tell me alot. "A man cannot help others until he has secured himself."
Maybe he did teach me about finances, I just did not understand until now?

Thank for your reply.
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mzvarner
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Re: Can I be doing more for my child later in life?

Post by mzvarner »

Thank you all for the responses thus far. I have modified the original post for clarity. Sounds like the major theme is that we were cherry picking what parts of the "investment prioritization" we wanted, and it is time to crunch dome numbers and reassess. I look forward to more information.
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Re: Can I be doing more for my child later in life?

Post by cchrissyy »

1. A custodial ROTH sounds ideal, but at 2, she doesn't have any earned income. It looks like we could gift her an annual contribution?
hello!
no you can't give her money for a Roth unless she has the earned income to qualify. save this idea for her teenage years or young adulthood. it's a very impactful thing you might want to do, if you can, at that time.

in the meantime, work on maxing out your own financial position like other posters have explained.

if you somehow get in an amazing personal financial spot including colege savings, before the year she has the earned income for the Roth idea, then the answer to your question of how to give her investment money is a custodial brokerage account. but you are a long way from needing that answer.

Good luck! It seems you have already succeeded at positioning her better than you were at this age.
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Re: Can I be doing more for my child later in life?

Post by BernardShakey »

KlangFool wrote: Wed Oct 27, 2021 11:42 am OP,

1) Do not contribute to 529.

2) Max up all your tax-advantaged accounts: 401K, HSA, Roth IRAs.

3) Any money beyond that, invest in your taxable account. 100% stock in your taxable account for tax efficiency.

4) When your kid has some earn income, contribute to their Roth IRA.

5) When your kid started college, spend from your taxable account and max up your tax-advantaged accounts. This effectively move money from your taxable account to the tax-advantaged accounts.

KlangFool
This assumes that when your kids go off to college you are still gainfully employed and making enough to still max up your tax advantaged accounts as KlangFool notes in step 5. You may find yourself out of work or working for less just when the kids head off to school. I'd recommend step 2 above and then contribute at least half of your additional savings to 529 (and the other half to taxable if you prefer). The 529 tax savings, if you load it up early, can be substantial. Then agree with step 4 when kids have earned income. 529's make no sense if you aren't already maxing out your tax advantaged retirement accounts. But after those are all maxed out, using 529's can save you a lot in taxes. And their use ensures the money will be there for college. Using only taxable, it can get spent along the way if you aren't highly disciplined.
An important key to investing is having a well-calibrated sense of your future regret.
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Re: Can I be doing more for my child later in life?

Post by KlangFool »

mzvarner wrote: Wed Oct 27, 2021 11:18 pm
KlangFool wrote: Wed Oct 27, 2021 11:42 am OP,

1) Do not contribute to 529.

Can you elaborate? Is this because we have not maxed our potential of Investment Priorities prior to opening a 529, as suggested by you #2 point? Im going to modify the original post for clarity. The other points make since to me.

KlangFool
If you agreed with the other points, why should you contribute to 529? Instead of tax free growth of 10+ years, you get tax free growth of longer period with your tax advantaged accounts.

Why would you save for college education? Your annual savings is big enough to pay college education.

KlangFool
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Re: Can I be doing more for my child later in life?

Post by KlangFool »

BernardShakey wrote: Thu Oct 28, 2021 12:12 am
KlangFool wrote: Wed Oct 27, 2021 11:42 am OP,

1) Do not contribute to 529.

2) Max up all your tax-advantaged accounts: 401K, HSA, Roth IRAs.

3) Any money beyond that, invest in your taxable account. 100% stock in your taxable account for tax efficiency.

4) When your kid has some earn income, contribute to their Roth IRA.

5) When your kid started college, spend from your taxable account and max up your tax-advantaged accounts. This effectively move money from your taxable account to the tax-advantaged accounts.

KlangFool
This assumes that when your kids go off to college you are still gainfully employed and making enough to still max up your tax advantaged accounts as KlangFool notes in step 5. You may find yourself out of work or working for less just when the kids head off to school. I'd recommend step 2 above and then contribute at least half of your additional savings to 529 (and the other half to taxable if you prefer). The 529 tax savings, if you load it up early, can be substantial. Then agree with step 4 when kids have earned income. 529's make no sense if you aren't already maxing out your tax advantaged retirement accounts. But after those are all maxed out, using 529's can save you a lot in taxes. And their use ensures the money will be there for college. Using only taxable, it can get spent along the way if you aren't highly disciplined.
If OP is unemployed or under employed when the kids go to college, OP cannot afford to pay for college education. Money stuck in 529 is a very bad thing.

OP need the money in the taxable account to feed the family.

Or, the money in the taxable account can be moved to tax-advantaged accounts and enjoy longer term tax-free growth. Still better than 529.

KlangFool
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Re: Can I be doing more for my child later in life?

Post by KlangFool »

mzvarner wrote: Wed Oct 27, 2021 3:23 am
extra on mortgage.
mzvarner,

This is a VERY BAD idea!

Some of my peers paid off the mortgage and then took a more expensive student loan for their kids.

Do not pay down or pay off your mortgage until you are Financially Independent and/or retired.

<<This mortgage is our only debt and we pay extra each month in hopes of paying it off sooner than later. >>

Why do you choose pay 10+% to 20+% taxes in order to save 3+% mortgage interest? How does paying more taxes instead of keeping more money in your own pocket makes any sense?

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J295
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Re: Can I be doing more for my child later in life?

Post by J295 »

OP
Do you itemize deductions or take the standard deduction on Your federal income tax return?
Lextalionis
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Re: Can I be doing more for my child later in life?

Post by Lextalionis »

Surprised no mention of a revocable trust with very specific allocation rules. We have a corporate trustee and have set very specific rules for our children based on age and asset liquidity. Hopefully this will stave off the shirtsleeves to shirtsleeves phenomenon. Of course this kicks in if or after we are gone and may not be pertinent to providing for your children while living.
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mzvarner
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Re: Can I be doing more for my child later in life?

Post by mzvarner »

KlangFool wrote: Thu Oct 28, 2021 7:40 am
mzvarner wrote: Wed Oct 27, 2021 3:23 am
extra on mortgage.
mzvarner,

This is a VERY BAD idea!

Some of my peers paid off the mortgage and then took a more expensive student loan for their kids.

Do not pay down or pay off your mortgage until you are Financially Independent and/or retired.

<<This mortgage is our only debt and we pay extra each month in hopes of paying it off sooner than later. >>

Why do you choose pay 10+% to 20+% taxes in order to save 3+% mortgage interest? How does paying more taxes instead of keeping more money in your own pocket makes any sense?

KlangFool
I guess I did (do?) not understand as well as I thought. We see all these investment products that sound like good ideas. It is hard to feel like one is "doing enough" when they are only investing in 1 account, but this is why there is a way to prioritize them. I get that time in the market is powerful because of compounding growth, and it is hard to have compounding growth if you spread the money across multiple products with varying levels of investment options.

As for the extra on a mortgage, this is important to my wife. I am trying to get her to see the benefit of not paying it off sooner. But that last line, "10%-20 taxes to save 3%" might do the trick. I personally have not thought of it that way.
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mzvarner
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Re: Can I be doing more for my child later in life?

Post by mzvarner »

J295 wrote: Thu Oct 28, 2021 8:05 am OP
Do you itemize deductions or take the standard deduction on Your federal income tax return?
We do not. Not sure that I see the benefit.
J295
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Joined: Sun Jan 01, 2012 10:40 pm

Re: Can I be doing more for my child later in life?

Post by J295 »

mzvarner wrote: Thu Oct 28, 2021 6:07 pm
KlangFool wrote: Thu Oct 28, 2021 7:40 am
mzvarner wrote: Wed Oct 27, 2021 3:23 am
extra on mortgage.
mzvarner,

This is a VERY BAD idea!

Some of my peers paid off the mortgage and then took a more expensive student loan for their kids.

Do not pay down or pay off your mortgage until you are Financially Independent and/or retired.

<<This mortgage is our only debt and we pay extra each month in hopes of paying it off sooner than later. >>

Why do you choose pay 10+% to 20+% taxes in order to save 3+% mortgage interest? How does paying more taxes instead of keeping more money in your own pocket makes any sense?

KlangFool
I guess I did (do?) not understand as well as I thought. We see all these investment products that sound like good ideas. It is hard to feel like one is "doing enough" when they are only investing in 1 account, but this is why there is a way to prioritize them. I get that time in the market is powerful because of compounding growth, and it is hard to have compounding growth if you spread the money across multiple products with varying levels of investment options.

As for the extra on a mortgage, this is important to my wife. I am trying to get her to see the benefit of not paying it off sooner. But that last line, "10%-20 taxes to save 3%" might do the trick. I personally have not thought of it that way.
OP does not itemize deductions.

How is it costing OP 10%-20% + in taxes by paying down a 3%+ mortgage?

There are many threads on this forum with reasonable insights on both sides of the “should I pay down my mortgage issue.” The wisdom of paying down ow not is based on each family’s facts and circumstances.
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teen persuasion
Posts: 2319
Joined: Sun Oct 25, 2015 1:43 pm

Re: Can I be doing more for my child later in life?

Post by teen persuasion »

J295 wrote: Thu Oct 28, 2021 7:42 pm
mzvarner wrote: Thu Oct 28, 2021 6:07 pm
KlangFool wrote: Thu Oct 28, 2021 7:40 am
mzvarner wrote: Wed Oct 27, 2021 3:23 am
extra on mortgage.
mzvarner,

This is a VERY BAD idea!

Some of my peers paid off the mortgage and then took a more expensive student loan for their kids.

Do not pay down or pay off your mortgage until you are Financially Independent and/or retired.

<<This mortgage is our only debt and we pay extra each month in hopes of paying it off sooner than later. >>

Why do you choose pay 10+% to 20+% taxes in order to save 3+% mortgage interest? How does paying more taxes instead of keeping more money in your own pocket makes any sense?

KlangFool
I guess I did (do?) not understand as well as I thought. We see all these investment products that sound like good ideas. It is hard to feel like one is "doing enough" when they are only investing in 1 account, but this is why there is a way to prioritize them. I get that time in the market is powerful because of compounding growth, and it is hard to have compounding growth if you spread the money across multiple products with varying levels of investment options.

As for the extra on a mortgage, this is important to my wife. I am trying to get her to see the benefit of not paying it off sooner. But that last line, "10%-20 taxes to save 3%" might do the trick. I personally have not thought of it that way.
OP does not itemize deductions.

How is it costing OP 10%-20% + in taxes by paying down a 3%+ mortgage?

There are many threads on this forum with reasonable insights on both sides of the “should I pay down my mortgage issue.” The wisdom of paying down ow not is based on each family’s facts and circumstances.
The OP is not maxing his 401k. The extra tax is on that income that does not get the tax deferral.

He'd be better to shift any mortgage prepayment and 529 contributions to a tax deferred 401k. Then cut back his expenses to find more money to save, filling up each successive step in the priority of investment list before moving on to the lower priority ones at the bottom. It only makes sense to add to the low priority ones once you've completely exhausted all available space in the highest priority levels.
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teen persuasion
Posts: 2319
Joined: Sun Oct 25, 2015 1:43 pm

Re: Can I be doing more for my child later in life?

Post by teen persuasion »

mzvarner wrote: Thu Oct 28, 2021 6:07 pm
I guess I did (do?) not understand as well as I thought. We see all these investment products that sound like good ideas. It is hard to feel like one is "doing enough" when they are only investing in 1 account, but this is why there is a way to prioritize them. I get that time in the market is powerful because of compounding growth, and it is hard to have compounding growth if you spread the money across multiple products with varying levels of investment options.

As for the extra on a mortgage, this is important to my wife. I am trying to get her to see the benefit of not paying it off sooner. But that last line, "10%-20 taxes to save 3%" might do the trick. I personally have not thought of it that way.
The problem with prepaying the mortgage is that it is at the expense of saving in tax advantaged accounts. You want those accounts to grow, and compound, faster, right? Then you want to feed them as much as possible.

Yes, prepaying the mortgage in hopes of getting to the end of mortgage payments sooner would eventually leave you with more money to save in the future. But until you actually reach the end, you still are obligated to make that mortgage payment. It doesn't free up disposable income until years later. So you've lost years/decades of compounding on the saving you didn't do (the prepayments).

You also paid more in taxes to divert the money to mortgage prepayment instead of a tax deferred account. Which leaves you with even less to save!

Now compare the interest you expect to avoid on the mortgage, vs the growth you expect to earn in your tax advantaged accounts. Current mortgage rates are low, you should keep that cheap, long loan rather than give it up early - instead invest those $$ in assets you expect to earn higher returns.
J295
Posts: 3399
Joined: Sun Jan 01, 2012 10:40 pm

Re: Can I be doing more for my child later in life?

Post by J295 »

Thanks
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