Cleaning Financial House with Birth of Child

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Topic Author
FaithfulSteward
Posts: 4
Joined: Tue Jul 20, 2021 9:36 am

Cleaning Financial House with Birth of Child

Post by FaithfulSteward »

First Post :). My wife and I just had our second child. I am taking the moment to cleanup our financial house and have a few questions.

Here’s a quick overview of our financial house (I am 38, wife does not work). Goals- able to walk away from working at 55 and pay for college in state under grad tuition.

401k - 625k ($550k pretax, $75k Roth), maxing out pre-tax
Contributions with a healthy company match.
After tax Inherited stock with <2000 shareholders (no ticker symbol) - 200k
Wife owned rollover IRA 67k
Roth IRA - 25k (7k conversiom from 2014, 18k earnings).
529 for daughter 16k. Saving 425/month. Goal it to provide in state under grad tuition.
Betterment - accounts for miscellaneous near term savings goals, emergencies, etc. 25k
Wife owned spousal traditional IRA 6k
Pension accruing that will be worth $1m+ when I turn 55.

Action 1: For simplicity, I am planning to move most of the accounts to the same brokerage. In the process, I would like to consolidate my wife’s two IRA’s. Anything that would prevent that?

Action 2: I’ve been tucking $75/month away for my daughter. I may never tell her it exists, I just don’t want to have to think about a wedding in retirement. It’s in the betterment aftertax account and is now over $3000. I don’t want the .25% fee longeterm so I’m thinking about opening a regular after tax brokerage account but open to other ideas. Any suggestions on the best way to approach this? I plan to do this for our son as well.

Action 3: I think I need to open a second 529 for our son. Need to save $3000 first to open it with vanguard. I’ll be doing that in betterment at $425/month. Any reactions or suggestions on this?

Action 4: With the secure act, we can access $5000 per parent from our IRA’s or 401ks (if allowed by plan rules). I have no interest in incurring more taxes today by withdrawing pretax dollars, but am interested in withdrawing after tax earnings if possible. I am currently maxing out my 401k on a pretax basis. My 401k does not allow me to access my Roth 401k for these types of withdrawals. All of my wife’s money is pretax. So really the only place I can go for after tax dollars I s my ROTH Ira. Today, regardless of whether I had a child, I could withdraw the $7k in conversion money tax free. If I want to withdraw the $5k allowed for childbirth, due to IRS ordering, would that withdrawal come out of my conversion funds that I can already access penalty free? Do I need to withdraw my $7k of conversion funds first to then withdraw the $5k in earnings penalty free or is there a way to withdraw the earnings portion while leaving my conversion portion in the account? I have some near term financial needs and do not anticipate needing these funds in retirement and would not contribute them today (in fact I could through back doors, mega back doors, etc if I believed it was necessary).

Thanks in advance.

FaithfulSteward
Lionel Hutz
Posts: 379
Joined: Sat Jan 30, 2021 12:18 pm

Re: Cleaning Financial House with Birth of Child

Post by Lionel Hutz »

Welcome and congratulations - I’ll take a crack.

1. Consolidation is perfectly fine. A few considerations: Are your wife’s two IRAs both Traditional IRAs, i.e. contributory only or are either Rollover IRAs? For possible future backdoor Roth reasons, it’s smart to keep a Traditional and Rollover IRA separate. If they’re both the same or you don’t care about that, combine away!

2. If you’re confident in your self-management abilities then yes a normal brokerage account is fine. UGMA/UTMA may interest you depending on your intentions for the money.

3.529: no reactions other than advising you research the best situation for what “state” it’s derived from.

4. First, after tax 401k earnings are taxable, but they can’t be withdrawn only anyway, there’s a pro rata rule between after tax basis and earnings.
Now, Roth IRAs use First In First Out, meaning contributions are taken before earnings. I’m not sure if the Child Credit provision of SECURE changes that any. And unless you’re +59.5 Roth earnings are taxable and subject to 10% penalty.

General advice for #4, so as not to upset the accounting of your retirement plans, find sources from non retirement money if possible.
Strayshot
Posts: 833
Joined: Thu Mar 05, 2015 7:04 am
Location: New Mexico

Re: Cleaning Financial House with Birth of Child

Post by Strayshot »

Lionel Hutz wrote: Sat Jul 24, 2021 7:50 am Welcome and congratulations - I’ll take a crack.

1. Consolidation is perfectly fine. A few considerations: Are your wife’s two IRAs both Traditional IRAs, i.e. contributory only or are either Rollover IRAs? For possible future backdoor Roth reasons, it’s smart to keep a Traditional and Rollover IRA separate. If they’re both the same or you don’t care about that, combine away!

2. If you’re confident in your self-management abilities then yes a normal brokerage account is fine. UGMA/UTMA may interest you depending on your intentions for the money.

3.529: no reactions other than advising you research the best situation for what “state” it’s derived from.

4. First, after tax 401k earnings are taxable, but they can’t be withdrawn only anyway, there’s a pro rata rule between after tax basis and earnings.
Now, Roth IRAs use First In First Out, meaning contributions are taken before earnings. I’m not sure if the Child Credit provision of SECURE changes that any. And unless you’re +59.5 Roth earnings are taxable and subject to 10% penalty.

General advice for #4, so as not to upset the accounting of your retirement plans, find sources from non retirement money if possible.
Good info here. For 2 Look up kiddie tax and the potential to derive “untaxed returns” by use of a UTMA account and selling/rebuying equities on a yearly basis. Betterment is a mess, best not to use that for this purpose. For 4, you can take out contributions at any time from a Roth after the 5 year clock if you need money but I would second the opinion to use other sources if possible. Contributions would come out first. You may be able to roll funds from your Roth 401k to your Roth IRA to ease access to the money, but once again this is complicated and opportunity exists to get crosswise with the IRS if a single step is botched.
I love Fidelity if you are looking for a one stop shop.
Grt2bOutdoors
Posts: 25625
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Cleaning Financial House with Birth of Child

Post by Grt2bOutdoors »

Take the $3k from the betterment account and open account with either Schwab or Vanguard-buy the total us stock market and let it ride.

Schwab has a no minimum child’s account but depending on state law you would have to retire the account to child at either age 18 or 21. If that’s not to your liking, then do the above in your name, scratch paying 25 bps, pay 1-4 bps for the same product.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
runner540
Posts: 1763
Joined: Sun Feb 26, 2017 4:43 pm

Re: Cleaning Financial House with Birth of Child

Post by runner540 »

Do you already have enough disability and life insurance?
Topic Author
FaithfulSteward
Posts: 4
Joined: Tue Jul 20, 2021 9:36 am

Re: Cleaning Financial House with Birth of Child

Post by FaithfulSteward »

Regarding disability and life insurance, good question. The answer is I think so. Roughly $1M life insurance policy + work covered disability plus my wife could easily go back to work if needed (she is an RN, was making ~90k/yr when she quit a couple years ago).
Topic Author
FaithfulSteward
Posts: 4
Joined: Tue Jul 20, 2021 9:36 am

Re: Cleaning Financial House with Birth of Child

Post by FaithfulSteward »

1. They are both traditional so no Roth basis to worry about.
2. I'll look into UGMA/UTMA, thanks for the tip. My idea was basically to make sure that I didn't have to work another year because a kid wanted to get married, etc. Figured if college was paid and there was an extra amount set aside I wouldn't have to stress.
3. I'm in Texas so really no advantage I'm aware of using the state's plans.
4. I was thinking the same. For ROTH, likely have to withdraw contributions if I want to take advantage of the $5k secure act provision since I could withdraw them anyways without that tax law change.

General advice - My thought here is that my retirement is already funded such that if I stopped contributing any more today, quit my job, and started flipping burgers to keep the lights on, sometime in my late 50's or early 60's I could stop flipping the burgers forever and still not run out of money (i.e. I really don't see the Roth as necessary to retire with all of the other likely income streams. It was actually a leftover 401k rollover from an internship long ago that I've more or less day traded for years, although I've adopted the boglehead strategy in recent times for most other accounts).
Lionel Hutz wrote: Sat Jul 24, 2021 7:50 am Welcome and congratulations - I’ll take a crack.

1. Consolidation is perfectly fine. A few considerations: Are your wife’s two IRAs both Traditional IRAs, i.e. contributory only or are either Rollover IRAs? For possible future backdoor Roth reasons, it’s smart to keep a Traditional and Rollover IRA separate. If they’re both the same or you don’t care about that, combine away!

2. If you’re confident in your self-management abilities then yes a normal brokerage account is fine. UGMA/UTMA may interest you depending on your intentions for the money.

3.529: no reactions other than advising you research the best situation for what “state” it’s derived from.

4. First, after tax 401k earnings are taxable, but they can’t be withdrawn only anyway, there’s a pro rata rule between after tax basis and earnings.
Now, Roth IRAs use First In First Out, meaning contributions are taken before earnings. I’m not sure if the Child Credit provision of SECURE changes that any. And unless you’re +59.5 Roth earnings are taxable and subject to 10% penalty.

General advice for #4, so as not to upset the accounting of your retirement plans, find sources from non retirement money if possible.
Topic Author
FaithfulSteward
Posts: 4
Joined: Tue Jul 20, 2021 9:36 am

Re: Cleaning Financial House with Birth of Child

Post by FaithfulSteward »

Grt2bOutdoors wrote: Sat Jul 24, 2021 8:30 am Take the $3k from the betterment account and open account with either Schwab or Vanguard-buy the total us stock market and let it ride.

Schwab has a no minimum child’s account but depending on state law you would have to retire the account to child at either age 18 or 21. If that’s not to your liking, then do the above in your name, scratch paying 25 bps, pay 1-4 bps for the same product.
Thanks for the tip on Schwab, I'll look into that. For this money, I'll probably just keep it as I don't plan to tell the kids it exists, But that is a good strategy for getting them to save gifts from grandparents, chore money, etc.
softwaregeek
Posts: 951
Joined: Wed May 08, 2019 8:59 pm

Re: Cleaning Financial House with Birth of Child

Post by softwaregeek »

Most brokers have no lower bound on accounts if the relationship minimum is met. My kid has one share of Disney at Merrill edge.
Hebell
Posts: 963
Joined: Wed Aug 12, 2020 1:56 am
Location: Boca Raton, FL

Re: Cleaning Financial House with Birth of Child

Post by Hebell »

If you've raised her right, or if it's not a tradition in your family, she won't be asking you for an expensive wedding. She'll be asking you for an excellent computer, money to jump start her business, or an opportunity to take a trip somewhere she's long wanted to go. You'll have those secret funds to release for that purpose too!
ralph124cf
Posts: 2985
Joined: Tue Apr 01, 2014 11:41 am

Re: Cleaning Financial House with Birth of Child

Post by ralph124cf »

FaithfulSteward wrote: Sat Jul 24, 2021 12:40 pm Regarding disability and life insurance, good question. The answer is I think so. Roughly $1M life insurance policy + work covered disability plus my wife could easily go back to work if needed (she is an RN, was making ~90k/yr when she quit a couple years ago).
If you lose your job, your wife can go back to work. That is back up plan #1. If you die, when she goes back to work she will have high continuing costs for child care. I would recommend an additional $2M 20 level TERM policy. That would allow your wife to stay home until the youngest is in grade school and then see your kids thru college.

If you lose your job, you also lose your disability insurance. Consider shopping for a true own occupation individual disability policy.

You don't say what your job is, but some occupations are more easily disabled than others. If you are a tenured university professor, it is actually hard to get disabled. If you are an airline pilot, it is quite easy, because there are so many medical conditions that are disqualifying that would not do more than slightly inconvenience a university professor.

Ralph
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