Anonymous and his wife have $275,000 saved and a child on the way. They’re 27 and want to reach financial independence by 35. They want to buy a house, but with this crazy market, what’s the smartest way for them to use their savings?
Pensions make Chad uncomfortable, to the point of quitting his job to roll his $175,000 over to an IRA. Is the 12 percent match his employer offers good enough to beat the two percent growth of his pension? Or should he leave and never look back?
Anonymous and his wife are 30 and hope to reach financial independence in five years. They want to know: is a taxable brokerage account the best place for their leftover $1,000 after they max out their pre-tax 401k contributions?
Sharon called in on Episode 336 and called back to clarify her question. Her husband purchased a below-market property which has a cap that limits how much they can sell it for. Should they keep the home, or sell it, even if they can’t get the full price for it?
Norm wants to buy a house in cash and doesn’t want his name on public record. Is it possible for him to stay anonymous?
Joe Saul-Sehy, my friend and former financial planner, joins me to tackle these questions on today’s episode.
Do you have a question on business, money, trade-offs, financial independence strategies, travel, or investing? Leave it here and we’ll answer them in a future episode.
Anonymous asks (at 3:14 minutes):
My wife and I, both 27 years old, have saved $275,000 thanks to large raises. It’s sitting in two separate money market accounts. We’d like to reach financial independence by age 35, and my wife is pregnant. She’ll stop working after the baby is born, and I’ll continue to work as long as needed.
Our initial goal was to buy a house in cash and retain a large nest egg on which to retire safely. However, with such an expensive housing market, we can no longer buy in cash. We’re getting priced out of the area in which our family lives, and being near our family is a must.
Should we put a large amount towards a downpayment and take out a small mortgage? Or put down less, and invest the rest in a market or a rental property? We aren’t keen to be landlords at this time, but we’re willing to do it to meet our financial goals.
We have $120,000 in our Roth IRAs, traditional IRAs, and 401ks combined. We also have $7,000 in an HSA (health savings account) which we’ll use for the delivery of our child. We’re open to using cash for the delivery so as to leave the HSA for retirement.
We’re debt-free and happily living out of our RV, but having so much money in cash is making us antsy. What would you do in our situation?
Chad asks (at 25:56):
Pensions make me uncomfortable. Should they?
As a teacher in Arizona, I’m forced to contribute 12 percent of my salary to the pension system. It only grows around two percent, but my employer matches the full 12 percent. I’m fully vested.
I know that I’m never going to retire in Arizona, and I can’t stand the thought of my retirement savings growing at such a low rate. I’m 43, and I have another 20 years before I retire.
I plan to quit at the end of the school year, primarily to roll $175,000 of the pension into an IRA, where I can invest aggressively.
My savings allow me eight months to look for another job, and I’m interested in trying something new. But if that plan fails, I can fall back on another teaching job.
Are there any holes in this plan to gain more control over that $175,000? Or is my pension actually sound?
Anonymous asks (at 34:12 minutes):
My question is about investment accounts. My wife and I are both 30 and work as software engineers. We don’t have kids (yet). Combined, we have $100,000 in our 401ks and $40,000 in our taxable brokerage accounts. All of our money is in broad market index funds. About 80 percent of our 401k money is in the pre-tax bracket, and the rest of it is in a Roth.
We put $40 to $100 a month towards investments, $30 to $100 towards pre-tax 401k contributions (until we each max it out), and the rest of it goes in the taxable brokerage account.
We’d like to work five more years, sell our current home, and return to India. If all goes well, we’ll have about $500,000 in our investment accounts, and $150,000 from the sale of our house. That, along with a paid-off house in India, we should reach financial independence by the time we go to India.
Is the taxable brokerage account the best place for the leftover $1,000 after we max out our pre-tax 401k contributions? Once we go back to India, I’d prefer to keep all the money in tax-deferred accounts so we can take advantage of being in a lower tax bracket and use a conversion ladder to withdraw.
Since I’m reaching the pre-tax max and I’m paying tax on the $1,000 anyway, I would like to contribute this to a Roth IRA account, but we’re avoiding income limits for the Roth IRA. Plus, doing a backdoor Roth IRA restricts the access to even the contributions for five years. The additional tax paperwork just to save tax on the dividends also made the backdoor Roth less worthwhile.
My company offers post-tax 401k contributions, but it seems like I’m giving up a lot of flexibility for not a lot of benefit. What are your thoughts?
Sharon asks (at 48:33 minutes):
I called in on episode 336, but I used the wrong term in my question. My husband has a below-market property that he purchased in 2008. He qualified as a low-income applicant. The property is not appreciating in value in terms of what’s in our neighborhood, and there is a cap price as well. If our neighbor sells their house at $600,000, my husband would only be able to sell the property somewhere in the $400,000s. We have 20-25 years left before we get out of the “below-market” property rules in terms of selling at full price. Should we keep the property, or sell it?
Norm asks (at 52:19 minutes):
Can you remain anonymous in public records when purchasing a primary residence in cash in Washington state? Would using an LLC, a revocable trust, or a special land trust help?
I’d also like to retain the federal capital gains exclusion, or understand the tax impact if I’m unable to do so.
Resources Mentioned:
- The Art of Decision Making, with Annie Duke | Podcast episode
- Ask Paula & Joe | Podcast episode
Thanks to our sponsors!
Shopify
Diversify your business by selling physical and digital products through Shopify’s all-in-one platform. Every 28 seconds an entrepreneur makes their first sale on Shopify! Go to shopify.com/paula for a free fourteen day trial and get full access to Shopify’s entire suite of features.
Native
Native creates safe, simple, effective products with trusted ingredients and performance. Their deodorant doesn’t have aluminum and comes in a wide variety of scents. They also have bar soap, body wash, toothpaste, and plastic-free deodorant. Go to nativedeo.com/paula or use code “paula” at check out for 20% off!
OUAI
Created by celebrity hairstylist Jen Atkin, OUAI’s hair care, body, and fragrance products are cruelty-, sulfate-, and paraben-free. Use their Detox Shampoo to reset your hair and scalp once-a-week. It smooths frizz and creates shine for all hair types. Go to theouai.com and use code “PAULA” to get 15% off your entire purchase. They have refillable pouches, too.
