February Mortgage Update: Moving Money Around

Last month (January):
Years left: 2.25
P =$1,079.06, I =$135.34, Escrow =$788.73

This month (February):
Years left: 2.083333333333
P =$1,091.24, I =$123.16, Escrow =$788.73

One month’s prepayment savings: $7.90

Still pre-paying the mortgage.  But I did make one other big change right before the New Year.

Usually I do all my retirement stuff from September to September, ignoring the tax year.  But 2015 (and 2016) we’re going to be paying half of our taxes in a state with super high income tax.  So it makes sense to get our taxable income down a bit.  So I’m switching to 100% traditional 403b instead of half Roth.  On top of that, the 403b/457 amounts that you can save went up by $500, so I’m increasing the amount saved.

I was thinking about how on half my salary next year, we may [will] not be able to max out retirement *and* pay for health insurance and benefits simply because my gross pay once taxes are taken out may not be enough to cover all of that.  (DH’s retirement options suck.  Though our income might be down enough next year to be able to do a Roth again, something to keep in mind.)  So here we are making extra money now that we don’t need right now, but next academic year we may not be making enough to bring home any take-home pay from my paycheck if we keep things as they are now.

We already have a lot of cash just sitting in savings waiting to be turned into rent and deposits and daycare payments and state sales tax payments and all those things that we can’t afford on DH’s salary alone next year.  It doesn’t make any sense to just keep stock-piling in there when we can pile extra money into retirement savings *this* (school) year and keep money in the paycheck *next* (school) year.

So that’s what I’m doing.  I sent in the form to completely max out my 2015 403(b) from January to May (18K/5 = 3.6K/mo for the rest of the school year).  I still haven’t sent in my 457 plan increase because I’m not sure we’re going to be able to afford to do both plans for 2015– it’s going to depend on housing and schooling options.  If it turns out we *can* afford to keep adding to the 457 for 2015, then we should still be able to pay just it (and health insurance etc.) and still have at least some take-home pay left over.

So… from Jan [Feb paycheck] to May we will be:  Prepaying the mortgage, maxing out my 403b in the traditional option, saving to (but not maxing out) the 457 (half Roth/half traditional), and putting any extra $ in cash.  In May we will stop any substantive mortgage prepayment.  In September we will re-evaluate the 457 situation and decide whether or not we can afford to save to that option or not while we’re living in paradise.

I had been planning on having >80K in savings before we moved to Paradise (because we are going to be spending more than we earn this next school year), but now it is going to be less than that.  However, I will be getting half-salary (yay!) and (as of this change) won’t be making any 403b contributions during that time period, so our monthly take-home pay will be higher next year than I had been planning on when I set that savings target.

So, go me for shifting things around some.  I hope I’m making the right decisions and doing the right things.  I think we’ll be getting some pretty significant tax savings for the year from putting all this money in a traditional 403(b).  And I think we’ll still be in pretty good shape, so long as DH doesn’t lose his job.  (And if he does lose his job, Paradise is probably the best place for him to be to find a new one right away.)

[UPDATE:  I may be doing completely the wrong thing– I had assumed we would be counted as residents because of someone’s previous experience, but it looks like there are significant differences between that experience and this one (namely that I will not be getting any Paradise income during this time frame).  If I’m only temporary, then I should be funneling all our money into the ROTH choice to take advantage of lower tax rates.  If I’m a part-year resident, then I should not be maxing out my retirement now, but trying to make my take-home pay as low as possible when we’re in Paradise.  I think we need to talk to an actual tax professional about this stuff.]

UPDATE 2:  Talked to the Paradise tax board.  They are very confident that we will be nonresidents.  “You are not planning on a permanent move, it’s temporary.”  Which means a lot of the choices I’ve made (like timing donations, changing the IRA), were not great choices.  But hey, maybe one of my grants will hit and I’ll get summer salary.  I wonder if I should change the 403b back…

UPDATE 3:  Talked to someone in almost my exact situation from two years ago, and ze didn’t have to pay Paradise state income tax either.

What are your 403b/401K/457/IRA plans for the year?

35 Responses to “February Mortgage Update: Moving Money Around”

  1. Holly@ClubThrifty Says:

    The plan for me hasn’t really changed. I am maxing out my SEP IRA and Roth IRA, just like I did last year.
    We started a new business and put it in my husband’s name only so that he can begin contributing to his SEP IRA again. His retirement options at work aren’t that great so we decided to lower his contribution to 5% so he could get the company match but nothing more. He is also maxing out a Roth if all goes well!

  2. Debbie M Says:

    Hey, good job thinking ahead there!

    Things are also changing for me this year. I’m retiring as of next week. My goal is never to work for money again except as a short-term favor. So I am going to research what counts as “earned income” (I’m 99% sure it’s my gross pay + my accumulated vacation pay but none of my pension) and contribute all of that to my Roth IRA. I will not be able to max that (unless I take on any short-term jobs as a favor). I’m picking the Roth because my pension is taxed, so I like having my other money untaxed.

  3. The frugal ecologist Says:

    Sounds smart – it’s impressive that you can keep putting so much away while getting ready for a big move. Were you able to find renters? Hope so – but if not, 1/2 salary is pretty great to have! Do you get it for the full year?

    • nicoleandmaggie Says:

      We’re not even trying to find renters yet. That market starts in March and ends in August. We’re still not sure what to do. We are currently getting a paint estimate because we can’t do anything until the master bathroom has been repaired after having fostered kittens.

      Yes, 1/2 salary for the full year. (Well, full 9 months anyway.)

  4. Foscavista Says:

    It’s boring here too – max out Roth IRA, contribute to 403(B) up to the point of the match, throw about ~19% of gross income to taxable investments. (It has now surpassed the Roth IRA amount!) Emergency savings and personal savings are at 118% of gross so nothing is added there, although the accounts can keep their interest increments.

    It’s 2014 all over again!

  5. Leigh Says:

    To be honest, I’m not completely sure yet. I already made my Roth IRA contribution in full. I know I’ll max out my traditional 401(k), though it’ll take an extra 2% out of my smaller number of paychecks than it will in 2016. I also plan to max out the Employee Stock Purchase Plan, which is 15%. I’ll sell that and divert the funds to the next savings goal once the holding period (still unknown) is up.

    But I’m not sure if I have access to an after-tax 401(k) as well (I reread the benefits document and I’m pretty sure I do though) or if it has to be contributed to with paychecks or whether I could do a lump sum or how much I can for sure contribute. I would prefer doing the lump sum in December and putting the money into a savings account in the meantime. It would take ~29% of my monthly paycheck, which would mean ~50% of my gross being taken out of my paychecks, which is a little bit too much.

  6. Leah Says:

    Planning to max out my Roth. I keep inching up my 403(b) contributions when I feel like I’ve adjusted to a lower spending level. I create fake money “dilemmas” by not letting money sit in my checking account so that I don’t feel like I have a lot to spend. Not sure I can inch up the 403(b) right now, since we did start a 529. Going to wait a few months and see if I can sustain the 529 contributions at the highest level we can afford (we think) and then see if I can add ever more on 403(b).

    I find the key to savings, for me, is to slowly keep saving a greater and greater percentage. That way, my savings don’t feel like a huge burden on my cash flow.

  7. Leah Says:

    Does it feel freeing to know that you *could* pay off your mortgage if you wanted to make different decisions? Honestly, I admire your restraint in not doing so. I hate debt so much that I’d struggle to keep paying it if I had the $$ around to do so. I suppose having that money earmarked is useful.

    • nicoleandmaggie Says:

      I’m not #1, but I would guess that she does it by imagining her family having to live in a cardboard box next year, while they are on sabbatical in paradise with only half her income.

    • nicoleandmaggie Says:

      Very funny, #2.

      That’s a really interesting question. We’ve actually been able to pay off the mortgage from our taxable investments for over a year now and I was poking through the mortgage posts to see how I felt at that point, but my DH was unemployed, so I wasn’t actually all that relieved or excited because we were about exactly spending what I was earning. It was more of a curiosity kind of thing. It looks like sometime around July, 2014 we hit the point where the amount in our mortgage was smaller than the amount in our savings account, but we still needed the money in savings to pay for summer and private school and things like that, so it wasn’t really not earmarked. Right now our money in savings isn’t really free and clear either because, as #2 notes, without it we might very well be living in a cardboard box next year. (Or maybe I would… I assume we’d leave DH and the kids here in the house.)

      Playing with the college financial aid calculators last month really hit home the idea that if you’re high income on the line like we are (where our savings matter for financial aid purposes) you want as little in fungible savings as possible and as much in retirement accounts as possible. The mortgage can be paid down at any point before college financial aid decisions, but in the US we lose retirement savings room every single year. It makes far more sense to max out retirement savings once you’re at the point where we are now (though before it made sense for us to do a number of different things in order to give us flexibility).

      Also finding about amortization took away a lot of the worry about what happens if we’re house rich but cash-flow poor. If DH loses his job, we can more than halve our required mortgage payments (that escrow part, unfortunately, will always be required). So there’s less risk to having a lot paid off but not entirely paid off than we had initially thought.

      • nicoleandmaggie Says:

        Also, to be completely honest, even though it is not at all logical, I don’t want to lose access to my free wells fargo checking and savings or to have to deal with figuring out a way for them to remain free or to pay a fee to use them. Even if the fee is less than the interest that we pay each month. https://nicoleandmaggie.wordpress.com/2012/01/02/jan-mortgage-update-and-musings-on-bank-packages/
        Soooo irrational.

        They don’t even provide free checks anymore. But they do have them all over the country which is useful.

      • Leah Says:

        I totally understand about the bank account. In that case, have you considered stopping pre-payment now so you can just ride out the rest of your mortgage?

        And I like your thoughts about retirement. We are funneling more to retirement than we would given our income because of a similar thought. We’re slowly saving for a house, and we figure we will buy one before FAFSA time in order to really reduce our savings.

      • nicoleandmaggie Says:

        Join us next month for thoughts on stopping pre-payment,

  8. on_sabbatical Says:

    At the risk of derailing the conversation in a tax-related direction, are you sure you’ll have to pay partial year income tax in paradise state? I am on sabbatical this year (Sept -May) in another state, and from what I’ve read, I can still claim my home state as my “tax home” since I am employed by my home state employer and will be out of state for less than a year total. (Maybe that’s the key – are you going away for more than a year?)

    This article has been very helpful: http://chronicle.com/article/Tax-PlanningSabbatical/126293/

    In my case, I can justify my move for research purposes, meaning I can tally up my housing and moving expenses while away (plus 50% of federal per diem for meals) and deduct it all on Schedule A.

    • nicoleandmaggie Says:

      Yes, we can deduct the housing and moving expenses because we will be gone for less than a year total.

      I don’t know about the tax home. I will have to look into that. Paradise is pretty grabby but I don’t think I will be on Paradise University’s payroll (though there’s still a chance…). Last time we checked it seemed pretty clear that we would have to pay whatever percent of the year I was going to be staying in Paradise, but last time we checked circumstances were a little different.

      Interestingly, the Opposite of Paradise where my DH telecommutes from is also pretty grabby, meaning we may have to fill out 3 state taxes because they want him to pay taxes for each day that he is in Opposite of Paradise for work (so like 3 days every two months). That’s definitely something for us to look into.

      • nicoleandmaggie Says:

        Hm… The state webpage suggests that we might be part-year residents in which case we should NOT be putting away money for the 403b traditional IRA now, but we should be doing that while we’re actually gone to get my income down as low as possible while we’re living there. So maybe I messed up.

        This is really hard. Everything I’m finding on the internet says it varies by state. But Paradise’s webpage doesn’t define the difference between temporary and part-year resident. If we’re just temporary then I shouldn’t be changing Roth vs. TDA (in fact, it is possible I should be putting more money in the Roth since I’ll have a lower salary!). If we’re part-year residents, then I really shouldn’t be doing what I’m doing right now except to the point that I think I will run out of money and be unable to pay for health insurance if I maximize my deductions.

      • nicoleandmaggie Says:

        Based on their really lengthy thing about residency, it looks like we’re only temporary/transitory. However we should really talk to a tax professional about this for sure.

      • Linda Says:

        See, this is why I didn’t try to figure out the tax issues before moving to my paradise. Yeah, I’m paying a lot more in taxes now and I knew I would be, but trying to pin down how much more and how it would affect my budget was just making me crazy. Of course, I’m not here temporarily, so I have to adjust to this as my “new normal” unlike you. Bottom line: it really makes a huge difference in my take home pay. As one colleague put it today I’m paying my “sun tax;” as I put it, I’ll never be able to take a vacation again. :-/

      • kellenaccountantbyday Says:

        So, I’m not a state and local tax professional at all, but what I WOULD do if a client had this kind of question and the state didn’t have clear rules was to start by telephoning the state and trying to get someone at the state tax department to help me out. You always have a chance to speak to someone at the state who is WRONG though, so ask if they can direct you to state tax code relevant to their answer. If they are an unhelpful jerk, call back and hope you get someone nice next time.

        Assuming a local tax professional in your area won’t be totally familiar with Paradise state tax laws (since your locale is not Paradise currently), then they’ll basically just do the reading and phone calling that you could do anyway. You might get better results from talking with a tax professional IN paradise, but again, if they are used to doing taxes for 100% paradise residents, they might not really know the ins and outs of this temporary vs. part year thing ANYWAY. Main benefit from a tax professional is a) they will do the work for you, you will just be paying $100/hr or so instead of spending your own time, and b) hopefully a few people with experience reading tax law will catch nuances better than you without having had experience reading tax law. HOWEVER, the stuff you read as an academic is probably actually denser than tax law so you might be better at it than your average CPA :)

      • nicoleandmaggie Says:

        Well, we did read all the state codes on the official documents last night, and we read a few of the court cases mentioned in an academic write-up about determining residency in Paradise.

        It isn’t 100% cut and dry, but given our circumstances and the fact that the only thing on their list of “determining residency” that we’ll be doing is registering our car, we think the person we talked to from the Paradise tax board this morning was right.

    • nicoleandmaggie Says:

      Looks like you are 100% right and I messed up! Thanks!!!! I can stem some damage…

  9. becca Says:

    My Roth is already maxed out. I wanted to switch over to Admiral shares of my Vanguard fund sooner, plus if I do it now I won’t skip it. I may see if we want to move things around so Carebear funds a traditional IRA this year. I am very concerned about Future Carebear, whereas he is more concerned with finding a home for now. I’ve got to go back on the job market again, so I am not putting any more in the 457(b) until I know what my emergency fund should look like… Technically, it’s possibly I can take the 457(b) out when I leave my job without penalty… I’m not sure enough of how that works.

    • nicoleandmaggie Says:

      Yeah, the 457 is a pretty good emergency fund for leaving state employment. Though we don’t get to decide how to invest ours, so if you’re planning on leaving in the short term not having it in stocks (and thus not in the 457) might be better.

      • becca Says:

        I’m glad it’s not a totally crazy thing to think about. We do get to decide how to invest ours, and I could theoretically put it in the TIAA traditional annuity… which guarantees the principle and has like a 3% minimum annual interest rate… that sounds like a good option for the emergency fund, though I presume it works like a CD and you don’t get partial interest for a partial year? I don’t know.

      • nicoleandmaggie Says:

        I don’t think I would put my emergency fund in an annuity? You’ll have to look at the terms of this one, but I think usually you’re locked into the annuity.

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