Financial Update Jan 2017

Another month, another update. A few random comments.

  • Thanks to aggressive tax sheltering in 2016, we’re getting a $8k refund in a few weeks. I filed taxes for free using Turbotax’s Freedom edition (turbotax.intuit.com/taxfreedom/), which is available to those with low incomes who qualify for EITC, etc. What’s nice about this edition is that it handles capital gains taxes, etc, which most other free versions don’t handle. Plus it covered two state returns free. Pretty good deal.
  • In 2016 we cashed out 90k of our Roth IRAs to fund our down payment for our home purchase. The principal, of course, is tax-free and penalty free. We were also able to use up to $10k each in interest for the purchase, penalty and tax free (which we didn’t need to do). Roth IRAs are incredibly powerful savings vehicles – especially when your effective marginal tax rate is relatively low today. I’m grateful to have maxed ours out since 2005. We’ll continue to do so indefinitely, but in 2017 and beyond we’ll be forced to do back-door roths.
  • I still need to fund 2016 Roth IRA contributions X 2. The deadline is ~April 15.
  • We had an anomalous $2.5k expenditure this month. Without this our monthly spending would have been around $3,500. Extrapolating a bit, I guess it takes about $50k/year for our family w/ 5 kids to live. One of our biggest expenses is mortgage interest, so once the house is paid off our yearly spend will fall significantly.
  • Financial priorities for 2017 (most important first):
    • 1.) Fully fund tax-deferred accounts (401a, $18k 457, $18k 403b, $6.75k HSA).
    • 2.) Fully fund back-door roths x 2 ($11k total).
    • 3.) Contribute to taxable accounts
    • 3.) Pay off mortgage debt early

I’m a bit torn between whether to pay off mortgage early or contribute to taxable accounts. Mortgage rate is 2.875% but I’m itemizing (and well above standard deduction this year), so the effective interest rate paid will be close to (1-45%)*2.875% = 1.6%. That’s pretty low rate at which to borrow, but I’m debt-averse.

What I’ll probably do is a mix of taxable accounts and mortgage repayments. Having a good chunk in taxable accounts would allow me to tax loss harvest every year and wipe a maximum of $3k/year off my taxable income. Seems like pretty low hanging fruit that everyone should be doing. If you harvest a loss greater than $3k in a given year, you can carry the unused losses forward for future years. For example, if you harvest a loss of $9k in 2017, you can reduce your taxable income by $3k/year for 2017, 2018, and 2019.

Footnotes:

  1. Don’t lend money to friends/family.
  2. I lazily approximate home value using Yodlee’s embedded SmartZip estimator.
  3. I have a 15Y mortgage; which results in a faster rate of repayment. The true cost of the mortgage should exclude repayment of principal, which I show above.
  4. $15 internet and $0 cell phones as described here.
  5. All expenditures at Costco & Walmart are classified as “Food at home” for simplicity (even if it’s laundry detergent, clothing, etc).
  6. I prefer Vanguard funds but my employer offers Fidelity instead. Also, Fidelity mutual funds work better at my Saturna HSA.
  7. Nobody knows the perfect asset allocation. Just pick one and run with it. Use a target date retirement fund as a benchmark if you want some guidance (link).
  8. My low portfolio expense ratio is the primary reason why I don’t hold target-date funds, which have expense ratios anywhere from 0.16% to 0.75%. I can achieve a much lower expense ratio on my own due to Admiral shares, etc. And it’s not hard. Plus, a DIY portfolio allows one to tax-loss-harvest more easily.
  9. The only other administrative cost not captured by my expense ratios is a $19/year administrative fee for my HSA at Saturna Capital.

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4 thoughts on “Financial Update Jan 2017

  1. Looks like you had an awesome month!!! I too weighed paying down my house vs. investing in the market. Ultimately I decided to pay off my house and it was the best move for me. It definitely helped me fall asleep at night knowing that I didn’t have a mortgage anymore. I recently ran the numbers and the difference between paying off the house and investing in the stock market was 0.1% so it was definitely worth it to me.

    • Thanks for the comment. Not a bad month indeed. With respect to paying off mortgage vs taxable brokerage, it’s definitely a toss-up to me. Expected return of the stock market going forward is probably something like 4-5%. But there’s a lot of risk there. Paying of mortgage early will definitely enable me to sleep better at night.

      Talking out loud here, perhaps I’ll front-load the taxable accounts to set myself up for lucrative tax-loss-harvesting in the beginning of the year. A balance of $20k or so would really help on that dimension.

      A priority I forgot to put up there was a 529 account. My state offers a modest tax break for 529 contributions so it probably belongs as priority #2.5.

  2. >>Seems like pretty low hanging fruit that everyone should be doing. (Tax Loss Harvesting).

    I understand the concept of TLH, sell at loss (take write off), buy something similar but different enough. But, when to sell? If at year end, my investments are all up from where I bought them… I can’t TLH.

    • The easiest scenario for TLH is when someone dollar cost averages (i.e. contributes regularly) over an extended time period. As a result of normal market fluctuations, you’re bound to have purchased some securities at a higher price than they are currently at. Just sell those, buy something “not substantially identical” and harvest the loss. I basically hold 2 funds: total domestic and total international. To THL, I’d simply sell the one that went down and buy the other. If you’re uncomfortable doing that, you can sit on the cash and rebuy after 30 days.

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