2018 Retirement Investing Strategy: 2nd Quarter Updates

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About a year ago … I had a light bulb moment.

After I read how one blogger made a 6-figure income and paid no federal tax, I realized that our family could do the same. By making just a few simple changes, I calculated we could earn over $100,000 of W-2 wages and not pay a single penny in federal tax.

As I investigated our tax situation, I quickly realized that it would be very easy to optimize our income so that our final federal tax bill in 2018 would come out to $0. Even though we can’t completely eliminate all of our taxes (payroll and state) … we will end up keeping over $3,000 of income we would have paid the federal government.

So at the start of 2018 … my wife and I set our goal to pay $0 in federal taxes on a 6-figure income. To keep us on track, we put together a strategy of where to invest our money … which is basically a hierarchy of the types of accounts our money will be invested in this year.

How is our investment plan for 2018 doing after 6 months of the year? Let’s take a look –

1. Pension – 6% of Paycheck (Pre Tax) = $6,089.04

At the beginning of the year, we projected our annual contribution to my pension at $6,000. But when this projection was made, we loosely based it on earning 6% of $100,000 … which isn’t accurate. My W-2 income is a bit higher than that, so we bumped our estimate up to $6,089.04 after the 1st quarter.

This is a mandatory contribution … so unless my income goes up (or down) … this should be the exact amount we contribute.

On top of the personal 6% contribution, my employer contributes a little over 8% match to the pension. I am eligible for a partial pension in about 12 years from my work … so this could provide a nice income stream in the future.

As long as I continue to work for my employer, this is the first deduction taken out of my paycheck. Therefore, it will always remain as bucket #1 on our investment plan.

For the first 6 months of the year, I contributed a total of $3,044.52 to my pension … which is exactly what I had expected.

2018 Projected Contribution = $6,089

My job is a state government job and most salary increases are dictated by the legislators. There are rumors of a 2% raise, which would retroactively go into effect on July 1st … the start of our new fiscal year. Any type of raise would automatically bump up my pre-tax contributions to bucket #1.

However, until I hear of any cost of living increases to come at my job … we will leave our projected contribution level as is for now.

2. 457b (Pre Tax) = $12,225

Note – This was originally #4 on our priority list, but it was moved to #2.

In order to pay $0 in federal taxes in 2018 … we need to leverage one of my work place pre-tax retirement accounts. Late last year I chose to open the 457b plan in order to optimize our income and pay as little as we could in federal taxes.

We have estimated that we need to invest a minimum of $8,000 in this account in order to fully optimize our taxes. So because of the importance of this plan … we moved it to our 2nd priority.

The maximum contribution limit for 2018 for the 457b plan is $18,500 … which gives us plenty of room to maneuver with our tax optimization.

We could make a choice and max out this bucket … but we don’t need to at this point. Instead, we want to leverage our Roth accounts for future tax optimization too. So for now, we plan to contribute $12,225 to this account in 2018. This is up from $12,045 in our last quarterly update.

2018 Projected Contribution = $12,225

For the first 6 months of the year, we have contributed a total of $5,865 to our 457 account. As mentioned earlier, I may end up getting a small salary increase later this year at work. If that happens … then 100% of the pre-tax increase will be invested in this account and my paycheck will remain the same.

3. Spousal Roth IRA (Post Tax) = $5,500

Note – This was #2 on our list during the 1st quarter but got moved down behind our 457b plan.

The spousal Roth IRA is now third on our retirement bucket priority list. For 2018, the maximum contribution limit is $5,500.

During the first 6 months of the year, we have invested $700 in my wife’s Roth IRA. This is up from $0 during the 1sst quarter.

One of our goals for the year is to pay $0 in federal taxes in 2018.

In order to do that, we have optimized our income and tax situation enough that we likely won’t need additional IRA (traditional) deductions. This is a result of the 457b plan we are currently contributing to.

Since we don’t necessarily need additional deduction, we want to take advantage of putting our money into Roth accounts so that our taxes are optimized in the future too.

2018 Projected Contribution = $5,500.00

We haven’t focused too much on this account in 2018, however we still hope to max it out. That means we need to add an additional $4,800 during the remainder of the year.

4. Roth IRA (Post Tax) = $2,800

Note – This was #3 on our list during the 1st quarter but was also moved down after our 457b plan changes.

This is another Roth account (in my name) that also has a 2018 contribution limit of $5,500. We won’t have enough available funds to hit that target, but hope to contribute an additional $2,800 to a Roth account.

Maximizing my wife’s account is first priority and then this account. During the first quarter, we estimated this account would only get $1,650 in investments. However, we are also paying back a loan to ourselves for my son’s braces. Those funds are being put into this account.

2018 Projected Contribution = $2,800

For the first 6 months of the year, we have invested $1,428 into this account.

5. Brokerage Accounts (Post Tax) = up to $10,000

Even though these are taxable accounts, our brokerage investing is still a very important part of our investment strategy. We are slowly building a solid dividend income stream with these investments.

Our goal for this year is to invest $10,000 of our income into these accounts. We were fortunate to get back our federal tax return in March and sent off $5,000 to one of our brokerage accounts. In total, for the first 6 months of the year, we have invested $5,129.09 in these accounts.

2018 Projected Contribution = $10,000

I would like to point out that the dividend income we are earning is calculated into our tax optimization strategy. We expect to earn around $3,300 in dividend income this year from our taxable accounts. This is included in our overall income earned for our taxes.

The good news is most of the income we are earning are from qualified dividends … and thus not taxed. The remaining portion is not currently enough to push our income levels to a point where it would be taxed.

6. Rollover IRA (Pre Tax) = $100

The combined contribution limit for an individual is $5,500 for 2018. That means I can contribute up to a total of that amount for the sum of my Roth IRA and traditional rollover IRA.

Since our approach in 2018 is to maximize our Roth accounts because of current tax law, this traditional IRA bucket falls to the bottom of our priority list. At the beginning of the year, I actually contributed $100 to this account … which is why it is even included in the list at this point.

If our income levels ever rose high enough to max out all our other retirement accounts, then we would consider using this bucket to invest.

2018 Projected Contribution = $100

2018 1st Quarter Investments

For the first 6 months of 2018, we invested $16,266.61 (up from $9,834.54 in the 1st quarter). That is approximately 16% of my entire 2018 expected income … which puts us on track to save over 20% of our income. I am hoping for a minimum of 25% savings rate this year.

Of that amount, $9,009.52 went to tax deferred accounts including my pension, 457b plan, and my $100 IRA contribution. The combination of these investments will help to lower our taxable income for 2018. This is a key step that has been carefully planned out so we don’t pay any federal taxes this year.

Another $5,129.09 was invested in taxable brokerage accounts. Any capital gains or dividend income earned from these investments “could” be taxed. Since we are long term buy and hold investors, I am not so much worried about capital gains. Dividend income could be taxed but as I mentioned before … it isn’t that much of an impact at this point.

The final $2,128 of investments were made to Roth accounts. These investments won’t help to lower our taxable income this year … but there will be tax advantages when we take the money out. So as long as we our optimizing and keeping our taxable income below a certain threshold … we want to take advantage of these Roth investments while we can.

One final item … we have adjusted our projected 2018 investments to $36,714.04 after the end of the 2nd quarter. If we hit this target, then we will have invested 36% of our income this year. We would like to push this up to 50% eventually, but this is still way better than our past 5 or 6 years.

How are your 2018 investments going? Are you on target still? What types of accounts are you investing in?

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