Kevin McCann is actively looking for a new job. In the meantime, he wants to make sure he is managing his savings wisely.
The 44-year-old from Chicago lost his position as a senior product manager at a tech startup over a year ago, where he earned upward of $200,000 a year including bonuses. He currently earns $20,000 from freelancing. His unemployment benefits ran out last November.
McCann, who is unmarried, has two 401(k)s from his previous employers totaling about $260,000 and a traditional IRA with about $160,000; the accounts are invested in about 80% equities and 20% fixed income. He is considering converting one or both of the accounts to a Roth IRA to take advantage of his current low income, which would mitigate the taxes he would owe on the conversion.
He already has a Roth with about $81,000, about $10,000 of which is in cash that could be used in an emergency. With the Roth, McCann can withdraw his original after-tax contribution without an early-withdrawal penalty or any additional taxes.
He also has almost $270,000 in a brokerage account. About $94,000 is invested in U.S. Treasury bonds that mature in one to six months, which he currently is tapping to supplement his income.
He has about $7,000 in a checking account, $6,000 in a health savings account and about $13,000 in six-month Series I savings bonds.
McCann owns a condo currently valued at about $625,000, with a $344,000 mortgage and a 2.99% interest rate. He pays $2,600 monthly, including taxes and HOA fees, and the mortgage is his only debt outstanding.
Other monthly expenses include $1,400 for groceries, eating out and entertainment, $150 for gas and public transportation, $200 for general shopping and $250 every six months for car insurance.
McCann currently has no health insurance. He looked at buying a high-deductible plan, but the plans cost about $400 a month, which he thought was too high given his current circumstances.
He says he has reduced his spending from $7,000 to $5,000 monthly since the job loss.
Advice from a pro
Jarrett Solomon, a certified financial planner and partner at Connecticut Wealth Management in Farmington, Conn., suggests McCann first rethink his decision to forgo health insurance. Paying $400 monthly for a high-deductible plan or looking for catastrophic coverage is worthwhile, he says, because an unexpected serious illness or injury could drastically alter McCann's financial well-being if he lacks coverage.
Solomon doesn't recommend converting either the 401(k) or traditional IRA into a Roth, because the taxes he would owe on the money he withdraws for the conversion might be too costly for McCann right now, even though he's currently in a lower tax bracket than he will be when he finds full-time employment.
Similarly, Solomon suggests McCann hold off on contributing to the HSA even if he decides to buy a high-deductible health plan. The money can only be used for qualifying healthcare expenses (otherwise income tax is owed on the amount withdrawn, and there's a steep penalty if you are under age 65), and he needs to be able to easily access his savings right now.
One move McCann can make to take advantage of temporarily being in a lower income-tax bracket is to sell some of his most profitable mutual funds in his taxable brokerage account and buy them back.
That could help reduce capital-gains taxes he might owe in the future, when his income is higher, because any gains at that point would be calculated from the price he pays for the funds now, rather than the lower price he paid earlier. And he wouldn't have to pay federal capital-gains taxes on the sale now as long as his taxable income is lower than $50,000, though he might still have to pay state tax.
He also might choose to keep some of the proceeds from the sale more liquid in case finding a new job takes longer than expected.
Solomon says McCann should look for ways to reduce monthly expenses, particularly on food and utilities.
Finally, Solomon suggests McCann can maximize long-term growth in his retirement accounts by investing more aggressively -- changing the asset allocation to 90% or even 100% equities. He can use the brokerage account for more-conservative fixed-income investments as well as cash.