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The Next Step for Super Savers

Our advice to this family: Don't worry so much about taxes, stay flexible, and make insurance a priority.

Our Readers:Who: Stuart Darby, 43, and wife Ana, 39Where: Pleasant Hill, Cal.

Question: What should we do next?

When the darbys got married seven years ago, they spent the first two years "working hard to get everything in order and pay off debt," says Ana. "Then we spent the next four years taking care of the kids and getting ready for the future."

Now Ana and Stuart, who both work in financial services, have a problem most people would envy: What's the next step when you're doing everything right? They've built an emergency fund, maxed out their 401(k) plans, paid off all their debt except the mortgage, and even save money every month for college for Isabel, 3, and Jordan, 1.

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The Darbys make too much to contribute to a Roth IRA. But one easy next step would be to start investing in a nondeductible IRA with the intention of eventually rolling it into a Roth IRA. (They can't make the switch now because married couples, as well as single filers, must earn less than $100,000 to convert a traditional IRA to a Roth. But the income limit disappears in 2010.) As long as they haven't made any tax-deductible IRA contributions -- or rolled over a 401(k) to an IRA -- they'll owe taxes only on the earnings when they make the conversion.

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Taxes aren't everything. Before putting more money into tax-deferred pots, however, the Darbys should think about their goals, says Barry Glassman, a financial planner in McLean, Va. For example, says Glassman, they should not automatically boost their monthly contributions to the kids' 529 college-savings accounts. Despite the tax benefits, "I prefer that parents not try to save 100% of college costs in a college-specific account."

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Instead, the couple could put aside money in a taxable account that may be used for anything without penalty. That would give them flexibility if their children end up getting scholarships or low-interest loans, or don't go to an expensive college.

Stay flexible. Tim Maurer, a financial planner in Hunt Valley, Md., agrees that some people become "addicted to filling special buckets." As a result, they often end up locking away their cash and neglecting regular savings.

Maurer recommends that the Darbys keep no more than six months' worth of living expenses in a money-market fund or online savings account. Even if Ana or Stuart were out of a job, they wouldn't need all of their cash right away. They can keep the rest of the money invested in a diversified portfolio of mutual funds targeted to their goals and their time frame.

One investment that's not appropriate for the Darbys is an annuity. It would tie up a chunk of their cash until age 59 1/2, and profits realized from stock investments inside the annuity would be taxed at regular income-tax rates (instead of the lower capital-gains rate) when they were withdrawn.

But life insurance should be a priority. The Darbys can use this life-insurance calculator to make sure they both have enough coverage, then buy low-cost term insurance to fill any gaps. And they should check their disability insurance to make sure they have enough coverage.

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