Where should i put my money?

[afuera]

Hello Mustachians,
I have just recently started reading the blog (last week to be exact) and I am pretty much in love with everything MMM is saying.  I'm 23 and he is 25 and we don't plan on having kids for a few years but my husband and I are always fake arguing over who gets to be the stay at home parent without knowing that there was ever an option for both of us to be able to.  Now that I know, I want that.  BAD.
Currently we are both working as engineers with our take home pay around 125K.  We have both maxed out our traditional 401Ks through our companies and just recently finished paying off debt from school, wedding (I know we shouldn't have debt from a wedding but we weren't Jr. Mustachians back then), and car (again bad, i know).  I've been told to open a Roth IRA and an Index Fund and put my money in high interest savings account so I am not really sure which path to take.  According to my calculations we should be able to retire in about 10 years and we want to buy a house in less than 2 (we are currently renting).
Any advice on asset allocation so that we have long term savings and access to our money if we need it before we are 59.5.
Thanks,
Lauren

[neo von retorch]

Prioritize tax-advantaged and return on investment first. So of course 401k that is matched by employers comes first. Reduce your taxes NOW and get a free match. Depending on specific income / tax limits, then either continue to max the traditional 401k or add to a Roth or Traditional IRA. Also look into an HSA. For a 10 year plan, it does look like a good idea to take advantage of the Roth IRA contributions - you only get $5500 to put in there each year per person. The two of you could put in $11000 and have $110,000 in 10 years (plus investment gains.) If this isn't enough to carry you for 5 years, you may need other taxable investments (privately invested money that has no tax advantages other than capital gains tax being lower than income tax when held longer than one  year.) Between the two, you're good for 5 years, so at the point of retirement you start to use your Roth / taxable investments and begin a Traditional IRA (401k/IRAs) to Roth IRA conversion ladder. This will be counted as income but since you'll be retired and keep your expenses low thanks to MMM philosophy, you can pay very little tax on this conversion process. This money then just needs to sit 5 years after a conversion before it's ready for your use. (So you convert just what you'll need in five years time each year to minimize taxes.)

[SaintM]

Why the first "BAD"?  That seems like a goal, not a mistake or poor behavior.

[Ohio Teacher]

Why the first "BAD"?  That seems like a goal, not a mistake or poor behavior.

It's a figure of speech.  She wants it badly, as in she wants it a lot.

[Cwadda]

Someone else can verify this too, but my thinking is this:

With a take home pay of around $122k, you're probably in the 25% or 28% tax bracket? It makes sense to me to go with a Traditional IRA and put away $11k per year. This way you get the tax benefit right away (~~ $2800/year saved). Then, because you are so young, you can later use a Roth conversion ladder to convert that money to a Roth, where it'll grow tax-free.

The next thing on the totem pole would be an HSA, which will let you contribute $6650 per year for a family. This is also deductible from your taxable income and not subject to FICA taxes.

Still after that, you can use a taxable account.

And down the road, it'd make sense to set up 529 plans for the mini mustaches!

[Ricky]

Someone else can verify this too, but my thinking is this:

With a take home pay of around $122k, you're probably in the 25% or 28% tax bracket? It makes sense to me to go with a Traditional IRA and put away $11k per year. This way you get the tax benefit right away (~~ $2800/year saved). Then, because you are so young, you can later use a Roth conversion ladder to convert that money to a Roth, where it'll grow tax-free.

The next thing on the totem pole would be an HSA, which will let you contribute $6650 per year for a family. This is also deductible from your taxable income and not subject to FICA taxes.

Still after that, you can use a taxable account.

And down the road, it'd make sense to set up 529 plans for the mini mustaches!

Nope, they can't claim any tax savings through a traditional IRA.

http://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-Covered-by-a-Retirement-Plan-at-Work

[zurich78]

I didn't see anything about an emergency fund.  I'd do a minimum of 6 months liquid first.  Then, I'd do the Roth.  Then, with leftovers, do a taxable investment account.

[Cwadda]

Someone else can verify this too, but my thinking is this:

With a take home pay of around $122k, you're probably in the 25% or 28% tax bracket? It makes sense to me to go with a Traditional IRA and put away $11k per year. This way you get the tax benefit right away (~~ $2800/year saved). Then, because you are so young, you can later use a Roth conversion ladder to convert that money to a Roth, where it'll grow tax-free.

The next thing on the totem pole would be an HSA, which will let you contribute $6650 per year for a family. This is also deductible from your taxable income and not subject to FICA taxes.

Still after that, you can use a taxable account.

And down the road, it'd make sense to set up 529 plans for the mini mustaches!

Nope, they can't claim any tax savings through a traditional IRA.

http://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-Covered-by-a-Retirement-Plan-at-Work

Their income might be sufficiently reduced by two 401(k)s. I don't know all of their numbers though. It'd make sense to go with a Roth if their MAGI is more than $98,000.

Also, after re-reading the OP, it was mentioned that they might want the money before 59.5, in which case a Roth would be a good option.