Author Topic: How to optimize 70k salary  (Read 4594 times)

tootz

  • 5 O'Clock Shadow
  • *
  • Posts: 10
How to optimize 70k salary
« on: August 09, 2017, 01:13:01 PM »
Hello Mustachians!

I have just started reading MMM, and it is extremely enlightening while entertaining.

Recently I graduated college and am in a fortunate position to earn a 70k salary. Starting to read a lot more personal finance, however there's the fear of not mobilizing fast enough. I have 28k in student loans (under 5% interest)

My first question is what are the MUST DOs ? (until I read through all the blog posts )

I've

  • set 401k contributions up to match (6%), 70/20/10 in vanguard large/med/small cap funds
  • opened HSA, set allocation to max to 3400
  • opened up Sapphire Preferred, transferred points from freedom. (will be downgrading preferred and getting reserve after I am done with the 4k spending

Some advice I've gotten in order:

401k - up till max
pay off loans
after loans paid, start ROTH IRA (Vanguard?)


Some questions:

Should I be opening a savings account right now? Or should i do that after the loans and IRA ?

Thanks guys, happy to join this great community.

Edit: Current situation:

  •   debt:28k
  • salary: 70k
  • CC limit: 9k
  • rent: 0
  • phone bill: 0
  • expenses: subscription of ~10 a month
  • commuter: $110 a month using commuter benefits
« Last Edit: August 09, 2017, 01:34:44 PM by tootz »

ketchup

  • Magnum Stache
  • ******
  • Posts: 3947
  • Age: 28
Re: How to optimize 70k salary
« Reply #1 on: August 09, 2017, 01:20:48 PM »
I'd probably max the 401k first, assuming your fund choices available are reasonable (they sure sound like they are if you're already in Vanguard).  Before doing that, I'd make sure you have a reasonable emergency fund, or at least a high limit credit card to float an emergency so you don't hit a cash crunch.

Savings accounts don't really serve any purpose other than organization (and that's fine if that helps you).

I would not pay the loans off early at that interest rate.

Consider posting a full case study.

tootz

  • 5 O'Clock Shadow
  • *
  • Posts: 10
Re: How to optimize 70k salary
« Reply #2 on: August 09, 2017, 01:32:59 PM »
Hey thanks for responding :)

does full case study mean posting my full constraints and situation?

if so,

  •   debt:28k
  • salary: 70k
  • CC limit: 9k
  • rent: 0
  • phone bill: 0
  • expenses: subscription of ~10 a month
  • commuter: $110 a month using commuter benefits



By maxing the 401k to hit the 18k?

The funds that are available differ from life choice ones (Ex: charles schwabb 2060 retirement), mix of large, mid and small cap funds. I chose all vanguard at an allocation of 70/20/10, large, mid, small funds respectively



Paul der Krake

  • Magnum Stache
  • ******
  • Posts: 4565
  • Age: 11
  • Location: USA
Re: How to optimize 70k salary
« Reply #3 on: August 09, 2017, 01:39:24 PM »
If your income is 70k, by contributing a full 18k to your 401(k) you will bring your modified AGI below the deductability limit of traditional IRAs. Conventional wisdom in the FIRE community is that traditional IRAs are better than Roth IF you qualify for the deduction.

Go do some reading about it:
https://www.irs.gov/retirement-plans/plan-participant-employee/2016-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-covered-by-a-retirement-plan-at-work
http://www.madfientist.com/traditional-ira-vs-roth-ira/

You will need to keep an eye on things when your income increases, or your filing situation changes.

ketchup

  • Magnum Stache
  • ******
  • Posts: 3947
  • Age: 28
Re: How to optimize 70k salary
« Reply #4 on: August 09, 2017, 01:41:11 PM »

GizmoTX

  • Handlebar Stache
  • *****
  • Posts: 1367
Re: How to optimize 70k salary
« Reply #5 on: August 09, 2017, 01:47:14 PM »
Yes, open a savings account paying at least 1% (online: Ally, CIT, or Synchrony) to store your emergency fund. You should have a minimum of $1,000, & then save 3-6 months of your fixed expenses. A credit card backup is good but not a substitute for your emergency fund. Even if your checking account is paying 1% (most don't), having your emergency fund in another account & bank makes it less tempting. Link the two for transfers.

I agree with setting your 401K initially for the employer match & fully funding your HSA. Assuming your 401K is the traditional kind, both will lower your Adjusted Gross Income for federal income tax. Once you have your emergency fund, max out your 401K to the full 18000 when you have a full year to work with. You can also fund a Roth IRA up to a max of $5,500/year for tax free earnings forever. Anything extra after this should go towards your loans, which effectively gives you a 5% return for your payment.

Consider including an International Stock Fund in your allocation mix.

Do not buy a new car or any other debt at this time.


Cwadda

  • Handlebar Stache
  • *****
  • Posts: 2182
  • Age: 25
Re: How to optimize 70k salary
« Reply #6 on: August 09, 2017, 02:07:36 PM »
Another common piece of advice is to read J.L. Collins' Stock Series, found here:

http://jlcollinsnh.com/stock-series/

ReadySetMillionaire

  • Handlebar Stache
  • *****
  • Posts: 1111
  • Location: The Buckeye State
Re: How to optimize 70k salary
« Reply #7 on: August 09, 2017, 02:08:09 PM »
Seems like you have very low expenses minus the loans.  I'd max 401k ($18,000), HSA ($3,400), and Traditional IRA ($5,500).  Assuming you get paid biweekly, your paychecks should be around $1,100-1,200, which is more than enough to make a dent in those loans.

GizmoTX

  • Handlebar Stache
  • *****
  • Posts: 1367
Re: How to optimize 70k salary
« Reply #8 on: August 09, 2017, 02:38:34 PM »
Seems like you have very low expenses minus the loans.  I'd max 401k ($18,000), HSA ($3,400), and Traditional IRA ($5,500).  Assuming you get paid biweekly, your paychecks should be around $1,100-1,200, which is more than enough to make a dent in those loans.

I agree with this, except change the traditional IRA to a Roth. Assuming you are maxing a traditional 401K, you won't be able to have any additional income tax deductions using a traditional IRA, & the Roth gives you the advantage of tax free earnings, not just tax deferred.

tootz

  • 5 O'Clock Shadow
  • *
  • Posts: 10
Re: How to optimize 70k salary
« Reply #9 on: August 09, 2017, 03:04:30 PM »
Seems like you have very low expenses minus the loans.  I'd max 401k ($18,000), HSA ($3,400), and Traditional IRA ($5,500).  Assuming you get paid biweekly, your paychecks should be around $1,100-1,200, which is more than enough to make a dent in those loans.

I agree with this, except change the traditional IRA to a Roth. Assuming you are maxing a traditional 401K, you won't be able to have any additional income tax deductions using a traditional IRA, & the Roth gives you the advantage of tax free earnings, not just tax deferred.

Can you explain why I won't be able to have any additional income tax deductions using traditional IRA?

there's an interesting article Paul de Krake posted above, which was saying that I should do a traditional IRA and then convert to Roth as I lower my income nearer to my early retirement

GizmoTX

  • Handlebar Stache
  • *****
  • Posts: 1367
Re: How to optimize 70k salary
« Reply #10 on: August 09, 2017, 05:08:31 PM »
Can you explain why I won't be able to have any additional income tax deductions using traditional IRA?

there's an interesting article Paul de Krake posted above, which was saying that I should do a traditional IRA and then convert to Roth as I lower my income nearer to my early retirement

Once you max out a traditional 401K at $18,000, that's it for lowering your AGI. You can continue to contribute to a traditional IRA, but you can't get a tax deduction beyond $18K/year. You can combine a t401k & a Roth IRA in the same year, but of course the Roth doesn't allow a tax deduction because its earnings are forever tax free.

Doing a conversion is a separate & much later decision.

If you expect your income to increase materially, you should be locking in your Roth investment years before you hit its income limit.

YYK

  • 5 O'Clock Shadow
  • *
  • Posts: 59
  • Location: Scattered disc
Re: How to optimize 70k salary
« Reply #11 on: August 09, 2017, 07:52:05 PM »

Once you max out a traditional 401K at $18,000, that's it for lowering your AGI. You can continue to contribute to a traditional IRA, but you can't get a tax deduction beyond $18K/year.

Can you provide a source for this? All I've read indicates that you can take a deduction for a tIRA even if you're covered by a 401(k) as long as your AGI is below $62000, which it would be if he contributes the $18000 to the 401(k).

https://www.irs.gov/retirement-plans/2017-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work

GizmoTX

  • Handlebar Stache
  • *****
  • Posts: 1367
Re: How to optimize 70k salary
« Reply #12 on: August 09, 2017, 07:59:39 PM »
The limit on employee elective deferrals (for traditional and safe harbor plans) is:$18,000 in 2015 - 2017. See https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits

YYK

  • 5 O'Clock Shadow
  • *
  • Posts: 59
  • Location: Scattered disc
Re: How to optimize 70k salary
« Reply #13 on: August 09, 2017, 08:04:42 PM »
The limit on employee elective deferrals (for traditional and safe harbor plans) is:$18,000 in 2015 - 2017. See https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits

Right, but that's only for 401(k)s or other employer administered plan. I don't see anything on there about IRAs.

JLee

  • Walrus Stache
  • *******
  • Posts: 5557
Re: How to optimize 70k salary
« Reply #14 on: August 09, 2017, 08:54:08 PM »
You absolutely can max a traditional 401k and traditional IRA as long as you're within the IRS income restrictions for doing so.