Author Topic: Maxing Out The Accounts - Nervous  (Read 8981 times)

wing117

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Maxing Out The Accounts - Nervous
« on: January 14, 2014, 09:41:41 AM »
Hey folks!

I have the opportunity to do the following:

$17,500 to a 457(b)
$17,500 to a 403(b)
$5,500 to a Traditional IRA
$5,500 to a 401(k) (mandatory 6% with 6% match) (This number doesn't include the match)
$3,300 to an HSA
--------------------------------------
$49,300 in pre-tax savings for the year (~57% savings).

This would put my take home pay at ~2,400/mo, 1,830/mo goes to bills/living expenses (for two people), leaving me with a meager $570/mo in excess or 6,840/yr.

This makes the most sense from a tax-advantage aspect (from my research), and utilizing the IRA Conversion Ladder would be used extensively in retirement and the HSA hack seen here (HSA Hack). This would also drop my tax bill from $18+K/yr down into the $2-5K range.

However, not having much of a buffer room for Oh Shit moments is frightening. I know a lot of folks who are further along in the journey don't have large emergency funds, so what can I do to buffer myself from being screwed if something comes up? My original plan, before starting all these pre-tax withdrawals, is to get 10K in emergency funds set aside. Does contributing to the 457(b) help buffer as I can make withdrawals penalty (not tax) free? How does it work if I want to then take some of the invested money and place 20% down on a home in the next 12-24 months (Probably 20-30K)?

Looking for advice on how to proceed!
« Last Edit: January 14, 2014, 09:43:40 AM by wing117 »

Frankies Girl

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Re: Maxing Out The Accounts - Nervous
« Reply #1 on: January 14, 2014, 10:05:02 AM »
Do you have an "oh shit" fund (emergency fund) already? As long as you have several thousand that could cover most catastrophes and a decent line of credit to back that up, you probably would be okay with the extra that you have to play with each month.

The only other thing is to really scrutinize your budget and make sure that you accounted for every single little expenditure so it isn't like that $570 a month suddenly becomes $100 because you forgot to put in car insurance, or the eating out budget is actually waaaay more than you thought.

$570 a month extra money going to savings is almost $7K a year and technically should become a nice buffer as your accounts build up.

arebelspy

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Re: Maxing Out The Accounts - Nervous
« Reply #2 on: January 14, 2014, 10:15:23 AM »
Hey folks!

I have the opportunity to do the following:

$17,500 to a 457(b)
$17,500 to a 403(b)
$5,500 to a Traditional IRA
$5,500 to a 401(k) (mandatory 6% with 6% match) (This number doesn't include the match)
$3,300 to an HSA
--------------------------------------
$49,300 in pre-tax savings for the year (~57% savings).

This would put my take home pay at ~2,400/mo, 1,830/mo goes to bills/living expenses (for two people), leaving me with a meager $570/mo in excess or 6,840/yr.

This post is HOT. 

What I'd suggest is to build up the emergency fund to 5k, and not contribute to the traditional IRA until the very end of the year (or early next year - you have until April 15 of the following year to contribute).  That will get you an extra 5k buffer above and beyond the 7k/yr you'll build up from your excess.

As far as the house down payment, you can withdraw from a traditional or Roth IRA up to 10k for a first-time homebuyer expense without incurring penalties (though you will pay tax if it's from a traditional IRA, obviously), so that should cover half to a third of your down payment, and then you can save the rest in taxable accounts.

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SunshineGirl

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Re: Maxing Out The Accounts - Nervous
« Reply #3 on: January 14, 2014, 10:30:26 AM »
I forget, since it's been a while since I worked in the real world, but can't you stop those contributions at any time? If so, just tell yourself you're going to do it for XX months and see how it works out. Build a little buffer, go full throttle, and revisit as necessary.

sol

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Re: Maxing Out The Accounts - Nervous
« Reply #4 on: January 14, 2014, 10:37:43 AM »
I wouldn't worry too much about building up a big buffer ahead of time.  If something goes wrong and you need immediate access to cash, you can cashflow up to $49,300 per year just by stopping your contributions. 

Seriously, what's going to go wrong that you need more than $4k extra on top of your $2400/mo of income?  With $4k/month of potential extra income available to turned on at a moment's notice, I think stashing too much for an efund is unnecessary.

arebelspy

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Re: Maxing Out The Accounts - Nervous
« Reply #5 on: January 14, 2014, 10:39:40 AM »
I forget, since it's been a while since I worked in the real world, but can't you stop those contributions at any time? If so, just tell yourself you're going to do it for XX months and see how it works out. Build a little buffer, go full throttle, and revisit as necessary.

Indeed!  The wife and I were both maxing a 457 last year (750/paycheck each, paid twice per month, put us just above the 17.5k limit, but we had contributed a little less last January), but last week we dropped the contributions from 750/paycheck to 100/paycheck to free up some cash flow for some real estate investment opportunities.

Your idea to "Build a little buffer, go full throttle, and revisit as necessary" is great.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
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arebelspy

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Re: Maxing Out The Accounts - Nervous
« Reply #6 on: January 14, 2014, 10:42:06 AM »
Seriously, what's going to go wrong that you need more than $4k extra on top of your $2400/mo of income?  With $4k/month of potential extra income available to turned on at a moment's notice, I think stashing too much for an efund is unnecessary.

Sure, but it usually takes a few weeks, at least, for them to process a withholding change like that, and then it might be another few weeks until the next paycheck - if it makes OP comfortable, it's probably worth having a buffer so he doesn't have to jump through those hoops/stress if and when something does happen.

Either way with OP's savings rate it should take only a month or so to save up a 5k buffer.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
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153

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Re: Maxing Out The Accounts - Nervous
« Reply #7 on: January 14, 2014, 10:56:16 AM »
I forget, since it's been a while since I worked in the real world, but can't you stop those contributions at any time? If so, just tell yourself you're going to do it for XX months and see how it works out. Build a little buffer, go full throttle, and revisit as necessary.


Your idea to "Build a little buffer, go full throttle, and revisit as necessary" is great.

Agreed! I anticipate possibly changing employers this year, so shut off the 403b and am banking the difference for now. I get no match, so if I switch to someone who offers a match, I want to be able to take full advantage. If the switch doesn't pan out, I'll spend the last few months of the year making massive contributions.

This strategy probably means someone in HR thinks I'm a nutbag who can't handle money, with massive w/h percentage swings.

mlipps

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Re: Maxing Out The Accounts - Nervous
« Reply #8 on: January 14, 2014, 11:14:20 AM »
You could consider making the IRA contributions to a Roth instead of a traditional IRA, at least for this year, to give you a bit more of a buffer since Roth contributions can be withdrawn at any time.

Home Stretch

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Re: Maxing Out The Accounts - Nervous
« Reply #9 on: January 14, 2014, 11:29:17 AM »
Just throwing up a few new ideas:

1. Have a credit card with a really high limit on hand if you need to pay for something crazy. That at least gives you between 30 and 60 days of buffer time to gather the cash to actually pay the bill. I have two credit cards with comically high limits (I just keep asking them to raise the limits every 3 months), so I can keep all of my cash invested and not worry about life's random expenses.

2. Consider starting to stash a little post-tax income in a non-retirement Vanguard account. I just set one of these up last week (it took literally 5 minutes because I already have a Roth IRA with them). I chose the "Target retirement 2060" fund, not because I plan on retiring in the distant future but because it has a healthy amount of risk for someone my age.

Great job with the saving/spending you've got going on though! Keep it up!

MooseOutFront

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Re: Maxing Out The Accounts - Nervous
« Reply #10 on: January 14, 2014, 11:34:55 AM »
The most important thing it to just friggin do it.  Then figure out whatever issues arise.  Either 401k can be shut off immediately for a $1450 pre-tax income bump the next month if need be.  Bridge the gap with a credit card or something.

We're maxing everything this year for the 1st time and I still have $10k just sitting around from my days when I felt like I needed a large cash buffer.  I intend to deploy this during 2014 but I would prefer a market crash first.

seattlecyclone

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Re: Maxing Out The Accounts - Nervous
« Reply #11 on: January 14, 2014, 12:23:16 PM »
$17,500 to a 403(b)
$5,500 to a 401(k) (mandatory 6% with 6% match) (This number doesn't include the match)

Are these both from jobs that you have? If so, you should be aware that there's a $17.5k contribution limit that is shared between all 401(k) and 403(b) accounts that you might have the opportunity to contribute to throughout the year. This plan would put you over the limit if both accounts belong to you. If, on the other hand, the 403(b) is from your job and the 401(k) is from your spouse's job (or vice versa), there's no problem. The 457 plan has a separate limit, so there's no issue there either.

Congrats on being able to save so much!

wing117

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Re: Maxing Out The Accounts - Nervous
« Reply #12 on: January 14, 2014, 12:38:21 PM »
This post is HOT. 

What I'd suggest is to build up the emergency fund to 5k, and not contribute to the traditional IRA until the very end of the year (or early next year - you have until April 15 of the following year to contribute).  That will get you an extra 5k buffer above and beyond the 7k/yr you'll build up from your excess.

As far as the house down payment, you can withdraw from a traditional or Roth IRA up to 10k for a first-time homebuyer expense without incurring penalties (though you will pay tax if it's from a traditional IRA, obviously), so that should cover half to a third of your down payment, and then you can save the rest in taxable accounts.

Badassity exemplified here.

arebelspy, that's a huge compliment coming from you. Thank you! Holding onto the IRA allocated money as a buffer till year's end makes great sense and I hadn't thought about it that way. I was mentally fixated on getting the money into the market as early as possible to reap the year's gains. This helps me mentally feel safe till I see things working. And you're right - I'll have 5K saved up again after tomorrow's paycheck. I'll do more digging into the first time home buyer expense! Great info.

I like the idea of the 5K buffer, Go full throttle and revisit later to see how things are going. I wasn't aware that I could start and stop contributions at any time. That is very helpful.

You could consider making the IRA contributions to a Roth instead of a traditional IRA, at least for this year, to give you a bit more of a buffer since Roth contributions can be withdrawn at any time.

I maxed out my Roth IRA last year, so I assume that money is still on the table? If so, then I'd keep with my plan of contributing to the Traditional IRA, knowing I have 5500 in the Roth I can grab if needed (probably wont need it).

Just throwing up a few new ideas:

1. Have a credit card with a really high limit on hand if you need to pay for something crazy. That at least gives you between 30 and 60 days of buffer time to gather the cash to actually pay the bill. I have two credit cards with comically high limits (I just keep asking them to raise the limits every 3 months), so I can keep all of my cash invested and not worry about life's random expenses.

2. Consider starting to stash a little post-tax income in a non-retirement Vanguard account. I just set one of these up last week (it took literally 5 minutes because I already have a Roth IRA with them). I chose the "Target retirement 2060" fund, not because I plan on retiring in the distant future but because it has a healthy amount of risk for someone my age.

Great job with the saving/spending you've got going on though! Keep it up!

I do have a credit card with 12.5K limit that I hadn't thought about (I'm still in the credit card usage = bad mindset though I know that's not the case when used wisely). Extra funds above and beyond the IRA contributions I plan on putting into a post-tax non-retirement account at Vanguard (VTSMX/VGTSX).

$17,500 to a 403(b)
$5,500 to a 401(k) (mandatory 6% with 6% match) (This number doesn't include the match)

Are these both from jobs that you have? If so, you should be aware that there's a $17.5k contribution limit that is shared between all 401(k) and 403(b) accounts that you might have the opportunity to contribute to throughout the year. This plan would put you over the limit if both accounts belong to you. If, on the other hand, the 403(b) is from your job and the 401(k) is from your spouse's job (or vice versa), there's no problem. The 457 plan has a separate limit, so there's no issue there either.

Congrats on being able to save so much!

Good point. I'll have to look into this further. This is all from the job I have. I'll bring this up with my benefits director. The 401(k) is part of a mandatory defined contribution package with the state (thus why I can only do 6% with that account) and the 403(b) is part of the supplemental retirement offered separately. I assume the same rules would then apply?

I'm planning on talking with my Benefits Director to cross my T's and dot my I's for sign up next week and will definitely ask him about my maximums pertaining to this.

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Re: Maxing Out The Accounts - Nervous
« Reply #13 on: January 14, 2014, 12:38:25 PM »
So badass! I can't wait to hear an updates on how this turns out.


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Re: Maxing Out The Accounts - Nervous
« Reply #14 on: January 14, 2014, 01:22:56 PM »
Agree with arebelspy.  But also consider that the marginal dollar contributed may not save much in taxes.  Ie if you max everything but the Ira, what's your marginal tax rate?  The Ira may not be a great deal if it's low or zero.

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Re: Maxing Out The Accounts - Nervous
« Reply #15 on: January 14, 2014, 01:25:08 PM »
This badassity is giving me serious motivation to max out my 403b! Putting on that for my list of goals post-debt :)

arebelspy

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Re: Maxing Out The Accounts - Nervous
« Reply #16 on: January 14, 2014, 01:58:05 PM »
Agree with arebelspy.  But also consider that the marginal dollar contributed may not save much in taxes.  Ie if you max everything but the Ira, what's your marginal tax rate?  The Ira may not be a great deal if it's low or zero.

Good point; at that point a Roth may be better.

Since most people can't do a 403 and 457, they don't get down to that level and traditional may be the way to go (ala MadFIentist examples), but if you do get to that level of taxable income the Roth could be free tax-free money.
« Last Edit: January 14, 2014, 02:00:17 PM by arebelspy »
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slugsworth

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Re: Maxing Out The Accounts - Nervous
« Reply #17 on: January 14, 2014, 02:21:20 PM »
Wing117, you just inspired me. I just maxed my 403b for 2014.

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Re: Maxing Out The Accounts - Nervous
« Reply #18 on: January 14, 2014, 02:26:24 PM »
In my case we get down to the 15% marginal bracket for 2014 due to maxing all this same kind of stuff.  At that level I prefer to fill a Roth just because the principal is so easy to get out in early retirement.  It's 1st on my "to drain" list after taxable. 

aj_yooper

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Re: Maxing Out The Accounts - Nervous
« Reply #19 on: January 14, 2014, 02:35:59 PM »
wing117, that is an remarkable effort!  This assumes that your paycheck routinely covers your monthly expenses.  You probably have good data on that though.  I would double check your withholding amounts (with payroll departments) so you are tight there too. This also assumes that you are using tax and financially efficient funds that follow good rules of asset allocation and location.

I like the idea of deferring the IRA until later, even to next year, so you have an already ready backup (EF).  Tax table wise, with married filing jointly, you look like you would be in the 10% tax bracket so a Roth IRA would be OK, if you retired into the 15% bracket.  If you have taxable that you could live on in ER, however, a Roth would not be needed to draw from, so a traditional IRA would save you 10% on taxes.  If you are firmly in 10% tax territory, I would also be putting money into a taxable account so you could prepare for your ER. 

You did a lot of work on this and your budget. You and your spouse are all in, over the road, under the road, flat out AWESOME!

Best wishes!

Allen

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Re: Maxing Out The Accounts - Nervous
« Reply #20 on: January 14, 2014, 03:05:04 PM »
Make sure you don't get tagged with AMT, which could fubar everything for you.

wing117

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Re: Maxing Out The Accounts - Nervous
« Reply #21 on: January 14, 2014, 03:08:01 PM »
Going to be doing some real number math here.
Some changes: 403(b) adjusted to reflect maximums of 17,500 of 401k and 403k combined. Filing status is single (a topic for another time!)

$17,500 to a 457(b)
$12,000 to a 403(b)
$5,500 to a Traditional IRA
$5,500 to a 401(k) (mandatory 6% with 6% match) (This number doesn't include the match)
$3,300 to an HSA
----------
$43,800

Gross yearly income -  $87,644.88
Left over - $43,844.88
Taxable Income (according to TurboTax calclator) - 33,844
Marginal Tax Rate - 15%

Without contributing 5,500 to Traditional:

Left Over - 49,344.88
Taxable Income - 39,344
Marginal Tax Rate - 25%

It looks to me like I'm right on the cusp of the two tax rates, with 36,250 being the golden mark. Should I pull a split and put $2,400 to the Traditional and the rest in my Roth?

Last, I found out today that I have access to a supplemental 401k program in addition to my mandatory 401k. Out of the 403(b) and 401(k) supplemental, which would be best to max out? I verified that I get no matching contributions for the 401(k) supplemental.

Thanks for all the compliments and I'm very happy that my post has inspired others! Keep up the badassity everyone!

edit: Just read Allen's post about AMT, I've looked it up and I'm not sure if it actually applies to me or not. Help?

Allen

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Re: Maxing Out The Accounts - Nervous
« Reply #22 on: January 14, 2014, 03:47:12 PM »
I didn't understand amt very well, but this link suggests you'd be pretty safe from it because all your investment income would also be exempt from amt.

http://finance.zacks.com/401k-contributions-avoid-amt-1630.html

I think it's all the 'below the line' deductions that can get you in trouble, which you should be fine on.

dragoncar

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Re: Maxing Out The Accounts - Nervous
« Reply #23 on: January 14, 2014, 03:51:34 PM »
Going to be doing some real number math here.
Some changes: 403(b) adjusted to reflect maximums of 17,500 of 401k and 403k combined. Filing status is single (a topic for another time!)

$17,500 to a 457(b)
$12,000 to a 403(b)
$5,500 to a Traditional IRA
$5,500 to a 401(k) (mandatory 6% with 6% match) (This number doesn't include the match)
$3,300 to an HSA
----------
$43,800

Gross yearly income -  $87,644.88
Left over - $43,844.88
Taxable Income (according to TurboTax calclator) - 33,844
Marginal Tax Rate - 15%

Without contributing 5,500 to Traditional:

Left Over - 49,344.88
Taxable Income - 39,344
Marginal Tax Rate - 25%

It looks to me like I'm right on the cusp of the two tax rates, with 36,250 being the golden mark. Should I pull a split and put $2,400 to the Traditional and the rest in my Roth?

Last, I found out today that I have access to a supplemental 401k program in addition to my mandatory 401k. Out of the 403(b) and 401(k) supplemental, which would be best to max out? I verified that I get no matching contributions for the 401(k) supplemental.

Thanks for all the compliments and I'm very happy that my post has inspired others! Keep up the badassity everyone!

edit: Just read Allen's post about AMT, I've looked it up and I'm not sure if it actually applies to me or not. Help?

Given the above, any choice you make is just hyper-optimizing.  I think whatever you decide will probably be fine, and without a crystal ball it will be hard to choose optimally.

For AMT, I'm pretty sure it won't be an issue since it's based on AGI -- therefore most of your contributions are taken off the top before the AMT calculation.

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Re: Maxing Out The Accounts - Nervous
« Reply #24 on: January 14, 2014, 04:11:48 PM »
WOW, impressive!!

I just fully funded my IRA for 2014 and made sure the percentages for the 401 K are set so I'll hit the max 17.5 k
And I was a bit worried about my now "low" take home pay as well, but when I read this, it totally puts things in perspective ;)
This is just totally awesome!!!
I don't use the word "badass" lightly, but this truly is ;)

May I ask what you do, so you have access to all of these ? Hope I am not being to nosey!

In any case, as others have said. CC with high limit for emergencies, or wait to fund IRA until later, plus you can stop or reduce contributions at any given time
Last year I fiddled A LOT with my percentages to optimise. The system says it may take two pay periods to adjust, but in my case it was always superfast.
« Last Edit: January 14, 2014, 04:20:09 PM by FrugalZony »

Allen

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Re: Maxing Out The Accounts - Nervous
« Reply #25 on: January 14, 2014, 04:57:48 PM »
For us to see truly potential bombshells, you could post your full budget that gives you $1,830/month in living expenses. We may see something you forgot or seems abnormally low.

wing117

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Re: Maxing Out The Accounts - Nervous
« Reply #26 on: January 14, 2014, 05:34:56 PM »
May I ask what you do, so you have access to all of these ? Hope I am not being to nosey!

I'm a Systems Administrator for a University.

For us to see truly potential bombshells, you could post your full budget that gives you $1,830/month in living expenses. We may see something you forgot or seems abnormally low.

No problem. I actually keep tight track of that and have been working on tailoring it for the last year. Now is as good a time as any to get an updated fresh pair of (many) eyes on it. That number is calculating additional money into my normal budget as the SO and I have decided to have her go to school full time and live on a single income. I'm assuming an increase in my spending for that.

Bills:

Rent - $650
Car - $0
Insurance - $25
My Phone - $28
Her Phone - $32
Electric - $71
Gym - $0
Water - $8
Internet - $41
Banfield - $25
*Netflix - $9
*SO's Stipend - $200 (This will start Feb. and is spending money as she doesn't currently have a job and is going back to school see this post for details. It will go away if she gets a TA or paid position of some sort. She is currently hunting for an internship position in her field of study.

Total - $1089.00

Living Expenses:

Groceries - $360
Restaurants - $60
Coffee Shops - $20
Pet Food/Supplies - $55
Gas - $40
Parking - $10
Movies - $25
Hobbies - $30 (for cycling gear, etc... rolls over each month - is also used on home improvement and books)
Assumed extra - $150 - This number is budgeted due to the SO going back to college to pick up anything that she normally bought for the household. May be less, but I'm playing it safe. Feb. will start this being added into the expenditure so we'll see if we need it then.

Living Expenses total - $750
Total Monthly Budget - $1839
Budget if SO gets TA/Paid Position - $1,456

So there's a potential $383 difference in my budget depending on some variables in the next few months, but because I agreed to support her fully while she attended college I want to make sure I budget for that. Movies, Coffee shops, hobbies and Restaurants can be cut back as well if needed providing an additional $135/mo in savings, or a budget of $1,321.

That being said, my expenditure can range from $15,852-$22,068/yr depending on some factors.

If you see any holes let me know! :)

*Added Netflix and recalculated the numbers, somehow I had forgotten that on my sheets
« Last Edit: January 14, 2014, 05:44:27 PM by wing117 »

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Re: Maxing Out The Accounts - Nervous
« Reply #27 on: January 14, 2014, 05:53:24 PM »
So there's a potential $383 difference in my budget depending on some variables in the next few months, but because I agreed to support her fully while she attended college I want to make sure I budget for that. Movies, Coffee shops, hobbies and Restaurants can be cut back as well if needed providing an additional $135/mo in savings, or a budget of $1,321.

Make sure she's on board with all the levels of spending and keep communication open - she might feel restricted in her spending, but unable to say anything since you're "providing".

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ch12

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Re: Maxing Out The Accounts - Nervous
« Reply #28 on: January 14, 2014, 08:13:05 PM »
I love this thread. I don't have the opportunity to double up, but it's really cool to see such a great savings rate.

I feel like I'm a huge cheerleader for RootofGood, but I think that his post on reducing income tax applies here: http://rootofgood.com/make-six-figure-income-pay-no-tax/


CorpRaider

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Re: Maxing Out The Accounts - Nervous
« Reply #29 on: January 15, 2014, 08:48:30 AM »
Hi Wing,

  I like your plan.  It seems like going with the Roth IRA would alleviate your concerns about penalties if you need to access some of your funds.
« Last Edit: January 15, 2014, 09:55:34 AM by CorpRaider »

wing117

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Re: Maxing Out The Accounts - Nervous
« Reply #30 on: January 15, 2014, 10:21:06 AM »
I took a look at rootofgood's post and found it helpful. I probably wont be getting down to the $150 tax bill, but as close as I can! I appreciate all the feed back! I definitely feel much better.  Plans are for the paperwork to go into effect Feb 1st (being taken out of Feb. 15th's paycheck) giving me plenty of time to get the 5K buffer built. I'm sure I'll come back 'round with updates and how the numbers actually worked out!

arebelspy - We have very open communication about funds and budgets. There's always a little give and take with these matters and we both understand that. She's never been shy to call me out if needed. :)

oldtoyota

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Re: Maxing Out The Accounts - Nervous
« Reply #31 on: January 15, 2014, 01:30:10 PM »
Hey folks!

I have the opportunity to do the following:

$17,500 to a 457(b)
$17,500 to a 403(b)
$5,500 to a Traditional IRA
$5,500 to a 401(k) (mandatory 6% with 6% match) (This number doesn't include the match)
$3,300 to an HSA
--------------------------------------
$49,300 in pre-tax savings for the year (~57% savings).

This would put my take home pay at ~2,400/mo, 1,830/mo goes to bills/living expenses (for two people), leaving me with a meager $570/mo in excess or 6,840/yr.


Awesome! And I do not get jealous often, but I have to admit to some jealousy that you get to contribute to a 401K AND a 457. Lucky dog!