Author Topic: On track to max out 401(k) next year. What next?  (Read 3693 times)

Genevieve

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On track to max out 401(k) next year. What next?
« on: September 10, 2015, 09:58:12 AM »
By the end of the year, we're anticipating having:

- $15,000 in debt on a car at 1.9%
- $2,000 in an emergency fund (not including cash of 1 mo. living expenses)
- $30,000 in Roth IRAs
- $10,000 in 401(k)

We anticipate being able to save at least $28,000, possibly $40,000 or more, next year.

Husband has a 9-5 job. I'm self employed. We're in the 25% federal tax bracket, no state income tax. No high deductible health plan with a HSA available at job.

Employer matches the first $5,000 of 401(k) contributions, so we plan to max out the 401(k) with the first $18,000.

We want a bit more in savings.

What to do with the rest?

I like the idea of a concrete goal that I can get excited about.

I also like the idea of not locking everything away in a 401(k). Keeping too much in cash because everything is locked away will weigh down your return, and it's expensive to withdraw from a 401(k) in the case of an emergency.

--I've always thought the idea of real estate sounded fun. Time to try that? Get a duplex so we cover the cost of rent and more?
--Solo 401(K) or SEP IRA? Not sure how long I will remain self-employed, so not sure if this is the right move.
--Roth IRA?
-- Brokerage account?

What would you do?

BarkyardBQ

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Re: On track to max out 401(k) next year. What next?
« Reply #1 on: September 10, 2015, 10:09:53 AM »
Pay off the car.

JLee

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Re: On track to max out 401(k) next year. What next?
« Reply #2 on: September 10, 2015, 10:19:58 AM »
Pay off the car.

At 1.9%, I'd be maximizing all tax-advantaged accounts before paying that off.

BarkyardBQ

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Re: On track to max out 401(k) next year. What next?
« Reply #3 on: September 10, 2015, 10:25:22 AM »
Pay off the car.

At 1.9%, I'd be maximizing all tax-advantaged accounts before paying that off.

That's the math, which is sound. I'm in the camp of confronting debts before trying to make better habits.

So, yes with that interest rate, a SEP or s401k is probably smartest even while OP is on the fence about the length of self-employment.

Also depending on OP's job and income after self employment, I'd want to get rid of the mandatory monthly payments.
« Last Edit: September 10, 2015, 10:31:43 AM by BackyarBQ »

JLee

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Re: On track to max out 401(k) next year. What next?
« Reply #4 on: September 10, 2015, 10:34:09 AM »
Pay off the car.

At 1.9%, I'd be maximizing all tax-advantaged accounts before paying that off.

That's the math, which is sound. I'm in the camp of confronting debts before trying to make better habits.

So, yes with that interest rate, a SEP or s401k is probably smartest even while OP is on the fence about the length of self-employment.

Also depending on OP's job and income after self employment, I'd want to get rid of the mandatory monthly payments.

Yep. Different methods work for different people. :)  I owe about that much at 2.49% and have decided to send $2k/mo to my 401k (I'm a mustachian-noob and just started aiming to max my 401k a few months ago, so I am playing catch-up) before paying down the loan. 

My car loan is 1% lower rate than my mortgage, which makes it really hard to prioritize over other options.

BarkyardBQ

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Re: On track to max out 401(k) next year. What next?
« Reply #5 on: September 10, 2015, 10:40:10 AM »
According to MDM and Case Study Spreadsheet here are the mathematical decision makers...

WHAT
0. Establish an emergency fund to your satisfaction
1. Contribute to 401k up to any company match
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
3. Max HSA
4. Max Roth or Traditional IRA based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, swap #4 and #5)
6. Fund mega backdoor Roth if applicable
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
8. Invest in taxable account with any extra.

WHY
0. Give yourself at least enough buffer to avoid worries about bouncing checks
1. Company match rates are likely the highest percent return you can get on your money
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.
4. Rule of thumb: trad if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between
5. See #4 for choice of traditional or Roth for 401k
6. Applicability depends on the rules for the specific 401k
7. Again, take the risk-free return if high enough
8. If you make enough to exhaust tax-advantaged space, congratulations!

MrMoogle

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Re: On track to max out 401(k) next year. What next?
« Reply #6 on: September 10, 2015, 12:43:04 PM »
Pay off the car.

At 1.9%, I'd be maximizing all tax-advantaged accounts before paying that off.

That's the math, which is sound. I'm in the camp of confronting debts before trying to make better habits.

So, yes with that interest rate, a SEP or s401k is probably smartest even while OP is on the fence about the length of self-employment.

Also depending on OP's job and income after self employment, I'd want to get rid of the mandatory monthly payments.

The tax break alone on a self 401k is higher than the 1.9%.  That's a guaranteed savings in taxes, plus the profit from investing.  That seems like the next step to me.

Genevieve

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Re: On track to max out 401(k) next year. What next?
« Reply #7 on: September 10, 2015, 01:26:51 PM »
My 1.9% loan is going to cost $800 over the next two years. No way I'm paying that off early.

I'm reluctant to open a solo 401(k) because I might not be a sole proprietor by the end of the year. Business is fine, but I might end up working for a client of mine as an employee instead of as a contractor.  Or even more likely, I'll turn the business into an LLC. Simple IRA and SEP IRA are complicated for the same reason -- changing tax status. I wonder if that matters for these two as long as I keep the business open in some form? I can call Vanguard's hotline. I'll have to figure it out at some point.

Pretty sure there's no backdoor Roth at work too.

That would leave the Traditional/Roth IRA and a brokerage account according to that list up there.

Nothing in that list there about buying a rental property though. Rental properties with leverage will bring you a greater return than stocks without leverage. Running a rental business sounds like fun to me, too.
« Last Edit: September 10, 2015, 01:39:19 PM by Genevieve »

Eurotexan

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Re: On track to max out 401(k) next year. What next?
« Reply #8 on: September 10, 2015, 02:03:28 PM »
I am a landlord or two properties (accidental, I wasn't planning to be a landlord!) but it has worked out well financially. However, it isn't fun, be prepared for those bank holiday emergency phone calls. My advise is to screen the tenants very well and don't always jump at the tenants offering to pay the highest rent. My priority is to have long term tenants who pay on time, even if they pay $100 or so under the market rent. I come out ahead in the long term. It might be more fun if I didn't have full time job as well but it can be hard work. Good luck to you!

BriarRose111

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Re: On track to max out 401(k) next year. What next?
« Reply #9 on: September 10, 2015, 02:52:10 PM »
According to MDM and Case Study Spreadsheet here are the mathematical decision makers...

WHAT
0. Establish an emergency fund to your satisfaction
1. Contribute to 401k up to any company match
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
3. Max HSA
4. Max Roth or Traditional IRA based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, swap #4 and #5)
6. Fund mega backdoor Roth if applicable
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
8. Invest in taxable account with any extra.

WHY
0. Give yourself at least enough buffer to avoid worries about bouncing checks
1. Company match rates are likely the highest percent return you can get on your money
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.
4. Rule of thumb: trad if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between
5. See #4 for choice of traditional or Roth for 401k
6. Applicability depends on the rules for the specific 401k
7. Again, take the risk-free return if high enough
8. If you make enough to exhaust tax-advantaged space, congratulations!

Interesting that maxing HSA is recommended before maxing 401K.  I've been pondering on that prior to reading this.

JLee

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Re: On track to max out 401(k) next year. What next?
« Reply #10 on: September 10, 2015, 03:24:19 PM »
According to MDM and Case Study Spreadsheet here are the mathematical decision makers...

WHAT
0. Establish an emergency fund to your satisfaction
1. Contribute to 401k up to any company match
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
3. Max HSA
4. Max Roth or Traditional IRA based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, swap #4 and #5)
6. Fund mega backdoor Roth if applicable
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
8. Invest in taxable account with any extra.

WHY
0. Give yourself at least enough buffer to avoid worries about bouncing checks
1. Company match rates are likely the highest percent return you can get on your money
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.
4. Rule of thumb: trad if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between
5. See #4 for choice of traditional or Roth for 401k
6. Applicability depends on the rules for the specific 401k
7. Again, take the risk-free return if high enough
8. If you make enough to exhaust tax-advantaged space, congratulations!

Interesting that maxing HSA is recommended before maxing 401K.  I've been pondering on that prior to reading this.
Probably because you can withdraw it for medical expenses at any point penalty-free, while you can't with a 401k?  I'm curious if there are other reasons as well- I will have HSA access next month.

johnny847

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Re: On track to max out 401(k) next year. What next?
« Reply #11 on: September 10, 2015, 03:27:00 PM »
According to MDM and Case Study Spreadsheet here are the mathematical decision makers...

WHAT
0. Establish an emergency fund to your satisfaction
1. Contribute to 401k up to any company match
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
3. Max HSA
4. Max Roth or Traditional IRA based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, swap #4 and #5)
6. Fund mega backdoor Roth if applicable
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
8. Invest in taxable account with any extra.

WHY
0. Give yourself at least enough buffer to avoid worries about bouncing checks
1. Company match rates are likely the highest percent return you can get on your money
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.
4. Rule of thumb: trad if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between
5. See #4 for choice of traditional or Roth for 401k
6. Applicability depends on the rules for the specific 401k
7. Again, take the risk-free return if high enough
8. If you make enough to exhaust tax-advantaged space, congratulations!

Interesting that maxing HSA is recommended before maxing 401K.  I've been pondering on that prior to reading this.
Probably because you can withdraw it for medical expenses at any point penalty-free, while you can't with a 401k?  I'm curious if there are other reasons as well- I will have HSA access next month.

Also because contributions are pre-FICA tax, saving you another 7.65%.

therethere

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Re: On track to max out 401(k) next year. What next?
« Reply #12 on: September 10, 2015, 03:34:57 PM »
HSA contributions skip FICA taxes. Also, after 65 they can be used for medical insurance premiums or long term care insurance. After 65 you can also take the money out for non-medical reasons, with  just paying taxes (no penalty).

So, it can be a really delayed benefit. But still a great strategy.

Genevieve

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Re: On track to max out 401(k) next year. What next?
« Reply #13 on: September 10, 2015, 04:14:02 PM »
Re:HSA  It's tax free on the way in and the way out for qualified medical expenses.