Author Topic: Small EF fund almost done. What next and 401k question  (Read 1222 times)

EconDiva

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Small EF fund almost done. What next and 401k question
« on: October 29, 2017, 12:30:32 PM »
Earlier this year I was trying to build a house downpayment fund.  Throughout the year I started questioning doing this as I decided ultimately it didn't make sense to go buy a house without a EF fund first.  So by the end of this year in a few months I will have a 4-6 month EF fund.  My first time having one.  It's currently sitting in a Capital One 360 account.  I do plan to continue to contribute to this fund going forward but at a drastically lower rate (probably only 100-300 per month after this year).

My question is regarding what order I should turn my attention/funds to next.  Do I max the ROTH IRA next?  Then after that, max the 401k?  Of note, I get an annual bonus every December that will be just enough to max out the ROTH starting next year.  So in 2018 for example, I could max out the ROTH with the funds from the December 2018 bonus.  Just a thought.

Also, I was hoping to get some opinions on something 401k related.  I have a close friend who is my most financially responsible friend.  High income, multiple streams of income, pretty savvy investor, etc.  He is strongly encouraging me not to give any more than the minimum required to my 401k for the employer match (2%).  He says it's a horrible idea to max it out due to the amount of taxes I will pay on the money in retirement.  I'm sure there are threads on this but I'd love some quick and dirty opinions on why maxing the 401k is best as it does seem to be pretty standard advice to do.

JLee

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GizmoTX

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Re: Small EF fund almost done. What next and 401k question
« Reply #2 on: October 29, 2017, 01:14:25 PM »
Max out your Roth IRA for 2017 with your December funds; 2017 can be funded until April, 2018. Then save for fully funding your 2018 contribution. Once you miss ‘the window’ it’s gone forever.

I agree about funding enough in your 401k to at least get the match. The traditional/deductible/tax deferred vs Roth tax exempt (both the IRA & 401k versions) choice depends on what tax bracket you believe you will be in when you take distributions, since you’ll then pay tax on any coming from tax deferred accounts. You don’t want to be paying more tax later than you are now.

EconDiva

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Re: Small EF fund almost done. What next and 401k question
« Reply #3 on: October 29, 2017, 01:17:01 PM »
Max out your Roth IRA for 2017 with your December funds; 2017 can be funded until April, 2018. Then save for fully funding your 2018 contribution. Once you miss ‘the window’ it’s gone forever.

I agree about funding enough in your 401k to at least get the match. The traditional/deductible/tax deferred vs Roth tax exempt (both the IRA & 401k versions) choice depends on what tax bracket you believe you will be in when you take distributions, since you’ll then pay tax on any coming from tax deferred accounts. You don’t want to be paying more tax later than you are now.

The December 2017 bonus is already marked for completing the EF fund for this year which is why I mentioned going forward in 2018 I could use the December bonus funds for the ROTH.

I will have to look further into this argument as I believe I'll be in a lower tax bracket come time to take distributions....

MrMoneySaver

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Re: Small EF fund almost done. What next and 401k question
« Reply #4 on: October 29, 2017, 01:20:37 PM »
If you plan to retire on a spend of $30K to $40K a year like many here, I don't imagine you'd be paying much in taxes at that time.

JLee

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Re: Small EF fund almost done. What next and 401k question
« Reply #5 on: October 29, 2017, 01:26:46 PM »
Earlier this year I was trying to build a house downpayment fund.  Throughout the year I started questioning doing this as I decided ultimately it didn't make sense to go buy a house without a EF fund first.  So by the end of this year in a few months I will have a 4-6 month EF fund.  My first time having one.  It's currently sitting in a Capital One 360 account.  I do plan to continue to contribute to this fund going forward but at a drastically lower rate (probably only 100-300 per month after this year).

My question is regarding what order I should turn my attention/funds to next.  Do I max the ROTH IRA next?  Then after that, max the 401k?  Of note, I get an annual bonus every December that will be just enough to max out the ROTH starting next year.  So in 2018 for example, I could max out the ROTH with the funds from the December 2018 bonus.  Just a thought.

Also, I was hoping to get some opinions on something 401k related.  I have a close friend who is my most financially responsible friend.  High income, multiple streams of income, pretty savvy investor, etc.  He is strongly encouraging me not to give any more than the minimum required to my 401k for the employer match (2%).  He says it's a horrible idea to max it out due to the amount of taxes I will pay on the money in retirement.  I'm sure there are threads on this but I'd love some quick and dirty opinions on why maxing the 401k is best as it does seem to be pretty standard advice to do.

If for some reason you did want to invest in Roth accounts instead of Traditional, you also have the opportunity to make Roth contributions to your 401k. Traditional is usually the superior choice.

If you still qualify for a Traditional IRA (i.e. you are not above the income limits), I would contribute to a Traditional IRA as well and take the tax deduction. Given that you're getting ~$5k end-of-year bonuses, I'm guessing that your income (and subsequently tax rate) is not low enough to make going Roth advantageous.