Author Topic: When retire.  (Read 2068 times)

heybro

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When retire.
« on: January 28, 2016, 01:09:07 AM »
Edited.
« Last Edit: February 03, 2016, 09:25:24 PM by heybro »

MDM

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After I max my Roth IRA each year ($5500 a year), where should I put the extra money?

I contribute the necessary amount to max my employer match in my employer retirement account.  Between me and my employer match, it is $2500 a year going in to the work IRA.

In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct.  Do you have access to one of these, or is your work plan a SIMPLE IRA or...?

Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).

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 Traditional IRA or Roth (or backdoor Roth) based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, 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 a 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: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic).  See also
   http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845
   and other posts in that thread about exceptions to the rule.
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. Because earnings, even if taxed, are beneficial   

The emergency fund is your "no risk" money.  You might consider one of these online banks: http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001   
      
If your 401k options are poor (i.e., high fund fees) you can check   
   http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/
for some thoughts on "how high is too high?"   


Quote
and, does the 25x rule, well is that how much you put in or how much it has grown too?
How much it has grown to when you retire, assuming a 30 year retirement.

slappy

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After I max my Roth IRA each year ($5500 a year), where should I put the extra money?

I contribute the necessary amount to max my employer match in my employer retirement account.  Between me and my employer match, it is $2500 a year going in to the work IRA.

In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct.  Do you have access to one of these, or is your work plan a SIMPLE IRA or...?

Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).

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 Traditional IRA or Roth (or backdoor Roth) based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, 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 a 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: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic).  See also
   http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845
   and other posts in that thread about exceptions to the rule.
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. Because earnings, even if taxed, are beneficial   

The emergency fund is your "no risk" money.  You might consider one of these online banks: http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001   
      
If your 401k options are poor (i.e., high fund fees) you can check   
   http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/
for some thoughts on "how high is too high?"   


Quote
and, does the 25x rule, well is that how much you put in or how much it has grown too?
How much it has grown to when you retire, assuming a 30 year retirement.

Since the HSA is limited to medical expenses until age 65 (I believe), why does that take priority over a Roth? At least with a Roth, you can take your contributions out if there was a dire necessity.  Am I missing something?  I guess you could take the HSA money if the need was dire, and just pay the penalty.

norabird

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You're putting in to the work IRA only to the employer max and not to reach the annual contribution limits? I'd start there--that will absorb almost all of your extra cash.

Gin1984

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After I max my Roth IRA each year ($5500 a year), where should I put the extra money?

I contribute the necessary amount to max my employer match in my employer retirement account.  Between me and my employer match, it is $2500 a year going in to the work IRA.

In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct.  Do you have access to one of these, or is your work plan a SIMPLE IRA or...?

Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).

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 Traditional IRA or Roth (or backdoor Roth) based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, 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 a 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: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic).  See also
   http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845
   and other posts in that thread about exceptions to the rule.
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. Because earnings, even if taxed, are beneficial   

The emergency fund is your "no risk" money.  You might consider one of these online banks: http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001   
      
If your 401k options are poor (i.e., high fund fees) you can check   
   http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/
for some thoughts on "how high is too high?"   


Quote
and, does the 25x rule, well is that how much you put in or how much it has grown too?
How much it has grown to when you retire, assuming a 30 year retirement.

Since the HSA is limited to medical expenses until age 65 (I believe), why does that take priority over a Roth? At least with a Roth, you can take your contributions out if there was a dire necessity.  Am I missing something?  I guess you could take the HSA money if the need was dire, and just pay the penalty.
It is pre-FICA, as well as pre-tax, then you can pull the money out without ANY tax for medical.  And trust me, you'll have medical costs after you are 65.  ;)

MDM

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Since the HSA is limited to medical expenses until age 65 (I believe), why does that take priority over a Roth? At least with a Roth, you can take your contributions out if there was a dire necessity.  Am I missing something?  I guess you could take the HSA money if the need was dire, and just pay the penalty.
If a dire emergency arises, it is often because of a significant medical expense.  Also, the 0th step is to fund your emergency fund, for emergencies and other dire necessities.

If your current marginal tax rate is 0%, then a Roth would be better than an HSA due to the greater flexibility.

Yes, paying the penalty remains an option.

Plus what Gin1984 said.


slappy

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Since the HSA is limited to medical expenses until age 65 (I believe), why does that take priority over a Roth? At least with a Roth, you can take your contributions out if there was a dire necessity.  Am I missing something?  I guess you could take the HSA money if the need was dire, and just pay the penalty.
If a dire emergency arises, it is often because of a significant medical expense.  Also, the 0th step is to fund your emergency fund, for emergencies and other dire necessities.

If your current marginal tax rate is 0%, then a Roth would be better than an HSA due to the greater flexibility.

Yes, paying the penalty remains an option.

Plus what Gin1984 said.

I missed the 0th step! I knew I was missing something! Thank you to everyone for the explanation. It makes a lot more sense now.  :)