Author Topic: Which tax saving investment accounts should I use?  (Read 3834 times)

teltic

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Which tax saving investment accounts should I use?
« on: October 19, 2016, 10:37:19 AM »
I'll try to keep this short.

I'm 25, single, no kids, live at parents house.


I make $60,000, with 5% matching 401k. Below is my plan.

Roth IRA: $5500 (after tax contrib)
529 plan: $2000 (after tax contrib)
401k: $15,000 (before tax contrib)
Company match: $3000 (free money, before tax)
HSA???  $3400 (before tax)


Total : $23,950 / $60,000 = 39.92%

Now I can and will invest more than this (rest will be investing in an individual account, which will one day be a down payment on a house)

My questions are...

1. Am I crazy to start a 529 plan? I have no kids, but plan to pay at least 50% of their education. I know I can start the fund under my name, and switch it to my kids when they are born.


2. HSAs... Is this smart? One day I will use these funds... My only concern is the first $2500 cannot be invested! So I'll have $2500 sitting in cash, rotting away. My current net worth is $80k if that matters. The alternative is to invest in an individual, and simply pay out of pocket on expenses (I would lose that tastey pay no taxes ever benefit)


Any help would be greatly appreciated! Just want to make sure I am optimizing my tax favored accounts and such!



mbl

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Re: Which tax saving investment accounts should I use?
« Reply #1 on: October 19, 2016, 10:45:13 AM »
I would suggest putting the max in your 401k before funding a 529.

raspberries

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Re: Which tax saving investment accounts should I use?
« Reply #2 on: October 19, 2016, 11:26:38 AM »
I agree, there's no reason to fund a 529 plan yet (unless you're planning to have 10 kids and fund 50% of all of their educations?)  Using this calculator: http://www.savingforcollege.com/college-savings-calculator/ - if you had a child today, you'd still only need to save around $465/mo to fully fund their college in 18 years. I'd move that $2,000 you're currently putting in a 529 into your pre-tax 401K.

teltic

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Re: Which tax saving investment accounts should I use?
« Reply #3 on: October 19, 2016, 02:07:40 PM »
529 plans cap you at putting $2000 in a year. So if I wait for a child, I will not be able to out the $465 in a month.

For the 401k plan. $18,000 is the max I can put in. I assume the $3000 the company matches will go towards my max? If not then I'll put $18k in... If not I'll keep it at the $15k.


So order of priorities

Match % of 401k contributions
Roth IRA
Max 401k
529 plan?
HSA?


I'm still hazy on the HSA whether it's worth "investing" in it. I don't go to the doctor currently... But I'm bound to eventually? Really it's just the "$2500 to sit in cash" requirement that bugs me.

tjrssibelle

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Re: Which tax saving investment accounts should I use?
« Reply #4 on: October 19, 2016, 02:15:12 PM »
The company match does not count toward the individual contribution, so feel free to max the 401k

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boarder42

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Re: Which tax saving investment accounts should I use?
« Reply #5 on: October 19, 2016, 02:16:09 PM »
From MDM the order this needs to be pinned somewhere

Current 10-year Treasury note yield is ~2%.  See   
   http://quotes.wsj.com/bond/BX/TMUBMUSD10Y
   
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
   https://www.bogleheads.org/forum/viewtopic.php?f=2&t=182081,
   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   

529s would be last IMO.

teltic

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Re: Which tax saving investment accounts should I use?
« Reply #6 on: October 19, 2016, 02:37:07 PM »
THANK YOU for the reply. I'll have to read up on back dooring the Roth.

HSA is superior to IRA, other than forcing you to have $2500 in idle cash. Probably is still worth it?


Really cool idea attaching interest rates to 10 year notes. Totally makes sense.




BigHaus89

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Re: Which tax saving investment accounts should I use?
« Reply #7 on: October 19, 2016, 02:40:22 PM »
Max the 401k and the HSA. Who is your HSA with? You could max a traditional IRA instead of the Roth for additional deductions to lower your taxable income.

If you have any extra, I personally would open a brokerage account and stuff it in there(with Vanguard of course).
« Last Edit: October 19, 2016, 02:42:12 PM by BigHaus89 »

Vagabond76

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Re: Which tax saving investment accounts should I use?
« Reply #8 on: October 19, 2016, 07:46:36 PM »
From MDM the order this needs to be pinned somewhere

Current 10-year Treasury note yield is ~2%.  See   
   http://quotes.wsj.com/bond/BX/TMUBMUSD10Y
   
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
   https://www.bogleheads.org/forum/viewtopic.php?f=2&t=182081,
   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   

529s would be last IMO.

Could move 529s up about Roth.  If used for education expenses (as defined by the IRC), the tax treatment is the same.  In my case, my kids will need college funds long before I need to access my Roth.

My plan is to use the 529 money to make payments on houses for the kids while they attend college.  I can rent out rooms to other students, which should offset the mortgage payments what we pay using tax-free distributions.

seattlecyclone

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Re: Which tax saving investment accounts should I use?
« Reply #9 on: October 19, 2016, 08:18:28 PM »
529 plans cap you at putting $2000 in a year.

No they don't. Maybe your state's plan has a $2,000 cap, or maybe your state only gives you a tax break on the first $2,000, but you may open an account with any state's plan and most of them do not limit you in this way.

I agree with the other posters who suggest maxing out the 401(k) before putting money in a 529. In fact, you may want to wait on that until you either have kids or have purchased a house (which is what you plan to do with your post-tax money).

Grizzly Dad

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Re: Which tax saving investment accounts should I use?
« Reply #10 on: October 19, 2016, 08:50:57 PM »
Cap on 529 plans is $14000 per parent per child without triggering gift taxes.

Here's a good source on the details

https://us.axa.com/goals/saving-for-college/questions/529-plans-gift-tax-exclusion.html

Tiger Stache

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Re: Which tax saving investment accounts should I use?
« Reply #11 on: October 20, 2016, 01:48:49 AM »
Don't start a 529 being single with no kids. You should max out 401k, Roth, then throw the rest into taxable accounts and be done with it. Tackle the 529 thing when there's a bun in the oven.

Vagabond76

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Re: Which tax saving investment accounts should I use?
« Reply #12 on: October 20, 2016, 03:56:27 AM »
529 plans cap you at putting $2000 in a year.

No they don't. Maybe your state's plan has a $2,000 cap, or maybe your state only gives you a tax break on the first $2,000, but you may open an account with any state's plan and most of them do not limit you in this way.

I agree with the other posters who suggest maxing out the 401(k) before putting money in a 529. In fact, you may want to wait on that until you either have kids or have purchased a house (which is what you plan to do with your post-tax money).

The $2000 cap applies to Coverdell Savings Accounts. CSAs have the same tax treatment, but allow the parent or grandparent to invest in most any marketable security. The securities industry and state governments push 529 plans because it makes them more money in fees.  We max CSAs, then contribute the remainder to 529 plans.

I agree OP shouldn't contribute to education accounts when single with no kids, but only because there may be no kids. I assume OP named a niece/nephew or younger sibling when opening the account.  Those people are not dependent upon OP for their education.

Jack

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Re: Which tax saving investment accounts should I use?
« Reply #13 on: October 20, 2016, 05:27:55 AM »
I'll echo everyone else saying to ditch the 529 and max the 401(k). Also, not that it matters since you're maxing it anyway, but the HSA should be the second-highest priority (after capturing 401(k) employer matching funds).

HSA is superior to IRA, other than forcing you to have $2500 in idle cash. Probably is still worth it?

The "$2500 in idle cash" is a requirement of your particular bank/brokerage, not inherent to all HSAs. Moreover, HSAs do not work like 401(k)s. Even if your employer has partnered with bank A to direct-deposit your contribution (which is good because it avoids FICA taxes), you're perfectly welcome to open another account at bank B and transfer the money from A to B after each deposit to A. Therefore, pick bank B to have a lower idle cash requirement (you should be able to find one that requires $1000 or less) and/or better investment choices and/or lower fees.

BigHaus89

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Re: Which tax saving investment accounts should I use?
« Reply #14 on: October 20, 2016, 10:27:40 AM »
I'll echo everyone else saying to ditch the 529 and max the 401(k). Also, not that it matters since you're maxing it anyway, but the HSA should be the second-highest priority (after capturing 401(k) employer matching funds).

HSA is superior to IRA, other than forcing you to have $2500 in idle cash. Probably is still worth it?

The "$2500 in idle cash" is a requirement of your particular bank/brokerage, not inherent to all HSAs. Moreover, HSAs do not work like 401(k)s. Even if your employer has partnered with bank A to direct-deposit your contribution (which is good because it avoids FICA taxes), you're perfectly welcome to open another account at bank B and transfer the money from A to B after each deposit to A. Therefore, pick bank B to have a lower idle cash requirement (you should be able to find one that requires $1000 or less) and/or better investment choices and/or lower fees.

One thing I do regarding the HSA is to have a small amount sitting in Bank A(work direct deposits into this acct) for medical expenses and no minimum amount requirement and transfer the rest of my money to Health Savings Administrators to invest 100% into VTSAX. Something for you to consider OP.

Jack

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Re: Which tax saving investment accounts should I use?
« Reply #15 on: October 20, 2016, 02:04:05 PM »
One thing I do regarding the HSA is to have a small amount sitting in Bank A(work direct deposits into this acct) for medical expenses and no minimum amount requirement and transfer the rest of my money to Health Savings Administrators to invest 100% into VTSAX. Something for you to consider OP.

You shouldn't actually be using your HSA for current-year medical expenses. Instead, you should pay them out-of-pocket now but save the receipts to claim tax-free income for living expenses after FIRE.

boarder42

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Re: Which tax saving investment accounts should I use?
« Reply #16 on: October 20, 2016, 02:20:06 PM »
One thing I do regarding the HSA is to have a small amount sitting in Bank A(work direct deposits into this acct) for medical expenses and no minimum amount requirement and transfer the rest of my money to Health Savings Administrators to invest 100% into VTSAX. Something for you to consider OP.

You shouldn't actually be using your HSA for current-year medical expenses. Instead, you should pay them out-of-pocket now but save the receipts to claim tax-free income for living expenses after FIRE.

its really 6 one half dozen the other isnt it?

tawyer

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Re: Which tax saving investment accounts should I use?
« Reply #17 on: October 20, 2016, 02:31:01 PM »
One thing I do regarding the HSA is to have a small amount sitting in Bank A(work direct deposits into this acct) for medical expenses and no minimum amount requirement and transfer the rest of my money to Health Savings Administrators to invest 100% into VTSAX. Something for you to consider OP.

You shouldn't actually be using your HSA for current-year medical expenses. Instead, you should pay them out-of-pocket now but save the receipts to claim tax-free income for living expenses after FIRE.

its really 6 one half dozen the other isnt it?

Paying later allows the HSA money to grow tax-free for as many years as you defer the expense for.

BigHaus89

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Re: Which tax saving investment accounts should I use?
« Reply #18 on: October 20, 2016, 05:25:52 PM »
One thing I do regarding the HSA is to have a small amount sitting in Bank A(work direct deposits into this acct) for medical expenses and no minimum amount requirement and transfer the rest of my money to Health Savings Administrators to invest 100% into VTSAX. Something for you to consider OP.

You shouldn't actually be using your HSA for current-year medical expenses. Instead, you should pay them out-of-pocket now but save the receipts to claim tax-free income for living expenses after FIRE.

Yeah, I get that. My annual medical expenses thus far have totaled only like $30 a year, so it doesn't really matter(for me). Not advising everyone to do it, that's just how I operate with it.

teltic

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Re: Which tax saving investment accounts should I use?
« Reply #19 on: October 20, 2016, 07:35:31 PM »
Thank you so much for all the replies!  I really appreciate it.


You guys are right on the no cap on 529 plans.  I made a mistake.  For who I am placing the beneficiary under, it will be me.  I can transfer it over when a kid arrives.  I get I probably shouldn't dump money into something I may not have (there's always a possibility of never having children), I guess I could work out a deal with one of my brothers who have children ( I'll pay for your kids tuition, lets split the tax savings 50/50)


Great idea on the HSA part as well.  Once I have $1k in the HSA I"ll look around to see if I can dump the funds into another bank that will allow me to invest at a lower threshold.  I should be getting something in the mail about my HSA, I'm not sure who it is through.


seattlecyclone

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Re: Which tax saving investment accounts should I use?
« Reply #20 on: October 21, 2016, 11:14:54 AM »
One thing I do regarding the HSA is to have a small amount sitting in Bank A(work direct deposits into this acct) for medical expenses and no minimum amount requirement and transfer the rest of my money to Health Savings Administrators to invest 100% into VTSAX. Something for you to consider OP.

You shouldn't actually be using your HSA for current-year medical expenses. Instead, you should pay them out-of-pocket now but save the receipts to claim tax-free income for living expenses after FIRE.

its really 6 one half dozen the other isnt it?

It really isn't. When you pay for medical expenses out of taxable funds and let your HSA ride, you're avoiding the need to pay tax on dividends and capital gains on that part of your stash, forever.

I would say that if you can't afford to max out all of your tax-advantaged accounts, you might as well pay for current medical expenses out of the HSA so that you can get closer to maxing out the rest of your tax-advantaged buckets. But if you're already saving in taxable anyway, use that money for medical expenses first.