401k/IRA priority for early retirement

[den]

Hi folks,

read the blog for a while, first time posting. Tried to use search but it errors out when I search...

We are a family of two, moved into the US 3.5 years ago.

- Age: 30 yo (both)
- Kids: planning in upcoming year or two. Will likely move out of the city and keep rent amount roughly the same.
- Location: San Francisco city (yes, one of the priciest places)
- Rent: $2300/mo (a studio in great location w/ parking, all utilities included except internet and electricity, which are $75 total, so it's lower spectrum with high around $8K/mo)
- Gross income for two: $195k/year, so take home is ~$136k
- Medical insurance: very decent
- Credit score: excellent for both
- Debt: financed car for getaways/snowboarding/camping/cross-state travels (~$20K) - I know how stupid it is and I'm fine with it. No student or consumer loans.
- Commute: walk/bike
- Food: we pack lunches and eat out on a rare occasion/while travelling. I make espresso (and few other brewing methods) for myself, so no Starbucks/Pete's, etc.
- 401k: traditional, maxed out for myself and ~$5K for my wife
- Roth IRA: was maxing out each January for both of us. Vanguard + some in Betterment. Can continue maxing out through the "backdoor" IRA (since current income is $195k), but see my question below
- YNAB 4 user, so we can dive into spending habits afterwards and fix'em :)

Other moneys go into Ally Savings 1% (medical emergency, car insurance for 6 mo, planned expenses, etc + some for a rainy day) + Betterment Safety Net (60/40).

Betterment setup:

• Tax Balanced Portfolio 90/10 (their latest feature)
  
  • 401k
  • Roth IRA
  • "Build wealth" regular taxable
• Safety Net 60/40

* Roth 401k is available

The only big "shock" for our budget would be a kid, meaning more everyday expenses.

So my question is: is putting $18k + $5k + $5.5k x 2 = $34k in retirement accounts each year makes sense for us if with calculated savings rate of 50% (https://networthify.com/calculator/earlyretirement?income=136000&initialBalance=50000&expenses=67000&annualPct=5&withdrawalRate=4) we plan to be financially independent at 45-47? Those funds won't be accessible till 59 yo (if I'm not mistaken), and this bothers me. What would be the optimal strategy for us in terms of savings/investments towards FI? Retirement vs regular taxable accounts? Other vehicles we should consider (Roth 401k, CDs, etc)?

P.S.: Re. spending/location - we can minimize it to shorten the projected career duration, but this is another question. Location and travel are a priority for us at this life stage. Rent vs mortgage in Silicon Valley - big rant and is out of the question here.

[seattlecyclone]

So my question is: is putting $18k + $5k + $5.5k x 2 = $34k in retirement accounts each year makes sense for us if with calculated savings rate of 50% (https://networthify.com/calculator/earlyretirement?income=136000&initialBalance=50000&expenses=67000&annualPct=5&withdrawalRate=4) we plan to be financially independent at 45-47? Those funds won't be accessible till 59 yo (if I'm not mistaken), and this bothers me.

You're mistaken. Read this thread about the two major ways to get penalty-free access to your money before you turn 60. Ask if you have any questions.

[MDM]

- Gross income for two: $195k/year, so take home is ~$136k
...
- 401k: traditional, maxed out for myself and ~$5K for my wife
- Roth IRA: was maxing out each January for both of us. Vanguard + some in Betterment. Can continue maxing out through the "backdoor" IRA (since current income is $195k), but see my question below

$195K gross, minus $36K to 401ks (not to mention any other pre-tax medical, etc. deductions) would put your MAGI at $159K and thus still eligible for "front door" Roth IRAs.  See https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2016.

[den]

$195K gross, minus $36K to 401ks (not to mention any other pre-tax medical, etc. deductions) would put your MAGI at $159K and thus still eligible for "front door" Roth IRAs.  See https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2016.

I'm still wrapping my head around specifics and didn't realize I can drop pretty much all pre-tax deductions AND IRA contributions to have a ball park MAGI. Thanks!

http://www.fool.com/knowledge-center/how-to-figure-out-my-adjusted-gross-income-with-my.aspx - an easily digestible description.

[den]

So my question is: is putting $18k + $5k + $5.5k x 2 = $34k in retirement accounts each year makes sense for us if with calculated savings rate of 50% (https://networthify.com/calculator/earlyretirement?income=136000&initialBalance=50000&expenses=67000&annualPct=5&withdrawalRate=4) we plan to be financially independent at 45-47? Those funds won't be accessible till 59 yo (if I'm not mistaken), and this bothers me.

You're mistaken. Read this thread about the two major ways to get penalty-free access to your money before you turn 60. Ask if you have any questions.

Reading, thanks! https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/ :)

[jom2025]

I have been reading this post and have a question.  I have a pension that upon retirement (hopefully early) can either be paid monthly or in a lump sum payment. I am being told if i take the lump sum i must place it into an IRA immediately or twenty percent will be held for penalty.  I am under 59!/2 and would like to retire early take the lump sum and access funds until social security at age 62. Can this be done without penalty under the age 55 rule ? Other than the income tax of my withdrawls yearly?

[seattlecyclone]

The age 55 rule doesn't apply to IRAs. Not sure if it applies if you take a lump-sum directly from the pension without putting it in the IRA first. But even if it does, you would be counting the entire sum as income all in one year, which might lead to a really high tax bill that year.

[ender]

You both can put $18k/year into a 401k. You each can have $5.5k into an IRA, for a total of $23.5k/year per person.

If I were you, I'd be maxing out both 401ks yesterday. Why aren't you doing this now?

What are you saving in a taxable investment account?

[MDM]

I'm still wrapping my head around specifics and didn't realize I can drop pretty much all pre-tax deductions AND IRA contributions to have a ball park MAGI. Thanks!
http://www.fool.com/knowledge-center/how-to-figure-out-my-adjusted-gross-income-with-my.aspx - an easily digestible description.

Note that Modified Adjusted Gross Income (MAGI) is different from plain ol' Adjusted Gross Income (AGI).  When determining your MAGI for IRA contribution/deduction purposes, you don't get to deduct the IRA contribution itself. ;)

See https://www.irs.gov/publications/p590a/ch02.html#en_US_2015_publink1000230988 for the MAGI calculation pertinent to Roth contribution limits.

[Gin1984]

Max your wife's 401k before your Roths.