Case Study: IRAs or Taxable Accounts for a Mid-30s Single SWE?

[EscapedApe]

Hey Mustachians

I was hoping to get the community's input on my situation so I can better begin planning for my future FIRE.

Here's the detailed breakdown:

Life Situation: Mid 30s, filing single, no dependents, living in the United States in a HCOL area (Los Angeles county).

Gross Salary/Wages: $67,000 per year, ~$5,550 per month.

Monthly Pre-tax deductions:

• TSP retirement: $277 (similar to 401(k), current maximum to get full employer matching)
• FERS retirement: $244 (mandatory withholding, funds a pension)
• Dental: $28
• Health: $159
• Vision: $7

Other Ordinary Income: None, but working to add extra sources.

Adjusted Gross Income: ~$3,488 per month

Taxes, monthly:

• Federal: $703
• State: $231
• OASDI: $332
• Medicare: $77

Current monthly expenses:

• Rent: $825
• Electricity: ~$15 (~$50 during the summer, Jun-Sep)
• Gas: ~$12
• Water: $0 (paid by landlady)
• Internet: $50
• Car Insurance: $100 (liability on an older model luxury sedan on loan from a friend)
• Cellphone: $70
• Groceries: $250 (I do body building, so my food needs are high)
• Petrol: $30 (I ride my bike to work every day, and only drive ~100 miles to see family once per month)

Assets:

• Checking: ~$3,000, expenses + emergency fund
• TSP Retirement Savings: ~$2,700
• FERS Retirement Savings: ~1,100

Liabilities:

• ~$12,000 student loan debt at 6% (this was $16K, paying it down aggressively)
• ~$12,000 student loan debt at 3.75%

Overview and Question(s):

I'm following frugal tenets. I cook all my meals at home and bring lunch to work, basically never eating out. I ride my bike on a daily basis to work and also around town to run errands. The only driving I do is to visit family once per month about 100 miles away. I have inexpensive hobbies like hiking and cycling. The most expensive hobby is weight training because it drives up my food costs.

I am aggressively paying down my debts, beginning with the higher interest rates. I've thrown $4,000 at my debts in four months, and every month any excess cash goes straight towards debts - this usually comes out to about $1,000 per month.

My goal is to retire ASAP so I can put my SWE skills towards personal projects and interests. No kids, and no plans on having any. I just want to start taking the right steps so that I'm ready.

So my question is, once my debts are paid down (December 2020 is the target), how should I distribute my retirement savings? Taxable accounts seem to be the way to go, since I want to retire sometime in my 40s.

I may not work in government forever, so depending on what happens I might get my FERS withholdings reimbursed, and I'd like to know what kind of accounts to throw all my extra assets into in order to retire and begin working on my own software projects.

Thanks for your input, everyone.

[terran]

https://forum.mrmoneymustache.com/investor-alley/investment-order/ and https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/ should answer your questions.

[EscapedApe]

https://forum.mrmoneymustache.com/investor-alley/investment-order/ and https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/ should answer your questions.

Thanks @terran. I was just reading some of your great responses in the HSA thread.

I'll admit, I'm still a bit new to this, so I'm looking for good sources of info to bring myself up to speed.

[terran]

https://forum.mrmoneymustache.com/investor-alley/investment-order/ and https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/ should answer your questions.

Thanks @terran. I was just reading some of your great responses in the HSA thread.

I'll admit, I'm still a bit new to this, so I'm looking for good sources of info to bring myself up to speed.

Sounds good. Take a look at those two threads. The advice there applies to most people, so come back with questions if you think of a reason it might not apply to you, but I would bet it makes sense for you to follow the recommended investment order there and then do a Roth conversion ladder when you retire. That's what makes sense for most people.

[EscapedApe]

Sounds good. Take a look at those two threads. The advice there applies to most people, so come back with questions if you think of a reason it might not apply to you, but I would bet it makes sense for you to follow the recommended investment order there and then do a Roth conversion ladder when you retire. That's what makes sense for most people.

I had actually read the investment order thread before, and prioritized my current actions (paying down my high-interest debt) based on it.

However, much of the rest of the thread was lost on me.

You know how it is: search engines only work if you know something about how the information will be returned to you. If you know absolutely nothing about a topic, it's hard to select the right search terms to give you back the info you need.

Now that you've given me some terms (like "Roth conversion ladder"), now I feel like I have a starting point for further research. Thanks.

[terran]

Now that you're looking through the investment order again with the assumption that your debt is paid off and you can move beyond step two, does that answer your question about where you should put your money next?

[EscapedApe]

Now that you're looking through the investment order again with the assumption that your debt is paid off and you can move beyond step two, does that answer your question about where you should put your money next?

I think so...it looks like I need to do more reading about moving my TSP funds into an IRA and then withdrawing from the IRA.

Can HSAs be withdrawn from without penalty the same way as IRAs/401ks?

[terran]

Here's another good link for understanding how to get money out of retirement accounts early: https://www.madfientist.com/how-to-access-retirement-funds-early/. For the TSP, you'll just roll it over to a traditional IRA and then the process is the same as getting money out of an IRA. Just max them out and don't worry about it for now.

No, you can only remove money from an HSA without a penalty free for qualified medical expenses until you're 65. The penalty is also worse at 20% instead of 10% for an IRA. Once you're 65 you can withdraw from an HSA for any reason without penalty, but you'll still pay income tax, so it's best to use it for qualified medical expenses if you can.

[EscapedApe]

Here's another good link for understanding how to get money out of retirement accounts early: https://www.madfientist.com/how-to-access-retirement-funds-early/. For the TSP, you'll just roll it over to a traditional IRA and then the process is the same as getting money out of an IRA. Just max them out and don't worry about it for now.

No, you can only remove money from an HSA without a penalty free for qualified medical expenses until you're 65. The penalty is also worse at 20% instead of 10% for an IRA. Once you're 65 you can withdraw from an HSA for any reason without penalty, but you'll still pay income tax, so it's best to use it for qualified medical expenses if you can.

I might place less of an emphasis on an HSA then and focus more on an IRA. I've never had health problems, and I take very good care of myself. My mother is 62, and she doesn't even take blood pressure medication because of her healthy eating and lifestyle.

My main focus is on achieving independence as soon as possible and by the simplest means possible.

MMM made it out to be much simpler when he emphasized maxing out a work-sponsored retirement account and then putting any excess into a taxable account. I'm willing to do a little extra legwork if it means taking advantage of tax-advantaged accounts, but I'd still like to keep this simple.

Thanks for all your help, @terran.

Edit: Okay, scratch that bit about not using an HSA. I just read Mad Fientist's bit on HSAs, and they're super powerful. Now I need to see about whether I quality for one through one, or if I have to set one up separately.

[terran]

You must have an HSA compatible high deductible health plan to be allowed to fund an HSA. If you do, then chances are it's best to use the one supported by your employer and contribute by payroll deduction as that's the only way to avoid paying FICA tax on the contribution. If your employer HSA is not good for investing (and you decide you want to invest) then you can open a second HSA (Fidelity has a good one) and periodically transfer your HSA money there, but continue to contribute through payroll deduction to the employer HSA for the FICA deduction.

[Kierun]

Open enrollment for feds is Nov 11 if you need to change up your health plan to be eligible for the HSA

[EscapedApe]

Open enrollment for feds is Nov 11 if you need to change up your health plan to be eligible for the HSA

Can I get an HSA through federal government work? Do you have any info or links on this?

[Kierun]

Under the assumption that you're a federal employee, you can start here https://www.opm.gov/healthcare-insurance/healthcare/plan-information/plans/

[EscapedApe]

Under the assumption that you're a federal employee, you can start here https://www.opm.gov/healthcare-insurance/healthcare/plan-information/plans/

Great, thanks.

Here's a question: if I leave federal employment, do I have to roll my funds from the FEHB HSA into a new HSA funded by my new employer?

[Kierun]

Great, thanks.

Here's a question: if I leave federal employment, do I have to roll my funds from the FEHB HSA into a new HSA funded by my new employer?

The HSA is portable so you can transfer your funds to another HSA, as far as if you have to transfer your funds if you leave federal employment, I'm not 100% sure but so far haven't really seen any language to suggest that you are forced to transfer the funds. I imagine it's similar to the TSP where you can leave it, since it's yours and you own that money and account.

[EscapedApe]

Great, thanks.

Here's a question: if I leave federal employment, do I have to roll my funds from the FEHB HSA into a new HSA funded by my new employer?

The HSA is portable so you can transfer your funds to another HSA, as far as if you have to transfer your funds if you leave federal employment, I'm not 100% sure but so far haven't really seen any language to suggest that you are forced to transfer the funds. I imagine it's similar to the TSP where you can leave it, since it's yours and you own that money and account.

I just read up on the GEHA 2020 literature, and yes, it appears that the HSA is portable (it is administered by HSA Bank, in this case). And you can keep contributing to it as long as you have a qualifying high-deductible health plan. Transfer probably wouldn't be necessary, I would just maintain the account through HSA Bank.

Thanks for your input!