new to fire. Questions

[rbfree]

Hi,

Im 45 yo and have no debt. I recently significantly increased my income and plan to make 224K before taxes this year. I have no car loan. I would like to fire as quickly as possible. I am thinking about turning my current residents into a rental. Mortgage currently 174K. Rent in this area is about 2K/month. I would move to a rental which would increase my living expense to 1800 for rent from 1382. I don't know if it is worth to increase my rent but am thinking the tax breaks will make it worth it? Also So I am thinking I could save up 100K this year. My goal would be to do this for about 7 years to reach fire. Does it make sense to use a 401K if I know I would want access to it before 59? Would it make more sense to pay taxes now and use a brokerage account?

Mortgage $1382 (including property tax)
Expenses $2118

Roth IRA 7K
brokerage: 9K
401K 48K I am planning to roll this to a traditional IRA as I no longer work at this job and think the fees are too high (I think I read that on JL Collins).

Thanks, I am new to all of this and just trying to create a plan.

[Tasse]

Welcome!

We need some more info from you before we can give good advice. First on my mind is, how confident are you in your expense numbers? Are those estimates, or are they from a long period of careful tracking? I notice that they add up to $3500 exactly, which makes me think they are probably an estimate. If so, I recommend starting to track your spending; lots of budget tools will work for this. It will help give you confidence in your plan.

I don't know much about landlording, but I do know it's a job. I would focus on saving the new income and getting really comfortable with that part of the plan before assessing whether there's more you can do to move faster.

Check out the investment order: https://forum.mrmoneymustache.com/investor-alley/investment-order/

I would not neglect your 401k. You're looking at the 32% tax bracket, so reducing your taxable income is going to be seriously worthwhile for you. I don't know where you live, so these numbers are approximate, but I used this calculator to create a really simplified example: https://smartasset.com/taxes/paycheck-calculator

• Without any pretax deductions, your $224k becomes roughly $150k take-home. You spend $42k and save $108k in a brokerage.
  
• If you max your 401k, on the other hand, your $224k becomes $135k take-home + $23k in the 401k. You spend $42k and save $93k in the brokerage, still giving you plenty of flexible funds to draw from. You end the year with $93k in the brokerage + $23k in the 401k = $116k total, $8k more in investments than the prior example.

And that's before considering any other tax-advantaged accounts you might qualify for, like an HSA. If you can save $100k per year, you can max all those tax advantages and still have plenty of leftover money to put in the brokerage. And remember, the brokerage only has to cover the time between when you retire (45+7 = 52) and turn 59 1/2 (8 years, rounding up). The 401k can fund the whole rest of your life (hopefully another 20-30 years!) So don't neglect it.

[ixtap]

You need to check this out:

https://www.madfientist.com/how-to-access-retirement-funds-early/

But only would I max out 401k but research if it allows for after tax contributions that can be converted to Roth (a process often referred to as Mega Backdoor Roth).

Personally, I despise landlording.

[uniwelder]

Moving to a rental makes no sense.  You'll be spending 5k more annually for housing than you do now, but you might break even with the extra rental income from your residence.  It sounds like you'd be able to depreciate about 7k annually from your income--- that is the tax advantage you're talking about.  Its definitely not worth moving to a new place, becoming a landlord, dealing with repairs and tenant issues, and your house will probably be more worn down when you eventually want to move back in or sell.

The easiest thing to do if you want to save some quick money is to get a roommate.  Utilities will be cut by half and you'll have rental income.  So much more flexible and convenient.

As mentioned by @Tasse max out the 401k, as well as IRA, and get yourself on an HSA healthcare plan if possible. 

[Tasse]

As mentioned by @Tasse max out the 401k, as well as IRA, and get yourself on an HSA healthcare plan if possible. 

I'm not familiar with all the implications at this income level, but I thought OP might be making so much that they would not qualify for either a Roth IRA or to deduct a traditional IRA. Is it worth anything to put money in a tIRA and not claim the deduction?

[rbfree]

We need some more info from you before we can give good advice. First on my mind is, how confident are you in your expense numbers? Are those estimates, or are they from a long period of careful tracking? I notice that they add up to $3500 exactly, which makes me think they are probably an estimate. If so, I recommend starting to track your spending; lots of budget tools will work for this. It will help give you confidence in your plan.

I don't know much about landlording, but I do know it's a job. I would focus on saving the new income and getting really comfortable with that part of the plan before assessing whether there's more you can do to move faster.

Check out the investment order: https://forum.mrmoneymustache.com/investor-alley/investment-order/

I would not neglect your 401k. You're looking at the 32% tax bracket, so reducing your taxable income is going to be seriously worthwhile for you. I don't know where you live, so these numbers are approximate, but I used this calculator to create a really simplified example: https://smartasset.com/taxes/paycheck-calculator

And that's before considering any other tax-advantaged accounts you might qualify for, like an HSA. If you can save $100k per year, you can max all those tax advantages and still have plenty of leftover money to put in the brokerage. And remember, the brokerage only has to cover the time between when you retire (45+7 = 52) and turn 59 1/2 (8 years, rounding up).

Thanks.
I track my spending at the end of the month, I don't think this it the best way to improve spending, I need to start budgeting to forecast instead see what I did once the spending is done. I just rounded for convenience.
Without any pretax deductions, your $224k becomes roughly $150k take-home. You spend $42k and save $108k in a brokerage.
If you max your 401k, on the other hand, your $224k becomes $135k take-home + $23k in the 401k. You spend $42k and save $93k in the brokerage, still giving you plenty of flexible funds to draw from. You end the year with $93k in the brokerage + $23k in the 401k = $116k total, $8k more in investments than the prior example.
This was super helpful to see how you thought through whether to use 401K or not. so I definitely will now. They do offer hsa I will look into this, the job  said once you contribute enough you can invest it in the market.
The 401k can fund the whole rest of your life (hopefully another 20-30 years!) So don't neglect it.
This is true. I was not looking at it like this. Very helpful

[rbfree]

Moving to a rental makes no sense.  You'll be spending 5k more annually for housing than you do now, but you might break even with the extra rental income from your residence.  It sounds like you'd be able to depreciate about 7k annually from your income--- that is the tax advantage you're talking about.  Its definitely not worth moving to a new place, becoming a landlord, dealing with repairs and tenant issues, and your house will probably be more worn down when you eventually want to move back in or sell.

I question moving myself all the time if goal is to save. I just was trying to look for ways to get tax breaks like the depreciation you mention. The tenant give great pause.

[uniwelder]

As mentioned by @Tasse max out the 401k, as well as IRA, and get yourself on an HSA healthcare plan if possible. 

I'm not familiar with all the implications at this income level, but I thought OP might be making so much that they would not qualify for either a Roth IRA or to deduct a traditional IRA. Is it worth anything to put money in a tIRA and not claim the deduction?

Damn, I forgot all about income limits.  I've never made much money, so those concerns don't ever come to mind.

[rbfree]

But only would I max out 401k but research if it allows for after tax contributions that can be converted to Roth (a process often referred to as Mega Backdoor Roth).

This seems like I may need a professional to help it.. I will look into it. There is no match at this job.

[Tasse]

You don't need a professional (though you can get one if you really want), but you do need to do some reading. I thought this suggestion from earlier in the thread was very accessible:

You need to check this out:

https://www.madfientist.com/how-to-access-retirement-funds-early/

That blog has a whole archive if you'd like to start there. https://www.madfientist.com/archives/

[lhamo]

One of the biggest tax breaks you will ever get in your lifetime, assuming you are willing to consider downsizing/moving to a less expensive house or less expensive area, is the $250k capital gains exclusion on your primary residence.  If you are at all handy, one way to benefit from this aspect of the current tax code is to buy a house that needs work, live in it for at least 2 years while you fix it up, and then sell it at an appreciated price with all gains being tax free (assuming you don't sell it for more than the original purchase price + cost of improvements + 250k). 

I'm not clear about the details, but I believe that renting your primary residence out would mean you would have to exclude some of that portion of gain from the 250k.  Might cost you much more than you get in short-term tax benefits.

[Laura33]

Moving to a rental makes no sense.  You'll be spending 5k more annually for housing than you do now, but you might break even with the extra rental income from your residence.  It sounds like you'd be able to depreciate about 7k annually from your income--- that is the tax advantage you're talking about.  Its definitely not worth moving to a new place, becoming a landlord, dealing with repairs and tenant issues, and your house will probably be more worn down when you eventually want to move back in or sell.

I question moving myself all the time if goal is to save. I just was trying to look for ways to get tax breaks like the depreciation you mention. The tenant give great pause.

Don't overlook the significant tax breaks you get as a homeowner.  Mortgage interest deduction, property tax deductions -- and that up-to-$250K in profit when you sell.  Given the current tax codes/standard deduction, those first two might not matter, but the third does.  If you convert it to a rental, you will need to subtract any of those depreciation deductions from the basis of the house when you sell it, meaning you ultimately have to pay those taxes anyway when you sell, unless you do a Starker exchange into another rental property.  IMO, whatever small tax benefits you might get from this scenario are not worth all of the hoops you're trying to jump through -- it just makes no sense to commit to spending an extra $20K/yr on top of your mortgage, just in the hope that you can rent your house for more than that mortgage-plus-$20K/yr (and remember, rental income is still income that you need to report and pay taxes on, and you can't guarantee that any depreciation deduction will offset all of that). 

FYI, the single-most important factor in how soon you can retire is the percent of your income you can put toward retirement.  See https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/.  If you just keep your expenses where they are and bank the rest of that large income, you will be putting yourself on a great path, without much actual effort or thought.

Also, on the 401(k):  the primary benefit to a 401(k) is that it allows you to shelter a much larger amount of your income from taxes than any other vehicle.  Sure, if you don't get a match, and you have only $5-6K/yr to invest, might as well do an IRA instead of a 401(k), because that gives you the best ability to minimize the fees associated with those investments.  But your ability to contribute to an IRA maxes out at $7K, whereas a 401(k) maxes out at $23,500.  So if you're trying to maximize the amount you can put away before taxes, the 401(k) gives you the best way of doing so, unless you're stuck with a truly terrible one. 

My primary thought:  don't let the perfect be the enemy of the good.  Focus on stashing as much as you possibly can into a basic index fund or index ETF.  Put as much of that into a tax-deferred vehicle as you can.  Once you get to that point, if you still have extra time/energy to focus on your finances, that time will probably be better spent trying to earn more, rather than getting into the details of trying to optimize all of the other potential decisions you can make.  Investing is only as complicated as you make it.