Case Study added..401K, Roth IRA and general investments (income limit question)

[ETBen]

I'm currently only putting 6% into my 401K (which also has an employer match).

I'm just starting over with my retirement planning due to divorce. 

I make over $125k per year, single.

Am I correct in this:

Maximize my 401K to the $18k limit in 2016
Put 5500 into the Roth IRA since I cannot deduct a tIRA with my income
Any remaining I am planning to invest through Betterment with tax loss harvesting.


I also have an old 401K to rollover.  But I should not roll that over into a Roth IRA as far as I can tell in reading (increased taxable income), it is better to roll over to a tIRA. 

[DK]

Sounds good to me,  that's about what I'm doing with a bit lower income.

[MDM]

Looks good.  See below for the generic suggestions - appears your plans are consistent.

   
In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct.   
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?"   
   
See http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html for some data on historical returns.   

[Scandium]

Sounds good. In that tax bracket I would fully fund the 401k before a Roth. Locking in that tax rate isn't terribly appealing. Of course you should be able to easily do both.

Note that if you have vanguard funds in your 401k and Roth you could have issues with wash sale rules when doing tax loss harvesting in Betterment. 

[seattlecyclone]

At your income you should be able to max out your Roth IRA if you first max out your traditional 401(k), but even then your income won't be very far below the $116k limit where your maximum Roth IRA contribution starts to phase out.

If you expect your income to go up much before you retire, you may want to leave open the possibility of doing backdoor Roth IRA contributions. The key here is that you don't want to have any pre-tax money in traditional IRA accounts. Roll that old 401(k) into your new 401(k) if possible. If you already have some pre-tax traditional IRA money, see if your new 401(k) will accept a rollover from that account as well.

[ETBen]

Interesting advice, thanks all!  I feel like I need to go do more research now. Make sure I really understand it all.

[ETBen]

Okay, I'm posting a case study to get some more information after reading these links.  I'm really lost on a few of these things.  My ex husband didn't plan much nor my parents, so I'm having these conversations for the first time over the past 6 months.  I learn more conversationally than reading.  Also, because I have a higher income, I find that everything has a "but" after I research it.

>>What kind of investment strategy makes sense?  About 1000 left over each month.  I basically started over my life since March after my soon to be ex husband ruined our finances.  I did so debt-free and bought a home and quite nicely furnished on the cheap lol.  After 13 yrs marriage with combined income 150-200k, we had no savings and minimal retirement, if that gives you an idea where I'm starting from.  (never let someone else control the finances, difficult lesson learned). 

GOAL:  I expect my pay to maintain or increase over the years and my goal is in 16 years, when both kids are done college, downsize housing here or elsewhere and not need to work full time.  Actually retiring at 55 is a push goal.  And I actually like working, always have. 


LIFE SITUATION:  37F.  I will be filing Head of Household, 2 dependents (ages 6&8).  I am separated and can file for divorce in April.  US, Maryland.  My tax situation is a wild card this year b/c of the life changes.  I will probably pay someone to assist me if I need to for this year.  Any advice for a website or calculator for a more complicated situation is appreciated.  (Name on mortgage in first house for 2 months only.  No mortgage payments March-August.  Bought a house in late August.  Childcare expenses split.)

GROSS WAGE: 110,000 plus April bonus.  Last year I grossed 130k.  I expect similar this year.  I also earn back about $100-150 per week in expenses (internet, tolls, mileage but I drive a Prius no car payment, so I make money).  Work is paying for my MBA, which should be finished in 12 months.  I get no child support or alimony.  I have not yet decided where to place this year's bonus for investing and saving.

PRE TAX Deduction. (I threw other investing questions here even though not pre-tax): 
- 401K:  I currently contribute 6% to a 401k.  I'm looking to max out in 2016, 15% of my base pay, not bonus. 
- 401K ROLLOVER:  I have 50k total in 401k.  Half of that is in an old 401K I need to rollover to a tIRA, I think. 
- FSA:  What advantage is there to an HSA/FSA?  I actually work for one of the Blues so I pay a very small premium for my family, no HDHP.  (sadly, I should know more about HSAs and FSAs)  I have no out of pocket costs for PCP visits or most meds or mental health/therapy visits.  I'm 37, the kids are young and the most we have spent is $150 per year for an occasional ER/Urgent care. 
- CHILDCARE pretax account or deduction on taxes?  I pay 2200 for a year of aftercare, plus about 3000 for 10 weeks of summer care.
- SAVINGS/EMERGENCY FUND: currently 5k .  I'm also unsure on the whole emergency savings thing.  If I lose this job, there would be severance.  I'm pretty readily employable as a nurse or my current director role.  Worst case scenario, I am up and running in a staff nursing job within a month but making a bit less than I am now until I found comparable. 

- NEXT STEPS... I'm looking to invest beyond the 401K, either tIRA or Roth, but I'm really lost as to what is best in my situation.
- With the net income I have, I should be able to invest in an area beyond those retirement accounts and I have set up a Betterment account but not started using it.   




AGI: I'm not sure yet as this is the first year I am doing my taxes on my own. 

EXPENSES: Total 3700 budgeted expenses per month after expense reimbursement.  That is budgeting every little thing, I generally spend less except for my moving and life set up costs.  This does not include either of the childcare expenses, which I pay lump sum from the two months that have an extra paycheck. 

I net about 3000 per pay or 6000 per month (not including those extra paycheck months).  I track everything in Mint, so I have a good idea on what I spend each month.  Kids are the large driver of spending (I'm frugal but every little bit adds up.)

DEBT: mortgage and STUDENT LOANS $220 per month I found my ex never paid off.  But then the rate is under 3%.  I could pay off student loans in April for peace of mind or not (10k balance)

MORTGAGE: P&I 1550, T&I 325, PMI 200, Condo fee 200. Total 2200.   (I know this is not how many people here would approach housing.  Here is the rationale.  Rent was 1800 and locations are limited b/c of custody agreement and our horrendous traffic.  It is a large townhouse where I know I won't need to move before the kids graduate and the condo fee for outside maintenance (and lower home insurance) makes my life as a single mom with high stress job much easier.  PMI was nature of the beast in my situation, but again the home was a "bargain" for this area.  I'd love for housing to be less but I'm fine with it.  I shopped around and other homes needed more work whereas everything here is recently replaced.)

FOOD: about $450 per month, I have the kids 2/3 of the time. 
CELL phone: none, work provides, got rid of personal cell.  INTERNET: work pays
ALL OTHER: I'm pretty frugal about clothes, hair, entertainment, home supplies.  I'm not someone who gets sucked into the void at target, Costco, those kinds of places.  I budget in vacations (Caribbean in September or visit family for cheap).  I use my airline card for everything. 

Factoring in occasional emergencies/surprises, I would say $1000 extra per month is a good estimate.  I do not spend my full budgeted expenses every month, which is how I was able to buy the home and furniture and supplies.  So it may be more but I'm still getting used to what my "normal" life will be.