Debt paid off and ready to roll on saving--need input

[dsmguy]

My wife and I are nearly done paying off about $35,000 in debt. 12k car loan (4%) , 15k student loans (6 to 8%) and 6500 cc (12%).

We are now in the position where we will have a fair amount of monthly income to contribute to investing ($2500-$3000). 

We both have access to employer 401(k) with 50% match up to 6%.  Additionally we both have HSA accounts (mine has match, hers does not).  My current elections in my 401(k) are as follows 50% large cap index fund (.02 expense ratio) 25% small cap index fund (.04 expense ratio) and international index fund (.07 expense ratio).  My wifes allocation is 100% to principal lifetime 2050 with a 1.36 expense ratio. 

So now we are at the point where we have some additional money to throw at our investing, but want to do so in the most efficient way given our current options. 

As it stands now I was thinking it made sense to open two Roth IRA's and fund those fully each year. After this, it gets a little more murky as far as what to do. My wife makes quite a bit more than I do (80k vs 50k), but I'm thinking it doesn't make sense to max her 401k due to the really high expense ratio (the other options in her account all have very high expense ratios as well). After funding the IRA's, would it make sense to fully fund, or as fully as possible, my 401k since my options are better? To fully fund my 401k would leave me with very little takehome pay, but that wouldn't really impact us if we are filing jointly, right?

Say we are able to do both of the above (fully fund IRA's and my 401k) would our next option be to max out our HSA accounts, or open a taxable account?

This doesn't even address the concerns I have about what funds to choose within any of the choices, but perhaps that's a conversation left for after I figure out the where to put the money. 

So what I'm really asking is if the following plan makes sense (and if not, what would be a better alternative).  1) Fully fund two Roth IRA's 2) Max out my 401k 3) Fully fund HSA's and 4) Open taxable account if anything left over to do so. 

Whaddaythink? Am I on the right track in the thought process here, or does this need some retooling?  Thanks in advance for any input provided. 

[Carrie]

What you are proposing sounds like a good plan to me.

[Allen]

Please note you can't both max your HSA accounts, you are covered under the 'family' contribution for both of you.

Also, I would make sure I stay below the 25% tax bracket, which means you may want normal IRA's instead of Roth IRA's depending on where your taxable income falls.

[Workinghard]

I am not anywhere near qualified to answer your question, but I can share what we do. We max out my husband's 401(k), our Roth  IRAs, and try to contribute an additional 2K a month to vanguard funds. I recently became eligible for my 401(k). I started out with 15%. Even though the expense ratios are high in my 401(k), it's better to increase pre tax contributions to that and decrease what we invest in Vanguard. I'll do that gradually.

Because our medical and dental insurance comes out of my husband's paycheck, and he's maxed out on his 401(k), he doesn't net that much. However, that will be a huge benefit when he starts drawing Social Security. We won't see that much of a difference in his income!

[dsmguy]

Please note you can't both max your HSA accounts, you are covered under the 'family' contribution for both of you.

Also, I would make sure I stay below the 25% tax bracket, which means you may want normal IRA's instead of Roth IRA's depending on where your taxable income falls.

Isn't the family essentially double what both of our individual maxes are anyway?

Good point on keeping track of where we are in relation to the threshold for 25% bracket. 

[GlassStash]

So what I'm really asking is if the following plan makes sense (and if not, what would be a better alternative).  1) Fully fund two Roth IRA's 2) Max out my 401k 3) Fully fund HSA's and 4) Open taxable account if anything left over to do so. 

This sounds like the logical choice, keeping in mind what Allen said about staying under the 25% tax bracket. Depending on your deductions, it may make sense to maximize your pre-tax contributions. That is really the only issue I see with your plan. So: 1) Fully Fund Roth IRAs if under 25% bracket, if not fund traditional IRAs to get under. 2) Max 401ks. 3) Fully fund HSA 4) Open taxable account. Keep in mind this isn't necessarily in order, as a fully funded HSA or 401k might take you under the 25% w/out traditional IRA contributions.

[eman resu]

Do those expense ratios represent the total cost to you in your 401k?  Any Plan management or other fees to consider (for either of you) when comparing?  Pretty awesome, if not.

Just to make sure, you are planning to continue contributing to her 401k up to the match point before the plan you outlined kicks in, right?  Her choices might not be what you want, but I wouldn't leave 3% match on the table due to less-than-ideal exp ratio. 

As far as HSA contribution max - if you each have self-only coverage than you get $3,250 in contribution space for 2013.  So you get an extra fifty bucks "total" in comparison to those with family coverage or with a family and self-only coverage situation.  (I am not a tax adviser, just a random guy on the internet typing things that might or might not be true while sipping gin.)

Good luck with your plans and congrats on  getting that consumer debt almost nixed. 

[dsmguy]

Do those expense ratios represent the total cost to you in your 401k?  Any Plan management or other fees to consider (for either of you) when comparing?  Pretty awesome, if not.

Just to make sure, you are planning to continue contributing to her 401k up to the match point before the plan you outlined kicks in, right?  Her choices might not be what you want, but I wouldn't leave 3% match on the table due to less-than-ideal exp ratio. 

As far as HSA contribution max - if you each have self-only coverage than you get $3,250 in contribution space for 2013.  So you get an extra fifty bucks "total" in comparison to those with family coverage or with a family and self-only coverage situation.  (I am not a tax adviser, just a random guy on the internet typing things that might or might not be true while sipping gin.)

Good luck with your plans and congrats on  getting that consumer debt almost nixed.

So I've been digging a bit more into the possible fees on my 401(k) in particular. From what I can tell the only additional fee is a $4.28 to $4.58 monthly administration fee.  Seems rather vague, but in the grand scheme of things is that a particularly high fee, especially considering the low expense ratios? 

The other question I have would be my allocation within the plan.  I just update it to be 50% large cap index fund, 25% international index fund and 25% small cap index fund.  Should I be including some bond options in there as well?  I'm 31 currently. 

[George_PA]

dsmguy first of all congratulations on your huge progress made so far!! It sounds like you made a complete 180 degree turn around in mindset and habits with your finances.

With regards to your 401k and possible fees, jlcollins covered this topic on his blog in: http://jlcollinsnh.com/2013/05/02/stocks-part-xvii-what-if-you-cant-buy-vtsax-or-even-vanguard/

Basically, the conclusion is that the employee match provides such a mathematical advantage that it trumps the damaging effects of fees; He brings up some good points, pay into the 401k only until you reach the full matching.  Once you retire you can then get this money out of the 401k into something with lower fees.

Here is the exact quote from that posting:
Even if your tax-advantaged, employer-offered plan doesn’t offer Vanguard you should still participate, certainly at least up to the amount needed to capture any employer match. Once you leave that employer you can easily roll your investments into an IRA with Vanguard.

[Cheddar Stacker]

I agree with Geroge_PA and eman resu - Don't leave an employer match on the table. You haven't said one way or the other whether you both contribute enough to get to the match, but that's the first thing I would do. If you don't, you're effectively spending 3% to save 1.36%.

Great job paying down debt and getting a big monthly savings number. The plan sounds good, but since you asked for the most efficient way please consider this:

     For every $100 you "save" in a tax deferred account (401K, Traditional IRA, HSA) you will receive another $25 to "save" elsewhere.

So let's say your high end estimate of $3,000/month is achievable and you can put away $36,000 this year. If you save it according to your plan you can save $42K:

Roth's = $11K
401K = $17,500 (Net of 25% tax savings of $4,375)
HSA = $6,500 (Net of 25% tax savings of $1,625) - I don't know all the HSA rules, so this limit might be off, just stick with me for now.
Taxable = $7,000 ($6,000 of this is only available because of your tax savings)

Consider this alternate plan - still $3,000/month $36K/year savings. If you save it according to this plan you can save $46,470:

Your 401K = $17,500 (Net of 25% tax savings of $4,375)
Wife 401K = $17,500 (Net of 25% tax savings of $4,375)
T.IRA's = $11K (Net of 15% tax savings of $1,650) I switched to 15% here since your taxable income just dropped $35K from the 401K's-this assumed about $22K in exemptions/deductions.
HSA = $470 (Net of 15% tax savings of $70)

Now, when you take this money out of the tax deferred accounts you will pay some tax, but with a slow IRA to Roth IRA conversion you might not have to pay any federal income tax at all.

Read these:
http://www.madfientist.com/retire-even-earlier/
https://forum.mrmoneymustache.com/ask-a-mustachian/4-withdraw/msg187544/#msg187544 - read my reply #12

Lastly on the wife's high expense ratio, by not contributing to this you are giving up a 25% tax deduction in order to save 1.36%. Take 1.36% off the $17,500 ($17,500*1.36%=$238) in my scenario and you're still left with $17,262. If you save it in an after tax account you are left with $13,125 (since you have to pay the tax first). Also, have your wife check to see if she can take in-service distributions. This would allow for her to convert her 401K funds into an IRA that she can put into index funds.

[Cheddar Stacker]

One other note/correction on my last post:

Your T.IRA deduction might be slightly limited. Total Gross = $130K. After 401K contributions the federal taxable wages will be $95K (130-35). Depending on everything else on page 1 of your tax return, your MAGI might be in the phase out stage for the T.IRA deduction which begins at $95K and ends at $115K (2013 #'s) for a married couple filing jointly who both work and are both covered by a 401K at work.

However, this becomes an even bigger reason for you to both max out your 401K's since they have no AGI limitations. Do these first if you're interested in the tax savings, then consider everything else.

[the fixer]

It might still make sense to contribute beyond the match for your wife's 401(k). The big question is: is this a job she intends to keep for a while? If not, when she leaves she can roll over the 401(k) into an IRA and get away from the expense ratios, which means she only has to pay them for a year or two. The tax advantages of the contributions would outweigh the damage from the fees.

I did the math on this once and calculated that the break-even point, assuming a 1% loss of return annually due to expense ratios, is about 10 years. So if your wife will still be at this job 10 years from now, don't contribute beyond the match. Note that you may need to re-evaluate this decision every year, since this year she may be 10 years away from quitting, but next year she'll be 9 years away and will make slightly more sense to contribute.

Note that this analysis does not account for Roth 401(k)s.

[eman resu]

So I've been digging a bit more into the possible fees on my 401(k) in particular. From what I can tell the only additional fee is a $4.28 to $4.58 monthly administration fee.  Seems rather vague, but in the grand scheme of things is that a particularly high fee, especially considering the low expense ratios? 

The other question I have would be my allocation within the plan.  I just update it to be 50% large cap index fund, 25% international index fund and 25% small cap index fund.  Should I be including some bond options in there as well?  I'm 31 currently.

The mthly fee is most likely a percentage of fund balance. You need to consider that percentage rather than the fee amount when deciding how "high" it is or isn't.  That said, I didn't mean to turn your focus to those fees too much... I just wanted to point out that the difference in expense between your wife's plan and your plan might not be as large as the exp ratios indicate on their faces, if other costs exist.   The advice of others not to disregard her 401(k) right off based on the fees is good.

As far as your allocation, it depends on your goals, risk tolerance, and investment plan and progress.  http://www.bogleheads.org/wiki/Investment_policy_statement

I can't tell you whether to include bonds... I can only tell you that I would want some bonds... and that what I would want really shouldn't matter to you.   :)