Author Topic: Frontloading my 401K vs. Taxable Accounts  (Read 2101 times)

onlykelsey

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Frontloading my 401K vs. Taxable Accounts
« on: December 21, 2015, 06:57:30 AM »
Hi all,

I'm struggling with what priority to place on:
  • a. paying down my mortgage (fixed, 4.25%),
  • b. paying down my HELOC (floating, 3.25%),
  • c. maxing my 401K, and
  • d. funding taxable accounts with vanguard. 

I've always funded my 401K to max spread out over my 24 paychecks, but it seems like if there's value to getting in to the market earlier in the year, the value would be maximized by maxing out my 401K in the first 3-4 months of the year (and then diverting the earlier contributions to one of the other three potential payments).  After I do that, a guaranteed ~2.8% return (4.25% mortgage, and I'm in the 33% bracket) on my mortgage seems a bit low, especially since I'm throwing cash at something that I can't easily withdraw equity from.  A guaranteed 2.1% return on the floating HELOC might make more sense, since I can tap that equity easily later.  I generally sort of like the idea of becoming less concentrated in real estate, since my apartment is ~80% of my net worth.  But maybe I should instead rely on doing better than 2.8% in the market, and throw that extra money in to my Vanguard account.

I have about 15K of liquid savings, and will also max out my IRA in January for 2016.

Thanks for any insight!  This is my first post but I've been reading for a while.

Jack

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Re: Frontloading my 401K vs. Taxable Accounts
« Reply #1 on: December 21, 2015, 07:39:07 AM »
the value would be maximized by maxing out my 401K in the first 3-4 months of the year

On average, this is true. However, don't forget about the company match. If they match per-paycheck and don't "true up" at the end of the year, then you want to hold back enough contributions to capture the match for the rest of the year.

a guaranteed ~2.8% return (4.25% mortgage, and I'm in the 33% bracket) on my mortgage seems a bit low

Do you itemize deductions? Most people don't (among the general public; folks on this forum skew high-income, so it's more common here). If you take the standard deduction then your tax bracket is irrelevant to the return of paying off your mortgage.

I generally sort of like the idea of becoming less concentrated in real estate, since my apartment is ~80% of my net worth.  But maybe I should instead rely on doing better than 2.8% in the market, and throw that extra money in to my Vanguard account.

Personally, I keep debt as leverage all the way up to 5%, so I say go for the taxable account. (Also, don't forget to max your IRA.)

onlykelsey

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Re: Frontloading my 401K vs. Taxable Accounts
« Reply #2 on: December 21, 2015, 07:49:45 AM »
Thanks.   I should have been more specific.  I have no company match, so that's a non-issue, unfortunately.

Good point on deductions.  The past two years I've itemized deductions, as I rent out my second bedroom and have costs associated with that, but I got married this year and truly have zero idea what my tax situation will be this year.

Sounds like it's one vote for taxable investments.  I could always mix and match, a bit, of course, and throw a couple extra hundred towards my mortgage or HELOC, but the bulk to Vanguard.

zephyr911

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Re: Frontloading my 401K vs. Taxable Accounts
« Reply #3 on: December 21, 2015, 08:17:06 AM »
The past two years I've itemized deductions, as I rent out my second bedroom and have costs associated with that...

Whatever percentage of the home is considered a rental, that percentage of (interest, taxes, insurance, utilities, maintenance, etc.) should all be moved from Schedule A (itemized deductions) to Schedule E (rental income). This would decrease, not increase, your itemized deductions, making it less likely that you'd itemize.

onlykelsey

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Re: Frontloading my 401K vs. Taxable Accounts
« Reply #4 on: December 21, 2015, 08:20:21 AM »
Thanks, zephyr911.  I actually started paying an accountant to do my taxes two years ago, so I'll have to check to make sure that's what he's been doing.

I also live in NYC, so I imagine I'll still be itemizing this year, given local and state taxes.