Author Topic: Newbie, need help  (Read 3296 times)

ereamrod

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Newbie, need help
« on: January 13, 2017, 10:58:42 AM »
Hello MMM community!

So I stumbled on the Frugalwoods, who led me to JLCollins, read his book, found MMM and now am convinced I don't have to work FOREVER!!  As Mr. Collins is not accepting comments on his "ask page"  I headed here to get some advice.  I literally had NO IDEA about finances until a few years ago except start saving for retirement asap.

I'm 25, a few months away from putting out my fire, what was 45k in student loan debt, and am curious where to put my money.

My company offers me two investment options, 403b TSA and Roth TSA -which I think is just like a 401k but they offer this because they are non-profit...?  I can contribute 18,000/year to each of these accounts.  Currently I put money in both, the total value is just over 13k in TRF 2055.  I recently upped my contribution rate because at orientation they said 5% was "pretty good", fools.  There is no company match.  They also have a pension for me that is calculated by years of service and age.  Currently its 5% of my base pay (I'm a RN and make shift differential); I become vested in this account this year. 
I also have an account (honestly no idea what it even is) that my high school employer started for me with $1200 in it and want to move the funds into something that's better suited for me. I'm considering just cashing it out and paying down more of my loans.
I have about 18,000 in cash in a money market account (is this too much?) as a safety net/reserve for travel/saving for a wedding.

My plan is to save 35k/year and be FI by 40 with the option to step away from my job, I actually love my job!

Do I max out the TSA, then the Roth?  or start my own IRA that I can control the stock/bond ratio in plain old VTSAX?  Is there a better place for me to keep my safety net that I can pull from with out penalty if I need to?  I've looked at a high yield savings account through synchrony.  I know a lot of people use betterment and an investment account over a savings account is an option they endorse (and I like because I feel like I'm being ripped off when my money makes twenty-five cents a month).  I think I can handle setting up an account at vanguard and move/re-balance there, if need be.

Thanks for taking the time to read and help if you can.


ChpBstrd

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Re: Newbie, need help
« Reply #1 on: January 17, 2017, 12:09:54 PM »
If your employer offers no match for the 403(b), you might as well set up an account with a brokerage. This way, you have better investment options like Vanguard funds at 0.5% annual expenses. Your employer's funds probably cost 1.5% or more per year. Just don't let the added freedom encourage you to trade too often. With direct deposit and automated buying/reinvestment you can mimic your employer's plan. There is some minor complexity, though, such as manual entry of the data at tax time and carefully shopping for a brokerage.

You can save $18k to your 403(b) but only $5500 to the Roth. Aside from Health Savings Accounts, this leaves a lot of your savings plan going into a separate, taxable account. So you'll need to set up 3 accounts: pretax IRA, Roth IRA, and taxable. You can still contribute to the maxes for last year until March 15, I believe.

Whether you should focus on the student loan or your pretax IRA depends on the interest rate on the loan vs. your tax rate and market expectations. Debt is a bad thing, but liquidity is a very good thing. Use your taxable brokerage account as an emergency cushion.

Aside from that, try to spend as little as possible on the wedding without it being a fight. Automate your finances to the full extent possible. Then focus in your career and life! Fiddling past this point has diminishing returns.

Nothlit

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Re: Newbie, need help
« Reply #2 on: January 17, 2017, 12:30:56 PM »
The "Roth" ereamrod is referring to is a Roth 403b, not a Roth IRA.

The point of traditional (pre-tax) vs. Roth (after tax) accounts (whether they are 401k, 403b, or IRA) is to strategize regarding your income tax rate. If you expect to be in a higher tax bracket after retirement, a Roth style account is generally the way to go (so you pay taxes now, not later). If you expect to be in a lower tax bracket after retirement, traditional is generally the way to go (so you pay taxes later, not now). Putting money into both types of accounts is basically throwing your hands up and saying, "I'll pay taxes on some of my money now and some of it later because I have no idea." Is that really what you want? Also, I doubt that you are allowed to put $18k into *each* 403b account. It's probably $18k total between the two. If it were me, I'd pick one and not contribute to both.

Since you have no employer match in your 403b, your main benefit from that account is that it allows you to stash away more than the IRA limit of $5500. The reasons to open an IRA would be 1) you max out the $18k limit for your 403b, or 2) the fund choices or fees in your 403b account are not good. It sounds like you are currently investing in a target retirement date fund (2055), which is a fine choice as long as the fees are low. Which broker is this with? Fidelity, Vanguard, someone else...?

A taxable account should come only after you are maxing out all appropriate tax-sheltered space.

Also, for ease of conversation, few people use the "TSA" (tax-sheltered annuity) term. 403b is much more commonly understood.
« Last Edit: January 17, 2017, 12:39:33 PM by Nothlit »

ereamrod

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Re: Newbie, need help
« Reply #3 on: January 17, 2017, 01:27:15 PM »
Fidelity is who its through.  The ER for my TRF 2055 is 0.1% and when I looked at my statement for last year there was a record keeping fee deducted quarterly that amounted to $46.
I'm in the 25% tax bracket now, but if I hadn't put money in the 403b I would be in the 28%, I think.  I don't know where I'll be at retirement.  I assume the same.

If I'm understanding correctly Nothlit, you're saying if I want to save the 35k, max out my company option then invest in an additional account.

Nothlit

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Re: Newbie, need help
« Reply #4 on: January 18, 2017, 09:15:31 AM »
Fidelity and 0.1% is not bad. Double check whether your 2055 fund is an index fund vs. an actively managed fund. ("Fidelity Freedom 2055 Fund" and "Fidelity Freedom K 2055 Fund" are actively managed; "Fidelity Freedom Index 2055 Fund" would be the better choice). I'm guessing it's the index fund given the 0.1% ER. I can't speak to the record keeping fee as my company's 403b has negotiated reduced fees, so I'm not sure what's typical. In general, your 403b sounds fine to me (absent the company match) so I think it would be fine to max it out before pursuing additional account types (IRA, taxable, etc.). Especially since you have $35k to work with, making use of all available tax-sheltered space seems like a good idea.

This thread offers some good advice for the order of your investments.

robartsd

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Re: Newbie, need help
« Reply #5 on: January 18, 2017, 10:21:08 AM »
You might want to post a "case study" in "Ask a Mustachian"

Want specific info related to your situation?

Please use the following guidelines/format as applicable to your situation to ensure we have ALL the information we need to help.

...

This spreadsheet https://drive.google.com/file/d/0B45krBaG0b6KTWZDeXEySVBHVXc/view?usp=sharing can be downloaded and used to help organize your case study posting.

It includes income, expense, and investment categories that will cover most situations.  For "not too complex" cases it will calculate IRS, SS, and Medicare taxes exactly, and state taxes approximately, helping one evaluate the after-tax effects of 401k, HSA, etc.  There is also a simplified section to evaluate "how long to FI?".

See this post and the spreadsheet itself for more details.

For most people (especially early retirees) tax deferred retirement savings works out to more tax advantage than Roth.  You can defer taxes on $23,500/yr with an IRA($5,500) and your 403b($18,000). That leaves $11,500 of your planned savings without tax shelter. If you have a qualifying medical plan you can also shelter savings in a HSA ($3,400 in 2017).

I consider $18,000 a lot of money to have rotting in a money market account. I'd be inclined to say that you'd likely be best served by using those funds to max out your 2016 tax deferred savings (I'm not sure if you can still make 2016 contributions to a 403b, but you certainly can still make 2016 contributions to an IRA until April 15th). Assuming travel and wedding plans are further out than your plan to put out your student loan fire, it makes no sense to hold on to funds in a money market account while paying interest on your loans - you can pay off your loans now, then use the loan payment you were making to replenish your savings. Everyone has a different number for what it takes in an emergency fund to feel safe, but keep in mind that you're expecting to save about $3,000 every month ($675/mo in taxable accounts assuming you max 403b, IRA and HSA), so you potentially could cash flow some pretty large unexpected expenses.

Reynold

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Re: Newbie, need help
« Reply #6 on: January 18, 2017, 03:46:16 PM »
I also have an account (honestly no idea what it even is) that my high school employer started for me with $1200 in it and want to move the funds into something that's better suited for me. I'm considering just cashing it out and paying down more of my loans.

If it is a 401(k) or some other tax advantaged account like that, I recommend against cashing it out, as you pay substantial penalties.  What you can usually do is to roll it over (directly, if at all possible) to some other tax deferred account, like your 403(b) or an IRA.  Then you don't have a separate account to keep track of, it is just in with the one you are actually watching and contributing to.  Start by finding out what kind of account it is, then whether you can roll funds in where you work now, this is usually allowed. 

ereamrod

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Re: Newbie, need help
« Reply #7 on: January 18, 2017, 07:27:51 PM »
Thank you all for taking the time to help!  I am going to try and sort everything into a case study at some point.

Just to touch on the flex spending account, I believe the one available to me is a "use it or lose it" set up.  In your experiences can you roll these over at the end of the year easily?

robartsd

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Re: Newbie, need help
« Reply #8 on: January 19, 2017, 08:52:29 AM »
Thank you all for taking the time to help!  I am going to try and sort everything into a case study at some point.

Just to touch on the flex spending account, I believe the one available to me is a "use it or lose it" set up.  In your experiences can you roll these over at the end of the year easily?
Flex Spending Accounts (FSA) are tax free "use it or lose it" accounts for healthcare, childcare, or transportation (3 different account types) - there is no ability to roll over (though there is a time period after the end of the year to file claims against it). Whiel FSAs can help reduce tax liability, they are not Nearly as useful to early retirees as Health Savings Accounts (HSA). HSAs are only available to people with compatible high deductible health plans; but if you have a compatible plan, you can open an HSA even if your employer does not offer it. HSAs are similar to health FSAs in that both are intended for tax-free payment of medical expenses; however, HSAs are intended to allow people to save for unexpected medical expenses and FSAs are intended for predictable medical expenses. After age 65, HSA funds can be disbursed as if it were a traditional IRA. Many early retirees use an HSA and save documentation of their out of pocket medical expenses to claim for tax-free money in early retirement while starting up a Roth conversion pipeline.

Trifele

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Re: Newbie, need help
« Reply #9 on: January 19, 2017, 01:38:56 PM »
Just one small correction robartsd -- FSAs can be rolled over into the subsequent year up to $500.  www.investopedia.com/ask/answers/111615/does-money-flexible-spending-account-fsa-roll-over.asp

I rolled over $300 I did not spend in 2015 into 2016, and I just filed a claim to clear out both the 2015 and 2016 amounts.  So yes they are still use-it-or-lose it, but they loosened up on the timeframe in which you have to spend it. 

ChpBstrd

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Re: Newbie, need help
« Reply #10 on: January 19, 2017, 04:00:18 PM »
Depends on the employer. My wife's FSA is use or lose. My employer allows the rollover.

I lost $13 this year, but saved a lot more than that in taxes.

Trifele

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Re: Newbie, need help
« Reply #11 on: January 19, 2017, 04:48:57 PM »
Thanks,ChpBstrd. I didn't realize the employer had the option of whether to allow that.  Makes me feel lucky!

Ryland

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Re: Newbie, need help
« Reply #12 on: January 21, 2017, 05:54:57 PM »
Alright! Welcome to a new phase in life. Was such a freeing moment when I learned I didn't have to work till I was 65. Hell yes.

I'm 26, saved $96k in the last three years and am just finishing a 5 month traveling sabbatical (it. was. awesome.).

As long as you are certain what each of those accounts are, I recommend doing this... (and if you don't just yet, just give the investment company a call! :)

1. max out 401k
2. max out trad IRA
3. max out your Health Savings Account (HSA)
4. add the rest to your brokerage

Here are some great articles by the MadFIentist about each of these accounts and how to use them as an FI'er.

http://www.madfientist.com/traditional-ira-vs-roth-ira/
http://www.madfientist.com/ultimate-retirement-account/

Good luck! And please keep us posted! I love seeing people of a similar age in here.