Author Topic: Many Retirement Account Options ... Maybe Too Many  (Read 6032 times)

bulery326

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Many Retirement Account Options ... Maybe Too Many
« on: January 06, 2015, 06:37:30 PM »
In August, my wife and I started faculty positions.  We used the rest of 2014 to re-build our emergency fund and pay-off our outstanding high interest debt while still getting our maxed out match and contributing the maximum allowed to our Roth IRAs.  With the new year upon us, I am re-evaluating our retirement investment strategy and wanted to get input from the Mustachian community.

Working for a University, we each have 5 retirement account options [401(a), 403(b), Roth 403(b), 457(b) & HSA] as well as a pension.  We also have our Roth IRA accounts that we have been contributing to over the past few years and tax-deferred accounts from our previous employers.  Our current contributions are 3% salary to the 457(b) which maxes out a 5% salary match by the university deposited in the 401(a) account and ~ 1% salary to the pension fund (which is required) which yields a 1% per year multiplier of last 5 years pay.  We also get $400 a year each in our HSA.

Our current gross salaries are $75,000 (dw) and $90,000 (me) which after deductions and taxes yields monthly take-home income of ~ $9,180 against monthly expenses of ~ $5,225 (a bit high and something we are working on decreasing).  I also have a $10,000 bonus coming to me in June.

I am trying to determine how to best invest the extra income and into which account type.  All of the university-associated accounts except the HSA have 5 Vanguard Index Funds to invest in (VINIX, VSMAX, VITSX, VTIAX & VBTLX) which we are currently invested at 30/20/20/20/10.  Is this a good distribution for these funds?  Reviewing the restrictions on the different accounts, it appears to me the best strategy is to max out the 457(b) since it does not have an age restriction on distributions and then the 401(a) or 403(b).  Does that make sense?  Is there any advantage to the 401(a) or 403(b) over the other if the investment options are the same?  Would putting any money in a Traditional IRA be of benefit if we already have Vanguard Index funds available to us?

We would also like to save some of our extra income for a down payment on a house.  While we have the option to take some of our income on top of our expenses as a taxable distribution and start saving it, I had an alternative idea I thought fellow mustachians could evaluate for me.  We have contributed ~ $24,600 in our Roth IRAs so far which is now valued at ~$27,700.  What if we placed all of our extra income in tax-deferred accounts, but shifted our Roth IRA deposits to our down payment "savings" (just on our personal ledger) over time.  By my calculations, we could place $32,800 in tax-deferred investments for the same cost as having $24,600 available to us post-tax.  I know many Mustachians are against having house down payment funds invested in the market, but we already have this money invested there with a buffer (~12.5%) against potential market dip, so am I missing something with this idea? 

Thank you for all your help.

MDM

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Re: Many Retirement Account Options ... Maybe Too Many
« Reply #1 on: January 06, 2015, 09:58:21 PM »
...5 Vanguard Index Funds to invest in (VINIX, VSMAX, VITSX, VTIAX & VBTLX) which we are currently invested at 30/20/20/20/10.  Is this a good distribution for these funds? 
Huge overlap in the holdings of VITSX and VINIX.  Pick one or the other but not both.  The overall distribution is certainly defensible - no way to know for sure how good it will be.

Quote
Reviewing the restrictions on the different accounts, it appears to me the best strategy is to max out the 457(b) since it does not have an age restriction on distributions and then the 401(a) or 403(b).  Does that make sense?
Yes.  We are taking advantage of that exact non-restriction.  There is the risk of losing your money if the employer goes bankrupt - you get to decide how likely that is.

Quote
Is there any advantage to the 401(a) or 403(b) over the other if the investment options are the same?
If everything (investment options, distribution options, etc.) is the same then there is no advantage.  I'd ask HR what differences exist (unlikely HR would be so bold as to suggest which is better) and decide based on the response.

Quote
Would putting any money in a Traditional IRA be of benefit if we already have Vanguard Index funds available to us?
You need your AGI to be below $118K for any tIRA contributions to be deductible, and below $98K for them all to be deductible.  Even putting $53K into pre-tax won't get $175K down to those levels.  For IRAs, Roth seems your best bet.

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We would also like to save some of our extra income for a down payment on a house.  While we have the option to take some of our income on top of our expenses as a taxable distribution and start saving it, I had an alternative idea I thought fellow mustachians could evaluate for me.  We have contributed ~ $24,600 in our Roth IRAs so far which is now valued at ~$27,700.  What if we placed all of our extra income in tax-deferred accounts, but shifted our Roth IRA deposits to our down payment "savings" (just on our personal ledger) over time.  By my calculations, we could place $32,800 in tax-deferred investments for the same cost as having $24,600 available to us post-tax.  I know many Mustachians are against having house down payment funds invested in the market, but we already have this money invested there with a buffer (~12.5%) against potential market dip, so am I missing something with this idea?
Don't think you are missing anything, with the possible exception of "will you be ok if your Roth investments drop 40% just before you want to make that down payment?

Good luck!
« Last Edit: January 12, 2015, 02:11:15 AM by MDM »

DrF

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Re: Many Retirement Account Options ... Maybe Too Many
« Reply #2 on: January 10, 2015, 01:23:40 PM »
My understanding is that you can't contribute any additional to your 401(a), which is essentially social security for you and your wife. Since you work for a university you do not contribute to social security benefits. Hopefully you chose the self directed 401a option rather than the public employee retirement plan.

So, you both have a 457 and 403. That adds up to $72,000 ($18,000 x 4). You can deduct this from your gross income of $175,000, giving you a MAGI of $103,000. This is below the threshold for you to be eligible for full traditional IRA benefit. I would open a traditional IRA for you and your wife and Max it out for 2014 and 2015. If you already contributed for 2014 into a Roth, I would remove it and put it into a traditional.

Your MAGI is going to be decreased more than this due to HSA contributions. I would max out your HSA contributions.

I forgot, since you have a 401a, a portion of your salary is removed pre-tax for that contribution, lowering your MAGI further. It is confusing from your post on the pension/401a (usually the 401a IS the pension??) If not, then you can put pre-tax money into the 401a as well (both of you X $18,000??).

After everything you should still have ~$80-85k before taxes (roughly, maybe less).

The amount of money you can save PRE-TAX is ridiculous.

Please read http://www.madfientist.com/retire-even-earlier/

If you can live on ~$80k before taxes (hint, you should be able to easily) then you should be FI in ~8 years.

I like the idea of your saving for a down payment strategy, since you are saving so much money in your other retirement accounts I would consider using money from your IRA for a down payment.

MDM

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Re: Many Retirement Account Options ... Maybe Too Many
« Reply #3 on: January 10, 2015, 01:31:29 PM »
So, you both have a 457 and 403. That adds up to $72,000 ($18,000 x 4).
Could you clarify/elaborate on that?  E.g., 4 of what?

Great if true.

DrF

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Re: Many Retirement Account Options ... Maybe Too Many
« Reply #4 on: January 10, 2015, 01:36:21 PM »
So, you both have a 457 and 403. That adds up to $72,000 ($18,000 x 4).
Could you clarify/elaborate on that?  E.g., 4 of what?

Great if true.

Wife = 457 = $18000 + 403b = $18000  == $36000

OP = 457 = $18000 + 403b = $18000 == $36000

total pre-tax contributions = $72000

this is not including some of the other options for the OP

add in traditional IRA wife + OP = $11000

HSA account etc

OP probably has ~$100,000 worth of pre-tax contributions at his disposal. Lucky bastard.

And he'll still probably be in the 28% bracket!
« Last Edit: January 10, 2015, 01:43:09 PM by DrFunk »

MDM

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Re: Many Retirement Account Options ... Maybe Too Many
« Reply #5 on: January 10, 2015, 02:25:17 PM »
OP probably has ~$100,000 worth of pre-tax contributions at his disposal. Lucky bastard.
Excellent points.  Now they just need to take advantage of it. 

They can easily get down to the 25% bracket with <$151,200 taxable income.

They can even reach the 15% bracket with <$74,900 taxable income if they want:
  175,000  Gross
-   72,000  457+403b x2
-   11,000  tIRAs
-     6,650  HSA
   ----------
    85,350  AGI

-   12,600  Standard deduction
-     8,000  Personal exemptions
    ---------
     64,750  Taxable income

bulery326, there's the water - drink up!

GGNoob

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Re: Many Retirement Account Options ... Maybe Too Many
« Reply #6 on: January 10, 2015, 03:05:03 PM »
All of the university-associated accounts except the HSA have 5 Vanguard Index Funds to invest in (VINIX, VSMAX, VITSX, VTIAX & VBTLX) which we are currently invested at 30/20/20/20/10.

With those funds, I would do a simple three-fund portfolio. For the stock portion, I would do 70% VITSX and 30% VTIAX. Then just add VBTLX for your bonds. All you have to do is pick your stock/bond ratio. If you aren't sure, a good starting point is probably 80% stock and 20% bonds. That would put you at: 56% VITSX, 24% VTIAX, and 20% VBTLX.

You should really max out as much as you can. You have so much space in traditional retirement accounts that you could save a ton of money on taxes! My wife and I are in a similar situation to this:

They can easily get down to the 25% bracket with <$151,200 taxable income.

They can even reach the 15% bracket with <$74,900 taxable income if they want:
  175,000  Gross
-   72,000  457+403b x2
-   11,000  tIRAs
-     6,650  HSA
   ----------
    85,350  AGI

-   12,600  Standard deduction
-     8,000  Personal exemptions
    ---------
     64,750  Taxable income

bulery326, there's the water - drink up!

Starting in 2016, my wife and I should be able to contribute enough to our tax-deferred accounts that we could deduct about $73,000 (pension, 457, 2x401k, 2xtIRA, HSA)! That means we might pay as little as 4% federal taxes on an income of around $140k. You guys are in an even better situation than us, so take advantage of those tax-deferred accounts!

For the house down payment...it sounds like you want to use your Roth IRA as your down payment fund? If that's the case, you will never be able to contribute to that money back to your Roth IRA again. Personally, I wouldn't take any money out of my Roth unless its an absolute emergency.

As far as investing your down payment goes, I'm not against it. Just realize you have to be flexible on when you can buy based on market conditions. Bad thing is, what if the markets crash as do housing prices and you don't have a down payment for that really cheap house you want?

I'm a veteran so I don't have to worry about a down payment and can finance 100% of my home value without PMI...but, I've heard that PMI might be going down from like 1.35% to .85%. I've also read that you can get a mortgage for as little as 3% down. Mortgage rates are at a historic low. I'm actually refinancing right now at 3.25% for 30 years (no rush to pay off my house). There's a lot of factors to consider here...but have you thought about purchasing a house now with PMI and then instead of wasting money on rent and coming up with extra money to save for a down payment, you could just contribute more towards the principal each month? Again, I know there are a lot of variables to consider here and lots of math to be done. But in my mind, I would spend the time considering this instead of wasting money on rent.

bulery326

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Re: Many Retirement Account Options ... Maybe Too Many
« Reply #7 on: January 12, 2015, 01:54:13 AM »
Thank you all for your wonderful advice.

I apologize for not responding sooner, but I was busy with some things for work and had a hard time getting back to review the responses.

MDM, thanks for pointing out the Vanguard funds overlap.  I didn't realize that 457s could be included in bankruptcies until I followed up on what you mentioned.  It adds some risk, but if a flagship state university goes into bankruptcy I imagine there will be bigger issues (i.e. fundamentals of the economy flaws) at play.  As far as MAGI eligibility to receive the full tIRA benefit, I think we need to be down to $98,000 instead of $118,000.  With regards to the house down payment we are not in a position to have to buy something so in a significant market downturn we would hold on cashing out Roth IRA deposits.

Dr. Funk, we still pay social security taxes which I believe should still make us eligible for benefits down the road.  A few years ago, our university shifted from being a pure pension system to a split system.  We still are forced to contribute to the pension (~ 1% - 1.5% annually to receive the 1% per year of last 5 years salary averaged), but have access to the other 4 retirement account options [401(a), 403(b), Roth 403(b) & 457(b)] as well as the HSA because of the health plans we chose.  The 401(a) is the account with the highest limit ($53,000), but as always the employer chooses the limits of the plan.  While the investment options are excellent [same Vanguard funds as the 403(b) & 457(b)], there seems to be some confusion between two documents provided by the employer.  One states that at the beginning of employment an "irrevocable election" is made (i.e. for me this would be the 5% salary match the university makes for my 3% 457 contribution) and can never be changed whereas another says things can be changed within the first 24 months of employment.  I plan to follow-up with HR on if I have the flexibility to change my allocations for the 401(a).  Right now I can personally change my 403(b) and 457(b) contributions online, but I do not have the same option available to me for the 401(a).

Logan T, I appreciate the link on the three-fund portfolio.  I will have to do a bit more leg work to determine if I should drop VINIX & VSMAS and focus only on VITSX, VTIAX & VBTLX.  Also thanks for giving my a run-down of your situation.  It is nice to know how other people are approaching similar pre-tax options.  My wife and I actually already own a home in a neighboring state from graduate school that we have since been renting out (see below for more information) which should make us ineligible for any first-time home buyer options.  With regards to losing the ability to contribute back to the Roth IRA if we take them out we are okay with that.  We have been able to contribute to the Roth mostly when we had lower income taxes (mostly in the 15% bracket), so in many ways our maxing out the pre-tax with our current high incomes is a ledger shift I mentioned in my previous post.  We are not against PMI if we have to use it, but will simply evaluate the value of paying PMI for a period of time (probably using the idea of paying down the mortgage to discharge the PMI requirement) versus removing Roth contributions.  I like to run scenarios on spreadsheets so this will be another fun one to play around with.

While limiting our income tax burden and gaining FIRE is very high on our list, this year we are looking to sell our old house (which has been rented out an been on a depreciation schedule for the past 4+ years) and some taxable long-term investments to help us buy a house, so reaching the 15% income tax bracket is of significant importance so we can go from 15% capital gains tax to 0% (would save ~$3,000 - $4,000).  Based on recommendations from responders and looking over the numbers myself this is what I have come up with that is required to get us below certain limits.

175,000 Gross
- 72,000 2x Max of 457 & 403
-   2,500 Required Pension Contributions
-   3,100 Pre-Tax Deductions (Health, Dental, Vision, Life & Parking)
-----------
   97,400 Adjusted Income (Just Below $98,000 Making Us Completely Eligible for tIRA Deduction)
-   2,000 tIRA
-----------
   95,400 AGI
-  12,600 Standard Deduction
-    8,000 2x Personal Exemptions
-----------
   74,800 Taxable Income (Just Below $74,900 Putting us in the 15% Tax Bracket Making Us Eligible for 0% Capital Gains Tax Rate)
-  10,700 Social Security
-    2,500 Medicare
-  10,300 Federal Income Taxes
-    5,300 State Income Taxes
-----------
   66,600 Take Home Pay (On ~ $62,700 Expenses ==> Working on improving this but over 50% is rent and student loan payments)

I think I have the math correct, but appreciate other people reviewing it.  We have more room in the tIRA and could contribute to the HSAs to decrease our AGI.

MDM

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Re: Many Retirement Account Options ... Maybe Too Many
« Reply #8 on: January 12, 2015, 02:27:38 AM »
I think I have the math correct, but appreciate other people reviewing it.  We have more room in the tIRA and could contribute to the HSAs to decrease our AGI.
Looks good.  You'll actually be in better shape on at least the federal taxes due to your student loan interest deduction.

Necessity being the mother of invention, you might be able to find relatively painless ways to make ends meet if you did contribute $11K to tIRAs and ~$6K to an HSA.  Just a thought....

Another Reader

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Re: Many Retirement Account Options ... Maybe Too Many
« Reply #9 on: January 12, 2015, 05:03:01 AM »
Recapturing the depreciation on the rental will likely put you back above the limit of the 15 percent bracket.  And the total of the income plus the capital gain must be less than the top of the 15 percent bracket.  Looks like you will likely pay tax at the higher income tax rate on the depreciation and capital gains tax on the profit from the rental sale unless you have some accrued losses you can use up.

TomTX

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Re: Many Retirement Account Options ... Maybe Too Many
« Reply #10 on: January 12, 2015, 05:31:53 AM »
OP probably has ~$100,000 worth of pre-tax contributions at his disposal. Lucky bastard.
Excellent points.  Now they just need to take advantage of it. 

They can easily get down to the 25% bracket with <$151,200 taxable income.

They can even reach the 15% bracket with <$74,900 taxable income if they want:
  175,000  Gross
-   72,000  457+403b x2
-   11,000  tIRAs
-     6,650  HSA
   ----------
    85,350  AGI

-   12,600  Standard deduction
-     8,000  Personal exemptions
    ---------
     64,750  Taxable income

bulery326, there's the water - drink up!

In the 15% bracket, I would give STRONG consideration to Roth instead of Traditional up to the top of the 15% bracket (unless state income tax now is much higher than in planned retirement.) There is a Social Security income trap. As your income goes up from other sources (such as tIRA/403/401 withdrawal) - more of the Social Security payout will be taxed Your marginal tax rate is effectively much higher. Take out a dollar, you pay income tax on the dollar, AND it triggers income tax on fifty cents of your Social Security.

I would also max the HSAs, unless the fund choices truly suck. HSA money spent on medical purposes pays NO INCOME TAX EVER. These are lifetime accounts - they don't stay with your employer and they don't expire. For added flexibility - if you don't spend it down, you can treat it basically like a tIRA @ age 65 and make withdrawals (paying income tax.)

DrF

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Re: Many Retirement Account Options ... Maybe Too Many
« Reply #11 on: January 12, 2015, 09:14:20 AM »
Now that you have a plan... implement it.

Don't get used to those HUGE paychecks! If you set it up immediately you will have massive FU money and FI in no time at all.

Too often people begin to have lifestyle drift because they don't set up the automated contributions.

By the way, Congratulations on the faculty gigs!!! Tough to come by in today's environment.


BarkyardBQ

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Re: Many Retirement Account Options ... Maybe Too Many
« Reply #12 on: January 12, 2015, 09:16:52 AM »
The 457/Bankruptcy is not set in stone. You can call your HR/Benefits department and ask if that is true for your institution and when the money is yours/vested. This is the case for my 457 and my wife's, it is ours, even if they go bankrupt.

dandarc

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Re: Many Retirement Account Options ... Maybe Too Many
« Reply #13 on: January 12, 2015, 10:00:11 AM »
No one's left this post here yet:

http://rootofgood.com/make-six-figure-income-pay-no-tax/

Sounds like you are in a great position to pay the amount of income taxes that you want to pay.

bulery326

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Re: Many Retirement Account Options ... Maybe Too Many
« Reply #14 on: January 12, 2015, 10:19:11 AM »
I cannot thank all the responders enough for their input.  It is greatly appreciated.

MDM, we are trying to make a few more cuts to free up more cash for us to put away in tax-advantaged accounts.  We have done pretty well sticking to a somewhat flexible budget in the past, but are using January to get a stricter hold on our expenses.  The student loans are Stafford graduate students loans from late last decade meaning they have an absurd interest rate (6.8%), so we are working with SoFi to refinance them to 3.625% - 4% which should lower the monthly payment by ~ $100.  At first I thought this refinancing would lose us the interest income deduction, but re-reading SoFi's literature it appears we will still be eligible to use this deduction.

Another Reader, I thought the requirement was for your earned taxable income to be below the upper limit for the 15 percent bracket and then all capital gains (recapturing depreciation on the rental and selling some stocks/funds) would be taxed at 0%.  Do I have this wrong?  I was unaware that the totality of income and capital gains had to be less than the upper limit.  I was looking for an online resource to look more into this, but was unable to find one.  Would you happen to have a link you could provide me so I could read more up on this?

TomTX, I agree on using a Roth IRA for the 15% tax bracket (some of our past years have been here).  I don't know if we can get to the point of fully using the Roth advantage with all of our income taxed at the 15% bracket.  The issue is that if we maxed out our 457s, 403(b)s and HSA, then maxed out our Roth IRAs our take home would be down to $4,500 a month which with student loan payments of ~$1,500 is just not possible.  We would probably be better able to take advantage of this plan after 5 years when we pay off the loans or earlier if we pay off the loans in advance.  The HSA does sound like a good deal, so I will have to look into the investment options in that plan.

dandarc, I have seen that link before and it definitely hits close to home.  Our biggest expense by far is student loan payment.  Once we get that discharged we will be able to decrease our taxable income even more.

Zdrave, I appreciate the comment on the 457/bankruptcy situation.  I will have to get a hold of HR this week to talk to more about when the money is truly ours.

DrFunk, thanks for the well wishes.  We really lucked out on finding a wonderful place with great opportunities.  I was the one looking for a faculty position whereas my wife wasn't necessary looking for a faculty position as she has worked in private practice her whole career.  IT was just a timing thing that when I was offered a position that a department on campus lost a clinical faculty member and it was an excellent fit for all parties.  We have been fortunate that in each of last 2 moves (East Coast to Midwestern Big City to Midwestern College Town) our cost of living has decreased while our paychecks have increased!  We are in no way trying to become accustomed to the big money.  We even avoided getting a new TV over the holidays because we just really didn't need a new one.  Have a FI number of $1.25 million (estimate for now) we are trying to hit in the next 10 - 15 years.

Thanks again everyone.

dandarc

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Re: Many Retirement Account Options ... Maybe Too Many
« Reply #15 on: January 12, 2015, 01:39:47 PM »
HSAs - if you can fund them through payroll - are also exempt from FICA taxes - so you might consider prioritizing that above the traditional IRA and even 403B money if the investment options and fees are roughly equivalent. 

Depends on your state though - if you're in California, IRA / 403B could be better as you'd be saving 7.65% of FICA tax only to pay state tax (which varies depending on your taxable income)

FarmerPete

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Re: Many Retirement Account Options ... Maybe Too Many
« Reply #16 on: January 12, 2015, 01:46:22 PM »
I have no idea what kind of loans you have, but have you considered staying in the higher tax bracket a year and paying off your loans?  I don't know what you owe, but I assume throwing nearly 100k at them would make them mostly go away in one year.  Just a thought.  Especially relevant if you're stuck paying the nearly 7% interest, as I wouldn't gamble on making over 7% in the market in the next year.

bulery326

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Re: Many Retirement Account Options ... Maybe Too Many
« Reply #17 on: January 13, 2015, 08:03:50 AM »
dandarc, I didn't know HSAs are exempt from FICA taxes.  Our state tax is about 5.5% so it would be better to pay this instead of 7.65% for FICA.  I'll have to look into the investment options to determine if they are better than the retirement accounts.

FarmerPete, we debated about focusing on the student loans but the issue is the amount of income tax (31% with 25% federal and 6% state) we would have to pay in order to free up the after-tax cash to accelerate paying off the student loans.  We have been working with SoFi to refinance to a lower interest rate (hopefully 3.625% - 4%) accelerating the payback timeline (from 6 years to 5 years).  This will save us about $7,500 - $8,300 in interest.

dandarc

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Re: Many Retirement Account Options ... Maybe Too Many
« Reply #18 on: January 13, 2015, 08:47:35 AM »
dandarc, I didn't know HSAs are exempt from FICA taxes.  Our state tax is about 5.5% so it would be better to pay this instead of 7.65% for FICA.  I'll have to look into the investment options to determine if they are better than the retirement accounts.

FarmerPete, we debated about focusing on the student loans but the issue is the amount of income tax (31% with 25% federal and 6% state) we would have to pay in order to free up the after-tax cash to accelerate paying off the student loans.  We have been working with SoFi to refinance to a lower interest rate (hopefully 3.625% - 4%) accelerating the payback timeline (from 6 years to 5 years).  This will save us about $7,500 - $8,300 in interest.
And depending on your state, it may be exempt from that too - treatment of HSAs for state taxes varies quite a bit.

CorpRaider

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Re: Many Retirement Account Options ... Maybe Too Many
« Reply #19 on: January 13, 2015, 01:36:37 PM »
FarmerPete, we debated about focusing on the student loans but the issue is the amount of income tax (31% with 25% federal and 6% state) we would have to pay in order to free up the after-tax cash to accelerate paying off the student loans.  We have been working with SoFi to refinance to a lower interest rate (hopefully 3.625% - 4%) accelerating the payback timeline (from 6 years to 5 years).  This will save us about $7,500 - $8,300 in interest.

That seems like the correct analysis to me.  Lots of these debt paydown versus tax deferred investment threads neglect the guaranteed tax deferral savings.  You can take a loan from your plan if you get into a jam from a cash flow perspective or just refinance it for yourself from your tax sheltered assets via a loan from the plan if the i-rate thereon is materially lower than the after tax rate on the student loans.