Author Topic: What to max and in what order?  (Read 6621 times)

klystomane

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What to max and in what order?
« on: April 15, 2015, 03:44:55 PM »
Hi:

My current situation is that I am the sole-earner of our family. My wife is a SAHM to our young daughter. For taxes, we file married-joint. Per our income, we qualify for Roth IRAs.

My company offers a 401k @ 100% match for the first 5%, up to a yearly maximum of $1700. Hypothetically, if each paycheck is $10,000 and I contribute 5% ($500) to my 401k, then the company will match 100% of the first 3 paychecks ($500+500+500) and the remaining $200 for the fourth paycheck. Anything else I contribute will not be matched for the remainder of the year. We have the option to contribute up to 75% of our paychecks, which means that with the right planning, it's not too hard to catch up on the contributions later on in the year.

The only viable fund I see in our 401k fund list is the Vanguard Mid-cap Fund (VIMAX). I have 100% of my contributions allotted to this fund for the time being.

I also have Vanguard IRA accounts setup for my myself and my wife.

Based on our current financial situation, we will not be able to max the 401K and both IRAs. Doing so would require us to save $29,000 ($18,000 + $5,500 + $5,500), which is not feasible at this point. Realistically, I believe we can set aside around $19,000 a year.

The questions:
1. Based on the above, does it make sense to max 401K ($18,000), and then contribute as much as possible to our IRA accounts (around $1-2k) with what's leftover? Keep in mind VIMAX is the only real viable fund that there is.
2. Or would it make more sense to put enough into the 401K for the employer match ($1,750), max both IRAs ($11,000), and then put whatever is available back into the 401K? The issue I have with this is that the less I put into my 401k, the less money I actually net from my paychecks - doesn't this then mean that I might not have enough to contribute to the IRAs? Or does this require precise withholding calculations done correctly so that I get more per paycheck to invest with? Is there some kind of online calculator that will allow me to adjust my withholding correctly?
3. Any other options I haven't thought of?

One final point I'd like to make is that although we have no debts, we also don't own a home, which means that at some point in the future we'd like to purchase one. I believe it's possible to withdraw $10k from IRAs for your first home, but not from your 401k, something I'm keeping in mind.

Would love to hear some experienced opinions, thanks.


Cheers,
K

Dodge

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Re: What to max and in what order?
« Reply #1 on: April 15, 2015, 03:59:36 PM »

MDM

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Re: What to max and in what order?
« Reply #2 on: April 15, 2015, 04:00:16 PM »
Are you close to any tax credit breakpoints?  E.g., the EIC and/or Saver's Credit?

klystomane

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Re: What to max and in what order?
« Reply #3 on: April 15, 2015, 04:06:02 PM »
Nice flow-chart! Looks like it'll be my Option 2. However, how does one go about adjusting the withholding so that there's enough to put into the IRA (to be claimed later in the year as a deduction)?

How does the Saver's Credit work when calculating AGI? If I make $30,000 a year and I put $10,000 into my IRA, $5,000 into my 401K and nothing else, is my AGI then $15,000?


Cheers,
K

MDM

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Re: What to max and in what order?
« Reply #4 on: April 15, 2015, 04:14:17 PM »
Nice flow-chart! Looks like it'll be my Option 2. However, how does one go about adjusting the withholding so that there's enough to put into the IRA (to be claimed later in the year as a deduction)?
A couple of web sites commonly suggested:
http://www.irs.gov/Individuals/IRS-Withholding-Calculator
http://www.paycheckcity.com/calculator/w4assistant.html?execution=e2s1

If you try both and get the same answer, that gives you a reasonable basis to conclude you have a correct answer.

Quote
How does the Saver's Credit work when calculating AGI? If I make $30,000 a year and I put $10,000 into my IRA, $5,000 into my 401K and nothing else, is my AGI then $15,000?
In short, yes.

These web pages will help evaluate some "what if?" options:
http://www.paycheckcity.com/calculator/salary/ or
http://www.bankrate.com/calculators/tax-planning/1040-form-tax-calculator.aspx or
https://turbotax.intuit.com/tax-tools/calculators/taxcaster/.

You could also use the spreadsheet linked in the case study sticky to evaluate your options.

klystomane

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Re: What to max and in what order?
« Reply #5 on: April 15, 2015, 04:45:29 PM »
Thanks for the links...looks like I have some planning to do.

retireatbirth

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Re: What to max and in what order?
« Reply #6 on: April 15, 2015, 05:28:20 PM »
Why is a Roth ahead of the non-matched 401k? Does this hold for high earners?

Dodge

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Re: What to max and in what order?
« Reply #7 on: April 15, 2015, 05:30:04 PM »

Why is a Roth ahead of the non-matched 401k? Does this hold for high earners?

Probably because you can control the investments and usually end up paying lower fees as a result.

relaxednature

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Re: What to max and in what order?
« Reply #8 on: April 15, 2015, 06:24:56 PM »
I like the chart, pretty accurate for me only missing HSA toward the top.

klystomane

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Re: What to max and in what order?
« Reply #9 on: April 16, 2015, 02:54:56 PM »
Anybody have any opinions about Vanguard VIMAX? It's the fund with the lowest expense ratio in my 401k selection.

Next closest one is PSIFX at 0.25% and what looks like a pretty crappy return over the past 10 years.

Thoughts?

seattlecyclone

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Re: What to max and in what order?
« Reply #10 on: April 16, 2015, 03:32:45 PM »
Anybody have any opinions about Vanguard VIMAX? It's the fund with the lowest expense ratio in my 401k selection.

Next closest one is PSIFX at 0.25% and what looks like a pretty crappy return over the past 10 years.

Thoughts?

VIMAX is a mid-cap fund (i.e. stocks from companies not large enough to be on the S&P 500, but too large to be considered "small-cap"). Seems like a fine fund for a portion of your portfolio. VTSAX invests in the whole market proportionally, and the market cap weighting means about 80% of it is in large-caps. If you want to follow that general weighting, you might want to put 10-20% of your domestic stock allocation into VIMAX, but the majority should go into a large-cap fund, either within your 401(k) or in a separate account. PSIFX looks like a good choice there. It tracks the S&P 500 quite well. The 0.25% expense ratio is higher than you'll pay with Vanguard, but it's still pretty low in the grand scheme of things.

ender

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Re: What to max and in what order?
« Reply #11 on: April 16, 2015, 03:36:42 PM »
No HSA?

klystomane

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Re: What to max and in what order?
« Reply #12 on: April 16, 2015, 03:50:58 PM »
Anybody have any opinions about Vanguard VIMAX? It's the fund with the lowest expense ratio in my 401k selection.

Next closest one is PSIFX at 0.25% and what looks like a pretty crappy return over the past 10 years.

Thoughts?

VIMAX is a mid-cap fund (i.e. stocks from companies not large enough to be on the S&P 500, but too large to be considered "small-cap"). Seems like a fine fund for a portion of your portfolio. VTSAX invests in the whole market proportionally, and the market cap weighting means about 80% of it is in large-caps. If you want to follow that general weighting, you might want to put 10-20% of your domestic stock allocation into VIMAX, but the majority should go into a large-cap fund, either within your 401(k) or in a separate account. PSIFX looks like a good choice there. It tracks the S&P 500 quite well. The 0.25% expense ratio is higher than you'll pay with Vanguard, but it's still pretty low in the grand scheme of things.

VIMAX and PSIFX are specific to my 401k. I believe these are the only two funds I should consider. I do not have access to VTSAX within my 401k.

That said, would you recommend splitting the 401k contributions into both VIMAX and PSIFX?

I started with a 70%/30% split between VIMAX/PSIFX, but now I have 100% in VIMAX.

Thoughts? I am quite clueless with investing.

Thanks.

seattlecyclone

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Re: What to max and in what order?
« Reply #13 on: April 16, 2015, 04:11:31 PM »
The real question is what asset allocation you want. What percentage of your money do you want to invest in bonds? What percentage of your money do you want to invest in stocks? What percentage of that should be domestic stocks, and what percentage should be international? Do you want to add REITs to the mix? There's no "right" answer; everyone has a different risk tolerance and at the end of the day you need to pick something that you feel comfortable sticking with through bull markets and bear markets alike.

I know you don't have VTSAX in your 401(k). I was just using it as an example. It should be the starting point for your domestic stock allocation since it invests in the whole stock market, weighted by market cap. Its rough breakdown 80% large-cap, 10% mid-cap, and 10% small-cap. If you would ideally invest your money in VTSAX if it were available in your 401(k), the closest you can come is to put 80% in PSIFX and 20% in VIMAX. If you have some investment accounts besides your 401(k), you may decide to do 90/10 in your 401(k) and use another account to meet your desired small-cap allocation.

sisto

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Re: What to max and in what order?
« Reply #14 on: April 16, 2015, 04:33:33 PM »
Keep in mind that unless your income is really high you should be able to contribute the full amount of a tIRA for your wife due to the fact that she is not offered a 401K plan from an employer this should also partially offset your taxable income.

klystomane

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Re: What to max and in what order?
« Reply #15 on: April 16, 2015, 04:52:59 PM »
Keep in mind that unless your income is really high you should be able to contribute the full amount of a tIRA for your wife due to the fact that she is not offered a 401K plan from an employer this should also partially offset your taxable income.

Yes, I believe our AGI is under the limit.

We plan on maxing our tIRA ($11k) and putting about $7k into our 401k, of which $1750 is matched by my employer (max).

retireatbirth

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Re: What to max and in what order?
« Reply #16 on: April 16, 2015, 05:54:14 PM »
I like the chart, pretty accurate for me only missing HSA toward the top.

I don't have an HSA, but it's something I'm considering. Anything to defer more income sounds good to me. The issue I'm having is that I'm in my early 30s and it's hard to really project ahead what I'll need for medical expenses. Do you think the HSA makes sense even if you withdraw it in retirement for non-medical expenses and have to pay the taxes?

Dodge

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Re: What to max and in what order?
« Reply #17 on: April 17, 2015, 12:00:25 AM »

I like the chart, pretty accurate for me only missing HSA toward the top.

I don't have an HSA, but it's something I'm considering. Anything to defer more income sounds good to me. The issue I'm having is that I'm in my early 30s and it's hard to really project ahead what I'll need for medical expenses. Do you think the HSA makes sense even if you withdraw it in retirement for non-medical expenses and have to pay the taxes?

Regarding the HSA question: http://www.madfientist.com/ultimate-retirement-account/

Doulos

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Re: What to max and in what order?
« Reply #18 on: April 17, 2015, 12:29:32 PM »
Dodge's picture is awesome!  It just needs the HSA in there too.

On HSA, if you fully fund that during your short pre-FIRE years, and never need to use it.
Consider yourself blessed!

Be ecstatic that you never had any major medical issues in your whole life! 
Not sad you put $3325 a year into a tax sheltered account, that is difficult to get money out of if you have no medical expenses.

frugalnacho

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Re: What to max and in what order?
« Reply #19 on: April 17, 2015, 01:14:28 PM »


The roth and 401k ordering seems to be wrong.  If you are high enough income to consider roth over tIRA I would think 401k should take priority over the roth.  If you are really low income and get no benefit from 401k or tIRA I would think roth should take priority.  That seems like a weird area of the flow chart that will be ordered differently depending on your specific situation.

EDIT: There are also lots of situations where I would prioritize tIRA or 401k contributions above debt too, so long as you come out ahead.  Tossing an extra $1000 into your tIRA in order to lower your AGI and qualify you for a higher savers credit should have a much higher net benefit that paying down a debt, even with seemingly high apr.  I'm sure there are other examples too.
« Last Edit: April 17, 2015, 01:18:04 PM by frugalnacho »

Mississippi Mudstache

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Re: What to max and in what order?
« Reply #20 on: April 17, 2015, 01:33:43 PM »
The roth and 401k ordering seems to be wrong.  If you are high enough income to consider roth over tIRA I would think 401k should take priority over the roth.  If you are really low income and get no benefit from 401k or tIRA I would think roth should take priority.  That seems like a weird area of the flow chart that will be ordered differently depending on your specific situation.

EDIT: There are also lots of situations where I would prioritize tIRA or 401k contributions above debt too, so long as you come out ahead.  Tossing an extra $1000 into your tIRA in order to lower your AGI and qualify you for a higher savers credit should have a much higher net benefit that paying down a debt, even with seemingly high apr.  I'm sure there are other examples too.

I agree on the ranking of the IRA. Also noted by ender is the missing HSA. I rank it above the IRA/401k (beyond the match), and below the 401k contribution (up to the match).

ender

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Re: What to max and in what order?
« Reply #21 on: April 18, 2015, 07:18:54 AM »
I like the chart, pretty accurate for me only missing HSA toward the top.

I don't have an HSA, but it's something I'm considering. Anything to defer more income sounds good to me. The issue I'm having is that I'm in my early 30s and it's hard to really project ahead what I'll need for medical expenses. Do you think the HSA makes sense even if you withdraw it in retirement for non-medical expenses and have to pay the taxes?

Is your HSA through your employer? If so, you won't pay FICA on it - so that's another 7.4% in reduced taxes on that money.

HSA's are really flexible and cover all sorts of other expenses which aren't "obvious" (birth control, vision/glasses, some dental work, braces) either.

Since you have a kid I would contribute to your HSA indefinitely.  The article Dodge posted has a bunch of other reasons an HSA is amazing.