Author Topic: Which type of retirement account meets my goals?  (Read 1273 times)

FrugalBuff

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Which type of retirement account meets my goals?
« on: December 30, 2015, 02:53:12 PM »
Hello everyone, I recently paid off my student loans and now I'm going to get serious about maxing out my retirement accounts. However, I'm having difficulty understanding the different withdrawal rules and the different accounts I have at my disposal.

To start, my wife's company doesn't offer a 401k until she's been working there 3 years and she just started, so she is going to open a Roth IRA.

However, I have a traditional 401k and a Roth 401k available, and I can always open a traditional or Roth IRA. I know I should contribute at least enough to my 401k or my Roth 401k to get my company match. The funds available through my company sponsored plans have very low fees, about 0.01% more than what Vanguard offers.

We are 26 Our tax status is married filling jointly and our gross income is about $130k. We don't qualify for any deductions but the standard deduction. My traditional 401k has a balance of $46k and my Roth 401k has a balance of $13k. Neither one of us is offered an HSA.

Finally, I think my wife would like to have a baby in the next 2 to 3 years and we don't own a home. Owning a home is not a 2 to 3 year goal but it could be a 6+ year goal.

How would you use some combination of these accounts to save money so that:

1. It's accessible in early retirement (by supporting a Roth pipeline or some other withdrawal method I'm not familiar with) without hefty penalties?
2. It supports an $80k down payment for home in 5+ years without having $80k sitting in a savings account earning no returns?
3. They minimize my marginal tax rate.

For item 2, I understand it's risky to save for a down payment using investments, but I really hate the idea of losing out on compounded interest. Assuming a Roth IRA does not have a 5 year negative return, between me and my wife we could at least save $55k of money that still has an opportunity to grow in the next 5 years.

Thanks for everyone's input.

MDM

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Re: Which type of retirement account meets my goals?
« Reply #1 on: December 30, 2015, 06:45:10 PM »
How would you use some combination of these accounts to save money so that:

1. It's accessible in early retirement (by supporting a Roth pipeline or some other withdrawal method I'm not familiar with) without hefty penalties?
2. It supports an $80k down payment for home in 5+ years without having $80k sitting in a savings account earning no returns?
3. They minimize my marginal tax rate.

For item 2, I understand it's risky to save for a down payment using investments, but I really hate the idea of losing out on compounded interest. Assuming a Roth IRA does not have a 5 year negative return, between me and my wife we could at least save $55k of money that still has an opportunity to grow in the next 5 years.
1. By virtue of various IRS limits (and assuming you Live Below Your Means), you will have a mix of traditional, Roth, and taxable investments that should allow this.

2. You don't need to save $80K.  All you need to save is ~$2500.  Then go to Las Vegas, Atlantic City, etc., pick the right roulette number and bet it all.  If you aren't comfortable with that much risk, put the $80K into an online savings account earning ~1%.  Or something in between - just remember that "opportunity to grow" also means "reasonable chance to drop".

3. Until your wife gets 401k access, based on the numbers in the OP you will be in the 25% federal bracket no matter what you do - even assuming maximum HSA contributions if you are eligible.

See back of the envelope calculations below.  You'll need to reduce the $69K "available to invest" by whatever you spend on food, clothing, shelter, etc., but there should be a good amount left for investing if you do LBYM.

CategoryMonthly
Comments
Annual
Salary/Wages for earner #1$5,000$60,000
Salary/Wages for earner #2$5,833$70,000
Traditional IRA$458Room to increase?$5,500
401(k) / 403(b) / TSP / etc.$1,500Room to increase?$18,000
Personal HSA$554At maximum$6,650
Income subject to IRS tax$8,321$99,850
Federal Total Income$8,321$99,850
Federal tax$9502015 rates, MFJ, stand. ded., 2 exempt.$11,400
State/City tax$330Guess, using 5.00% * Fed. Taxable$3,963
Soc. Sec.$672Assumes 2 earners paying$8,060
Medicare$157$1,885
Total income taxes$2,109$25,308
Income before other expenses  $6,212$74,543
Monthly Average Expenses:
Other tax-advantaged investments:
Roth IRA$458Room to increase?$5,500
Total Expense$458$5,500
Total to invest$5,754$69,043
Summary:
"Gross" income$10,833$130,000
Income taxes$2,109$25,308
After-tax income$8,724$104,693
IRA+401k/403b/TSP/457 (Savers' credit)$2,417$29,000
HSA$554$6,650
After-tax investable$5,754$69,043


Filing Status21=S, 2=MFJ, 3=HOH
# Exempt.2
Earner #1Earner #2
Ages3030
# of earners2
Total Income$99,850
Std. Deduct.$12,600
Act. Deduct.$12,600
Exemption$8,000
AGI$99,850
MAGI$105,350
Taxable$79,250
1040 Tax$11,400
Saver's credit$0
Tax after n-r credit$11,400
Child Tax Cred.$0
EIC$0
Net Tax$11,400
Monthly$950
State tax$3,9635.00%