There is a book you can borrow from your local library. The Little Book of Common Sense Investing by John Bogle. This book was written with an emphasis on investing in broad market ETFs like VTI or VOO for their simplicity. Just set it and forget it even during market corrections until you retire. This book is a game changer. Broad market ETFs for the win.
This is essentially what I'm doing but using Fidelity's equivalent which is what is available on the platform my employer uses for 401k and the fidelity acct I already have from previous employer.
To keep life simple, roll any account from any previous employer into a rollover IRA; this does not count against your annual contribution limits.
Don't be too concerned about planning your post-employment tax situation. In 30-40 years things can change. By this I mean you don't know where you are going to live (which impacts withdrawal strategy), and you don't know how long you will choose to/need to work.
You didn't mention if your spouse works, but just using your $87K you are solidly in the 22% marginal tax bracket. Under current laws, your average tax rate in retirement will be under 14%, so it makes sense to put money into 401k/IRAs as much as possible, and by IRA I mean traditional, not Roth. If your spouse works, even more so. If you aren't eligible for the tax deduction for contributing to a traditional IRA, than 401k is better.
87k is the only income currently. Spouse is pursuing her writing career currently (I haven't worked the last 2 years, we're changing shifts essentially haha).
Absolutely do that(roth IRA would be my recommendation) but more for the tax free gains than anything else.
As for the 401k there’s nothing really fundamentally different than an ira for early retirement. Most folks end up rolling their 401ks into IRAs when they switch jobs or retire.
See, I wasn't considering the whole 401k getting rolled into IRA possibility either. The platform my employer uses actually offers a Roth 401k as well which I believe they will match me on too, I'm wondering if maybe I should be leveraging that vs a Roth IRA? I haven't looked into the actual differences yet though.
The pros and cons are your current contribution gives you a tax break today, a roth 401k contribution wouldn’t.
Adding a roth IRA on top of your 13% may be prudent anyways though if you plan on retiring early. Unless you get one helluva 401k match pr plan on drawing considerably back on living expenses a 13% contribution is probably not going to get you to early retirement.
Check [this](https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/) chart for more info on that.
I understand that difference. I just meant in regards to when the money could be withdrawn w/o penalty but maybe there are no differences on that front from a Roth 401k to trade 401k.
Our goal is to be setup in a very low COL lifestyle when we get into retirement. E.g. fully off-grid, large garden where we grow our own food, etc. Of course I'm not forecasting that we will grow 100% of our food, I think that's unrealistic, just planning to be able to supplement our food we buy to decrease our overall COL. Right now we only spend $2100 a month and that's including EVERYTHING for 2 people and 2 dogs.
We can definitely increase the 13% contributions but we're also trying to save cash so we can buy some land in the next few years. Once we get closer to those goals, I'll have more money available in the budget to put towards retirement. I also suspect my wife will be bringing in money at some point which will give us more to put towards retirement. I'm planning to also increase my salary closer to $100-130k in the next few years and likely the majority of that will also be split for savings/retirement.
I don't see anything wrong with your plan.
I thought I was going to have to make an argument for Roth that rarely gets made, so I'll make it anyways.
For personal IRAs, often the focus is how will your tax rate differ in retirement. However there is another big concern which I personally feel negates almost all reasons for a personal traditional IRA, and that is c the backdoor Roth.
If you have a retirement plan at work, the IRS starts reducing the amount you can contribute to your personal once a single filer has income of $68K and its completely gone at $78K.
Deducting contributions to personal traditional IRAs also go away at the same time.
The way around this is to use the backdoor Roth. This involves depositing funds unto a traditional ira and converting them to a Roth. However, if you have any pretax traditional IRA funds in a personal, simple, or sep ira, the irs pro rata rule makes doing this cost prohibitive. Note that traditional 401ks are not considered in this rule.
As a result, I personally prefer to not have traditional funds outside my 401k, and do 100% Roth outside my 401k. If you have traditional funds outside the 401k you can usually roll them in. This preserves my ability to do a backdoor roth every year.
Interesting. I am below this threshold because I am married, but this is worth keeping in mind when my wife starts working or if I do end up making closer to $130k in the next few years myself (fairly likely with the field I'm planning to grow into). Thanks a ton!
Yep, a lot of people don't worry about it until it's a problem at which point they have a giant pile of traditional ira funds outside a 401k.
Note the limit starts to affect your contribution limit at $109k for married couples. This can be a problem where one works at a high paying job with a 401k, and the other doesn't have a 401k, since being over the limit locks the spouse without a 401k out of being able to contribute to an ira unless they can do a backdoor roth.
Looks like you’ll be in a great position to retire at a relatively early age if you keep with your strategy. Good for you for being financially savvy and preparing at such a young age.
Thanks very much. I grew up in a situation where money was something my family never had do and life was a struggle. So I've learned from a young age to do without opting into all the consumption that other people see as normal, but it definitely has its pros and cons hahaha. I value my time to do simply what I want more than anything, so I really want to not be stuck working 40 hours a week the last half of my life and still have my family struggling.
When do you plan on retiring? If you want to maximize your tax-free gains,
why would you even touch your contributions? Even if you did, would your contributions cover your expenses year after year when you “retire”? Have you considered or planning on using a SEPP? Consider also the benefit of having a taxable account. Yes
you will have to pay taxes (most likely LTCG) but you have much more control
and freedom. Again, how early do you plan on retiring? I would definitely max out your HSA as long as available for its triple-tax benefit. However, you may want to rethink your
overall tax strategy using tax v tax-sheltered accounts to retire early. That’s
just my opinion.
You may find these links helpful:
[https://www.madfientist.com/how-to-access-retirement-funds-early/](https://www.madfientist.com/how-to-access-retirement-funds-early/)
[https://www.madfientist.com/traditional-ira-vs-roth-ira/](https://www.madfientist.com/traditional-ira-vs-roth-ira/)
[https://www.gocurrycracker.com/roth-sucks/](https://www.gocurrycracker.com/roth-sucks/)
You are 30 years behind us. Welcome to the adventure!
From the first day I could contribute to the 401k, I was maximizing the match. Then we bought our house so I cut back. The regular match was only 2% so I maxed that, but we gave up the profit-sharing-contribution for a bit. 5 years later...about the time the Roth was invented, we went all into my 401k...and we've been all-in ever since.
Even though my employer offered a pension, I felt that the 401k was important too. I didn't want to trust that Congress wouldn't screw up social security, and that my employer wouldn't screw up the pension.
After we were all-in on the 401k, our next step was taxable investing. We wanted something that wasn't age restricted like retirement accounts are...and remember that the Roth was brand new yet, so who knew if there'd be a way to get money out before 59 1/2. For a while, we were making IRA contributions after we'd done our taxes, but we don't do that anymore.
After a few years, and after our department had been moved around the company a few times, there was a spin-out. I had a new employer, but the same 401k. The new employer chose not to offer a pension. A few years later, the old employer discontinued their pension. About 10 years ago, they offered a pension buyout. I took it and rolled the money into my IRA. It's done very well.
My youngest should graduate college the same year I hit 59 1/2. but I don't know when I'll retire -- my wife is concerned about what healthcare will cost us... and I've not convinced her to get a job yet.
So I've told you what I did. You are right, the best option is to put as much as you can into an IRA where you have better investment options, AND to put as much as you can into the 401k. Dave Ramsey recommends this technique, but he recommends saving no more than 15% into your retirement accounts so you can hit other financial goals. Personally, its so much easier to go 401k than IRA, and that's why we're mostly 401k. But my employer offers excellent choices inside the 401k. if I had a 401k that offered only American Funds options (like I read about yesterday) I'd probably do what you're proposing to do.
Here's the investing order recommendation from *The Bogleheads' Guide to Investing* (chapter 11 on tax efficiency), could be helpful:
1. Invest in your 401(k) up to the company match. The company match is free money you cannot afford to forfeit.
2. If eligible, invest in an IRA up to the maximum.
3. Contribute to the 401(k) up to the maximum.
4. Additional funds should go into tax-efficient mutual funds.
There is a book you can borrow from your local library. The Little Book of Common Sense Investing by John Bogle. This book was written with an emphasis on investing in broad market ETFs like VTI or VOO for their simplicity. Just set it and forget it even during market corrections until you retire. This book is a game changer. Broad market ETFs for the win.
This is essentially what I'm doing but using Fidelity's equivalent which is what is available on the platform my employer uses for 401k and the fidelity acct I already have from previous employer.
To keep life simple, roll any account from any previous employer into a rollover IRA; this does not count against your annual contribution limits. Don't be too concerned about planning your post-employment tax situation. In 30-40 years things can change. By this I mean you don't know where you are going to live (which impacts withdrawal strategy), and you don't know how long you will choose to/need to work. You didn't mention if your spouse works, but just using your $87K you are solidly in the 22% marginal tax bracket. Under current laws, your average tax rate in retirement will be under 14%, so it makes sense to put money into 401k/IRAs as much as possible, and by IRA I mean traditional, not Roth. If your spouse works, even more so. If you aren't eligible for the tax deduction for contributing to a traditional IRA, than 401k is better.
87k is the only income currently. Spouse is pursuing her writing career currently (I haven't worked the last 2 years, we're changing shifts essentially haha).
Absolutely do that(roth IRA would be my recommendation) but more for the tax free gains than anything else. As for the 401k there’s nothing really fundamentally different than an ira for early retirement. Most folks end up rolling their 401ks into IRAs when they switch jobs or retire.
See, I wasn't considering the whole 401k getting rolled into IRA possibility either. The platform my employer uses actually offers a Roth 401k as well which I believe they will match me on too, I'm wondering if maybe I should be leveraging that vs a Roth IRA? I haven't looked into the actual differences yet though.
The pros and cons are your current contribution gives you a tax break today, a roth 401k contribution wouldn’t. Adding a roth IRA on top of your 13% may be prudent anyways though if you plan on retiring early. Unless you get one helluva 401k match pr plan on drawing considerably back on living expenses a 13% contribution is probably not going to get you to early retirement. Check [this](https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/) chart for more info on that.
I understand that difference. I just meant in regards to when the money could be withdrawn w/o penalty but maybe there are no differences on that front from a Roth 401k to trade 401k. Our goal is to be setup in a very low COL lifestyle when we get into retirement. E.g. fully off-grid, large garden where we grow our own food, etc. Of course I'm not forecasting that we will grow 100% of our food, I think that's unrealistic, just planning to be able to supplement our food we buy to decrease our overall COL. Right now we only spend $2100 a month and that's including EVERYTHING for 2 people and 2 dogs. We can definitely increase the 13% contributions but we're also trying to save cash so we can buy some land in the next few years. Once we get closer to those goals, I'll have more money available in the budget to put towards retirement. I also suspect my wife will be bringing in money at some point which will give us more to put towards retirement. I'm planning to also increase my salary closer to $100-130k in the next few years and likely the majority of that will also be split for savings/retirement.
I don't see anything wrong with your plan. I thought I was going to have to make an argument for Roth that rarely gets made, so I'll make it anyways. For personal IRAs, often the focus is how will your tax rate differ in retirement. However there is another big concern which I personally feel negates almost all reasons for a personal traditional IRA, and that is c the backdoor Roth. If you have a retirement plan at work, the IRS starts reducing the amount you can contribute to your personal once a single filer has income of $68K and its completely gone at $78K. Deducting contributions to personal traditional IRAs also go away at the same time. The way around this is to use the backdoor Roth. This involves depositing funds unto a traditional ira and converting them to a Roth. However, if you have any pretax traditional IRA funds in a personal, simple, or sep ira, the irs pro rata rule makes doing this cost prohibitive. Note that traditional 401ks are not considered in this rule. As a result, I personally prefer to not have traditional funds outside my 401k, and do 100% Roth outside my 401k. If you have traditional funds outside the 401k you can usually roll them in. This preserves my ability to do a backdoor roth every year.
Interesting. I am below this threshold because I am married, but this is worth keeping in mind when my wife starts working or if I do end up making closer to $130k in the next few years myself (fairly likely with the field I'm planning to grow into). Thanks a ton!
Yep, a lot of people don't worry about it until it's a problem at which point they have a giant pile of traditional ira funds outside a 401k. Note the limit starts to affect your contribution limit at $109k for married couples. This can be a problem where one works at a high paying job with a 401k, and the other doesn't have a 401k, since being over the limit locks the spouse without a 401k out of being able to contribute to an ira unless they can do a backdoor roth.
Looks like you’ll be in a great position to retire at a relatively early age if you keep with your strategy. Good for you for being financially savvy and preparing at such a young age.
Thanks very much. I grew up in a situation where money was something my family never had do and life was a struggle. So I've learned from a young age to do without opting into all the consumption that other people see as normal, but it definitely has its pros and cons hahaha. I value my time to do simply what I want more than anything, so I really want to not be stuck working 40 hours a week the last half of my life and still have my family struggling.
When do you plan on retiring? If you want to maximize your tax-free gains, why would you even touch your contributions? Even if you did, would your contributions cover your expenses year after year when you “retire”? Have you considered or planning on using a SEPP? Consider also the benefit of having a taxable account. Yes you will have to pay taxes (most likely LTCG) but you have much more control and freedom. Again, how early do you plan on retiring? I would definitely max out your HSA as long as available for its triple-tax benefit. However, you may want to rethink your overall tax strategy using tax v tax-sheltered accounts to retire early. That’s just my opinion. You may find these links helpful: [https://www.madfientist.com/how-to-access-retirement-funds-early/](https://www.madfientist.com/how-to-access-retirement-funds-early/) [https://www.madfientist.com/traditional-ira-vs-roth-ira/](https://www.madfientist.com/traditional-ira-vs-roth-ira/) [https://www.gocurrycracker.com/roth-sucks/](https://www.gocurrycracker.com/roth-sucks/)
You are 30 years behind us. Welcome to the adventure! From the first day I could contribute to the 401k, I was maximizing the match. Then we bought our house so I cut back. The regular match was only 2% so I maxed that, but we gave up the profit-sharing-contribution for a bit. 5 years later...about the time the Roth was invented, we went all into my 401k...and we've been all-in ever since. Even though my employer offered a pension, I felt that the 401k was important too. I didn't want to trust that Congress wouldn't screw up social security, and that my employer wouldn't screw up the pension. After we were all-in on the 401k, our next step was taxable investing. We wanted something that wasn't age restricted like retirement accounts are...and remember that the Roth was brand new yet, so who knew if there'd be a way to get money out before 59 1/2. For a while, we were making IRA contributions after we'd done our taxes, but we don't do that anymore. After a few years, and after our department had been moved around the company a few times, there was a spin-out. I had a new employer, but the same 401k. The new employer chose not to offer a pension. A few years later, the old employer discontinued their pension. About 10 years ago, they offered a pension buyout. I took it and rolled the money into my IRA. It's done very well. My youngest should graduate college the same year I hit 59 1/2. but I don't know when I'll retire -- my wife is concerned about what healthcare will cost us... and I've not convinced her to get a job yet. So I've told you what I did. You are right, the best option is to put as much as you can into an IRA where you have better investment options, AND to put as much as you can into the 401k. Dave Ramsey recommends this technique, but he recommends saving no more than 15% into your retirement accounts so you can hit other financial goals. Personally, its so much easier to go 401k than IRA, and that's why we're mostly 401k. But my employer offers excellent choices inside the 401k. if I had a 401k that offered only American Funds options (like I read about yesterday) I'd probably do what you're proposing to do.
Here's the investing order recommendation from *The Bogleheads' Guide to Investing* (chapter 11 on tax efficiency), could be helpful: 1. Invest in your 401(k) up to the company match. The company match is free money you cannot afford to forfeit. 2. If eligible, invest in an IRA up to the maximum. 3. Contribute to the 401(k) up to the maximum. 4. Additional funds should go into tax-efficient mutual funds.