Retirement Plan

[gilapoin21]

I have been following this approach when it comes to contributing to retirement funds.

1. 401k up to match %, then
2. Max Roth IRA, then
3. Max 401k, then
4. Regular savings account

What do you guys think? Is there a better approach?
Also when maximizing 401k, would you go regular, roth, or mix?

 

[Matt]

I have been following this approach when it comes to contributing to retirement funds.

1. 401k up to match %, then
2. Max Roth IRA, then
3. Max 401k, then
4. Regular savings account

What do you guys think? Is there a better approach?

It's a good start- hard to narrow down without specifics in terms of amounts.

Do you struggle to put the $23.5k in usually and therefore the savings account doesn't get much action?

I ask as you flip flop on the 401k.

Broadly, if you are saving taxable then probably a brokerage is better than a savings account after a certain value.

You might benefit from an HSA or Munis also.

 

[Free-quent Flyer]

Is this a question about tax advantaged savings or investment allocation? Unclear from how it's phrased. You're doing great on tax savings! But you could be invested in gold or something so need more information.

 

[gilapoin21]

@Matt, that's how I started and just keep upping the % over the years. I think someone who's just starting out should at least do #1 and #2. I'd like early retirement (who doesn't, right?) so I don't want my funds all tied up until 65 so I'm looking for other options. If I want to retire at 55, would brokerage be the best option? Can you elaborate on HSA or Munis? I'm not familiar with either.

@Free-quent Flyer, it's more tax advantaged savings. Thanks As for allocation, I'm mostly invested in stocks (index funds) and some bonds.

 

[Matt]

@Matt, that's how I started and just keep upping the % over the years. I think someone who's just starting out should at least do #1 and #2. I'd like early retirement (who doesn't, right?) so I don't want my funds all tied up until 65 so I'm looking for other options. If I want to retire at 55, would brokerage be the best option? Can you elaborate on HSA or Munis? I'm not familiar with either.

@Free-quent Flyer, it's more tax advantaged savings. Thanks As for allocation, I'm mostly invested in stocks (index funds) and some bonds.

OK so your plan isn't what you laid out in the OP?

• A Muni is a bond issued by a municipality, such as a city. These have favorable tax treatment. While they do not have very high yields in this market they will pay more than savings after a certain point (really depends on how much money you have).
• An HSA is an account that is paired with a HDHP, it allows you to save in a tax deferred manner.

I can't give you much more advice than to look into that based on what you have put out there.

Regarding:

I don't want my funds all tied up until 65 so I'm looking for other options. If I want to retire at 55

There is a part of the code called 72(t) that allows you to access retirement savings earlier, however you'd need to have a very robust 401k to make that work. Ideally, you should have money outside of that for early retirement.

Have you thought about how much money you will need in retirement. and considered future costs - long term health insurance, any kids going to college, etc?

 

[addemoh]

@Matt, that's how I started and just keep upping the % over the years. I think someone who's just starting out should at least do #1 and #2. I'd like early retirement (who doesn't, right?) so I don't want my funds all tied up until 65 so I'm looking for other options. If I want to retire at 55, would brokerage be the best option? Can you elaborate on HSA or Munis? I'm not familiar with either.

If avoiding the 10% early withdrawal penalty is your primary concern and not tax deferral/avoidance in retirement, then retiring after you attain the age of 55 may allow you access to 401(k) assets and income prior to age 59 1/2. This would require you to hold off on an IRA rollover but provides earlier access to funds. From the IRS 401(k) Resource Guide:

Exceptions. The 10% tax will not apply if distributions before age 59 ½ are made in any of the following circumstances:

• Made to a beneficiary (or to the estate of the participant) on or after the death of the participant,
• Made because the participant has a qualifying disability,
• Made as part of a series of substantially equal periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the participant or the joint lives or life expectancies of the participant and his or her designated beneficiary. (The payments under this exception, except in the case of death or disability, must continue for at least 5 years or until the employee reaches age 59½, whichever is the longer period.),
• Made to a participant after separation from service if the separation occurred during or after the calendar year in which the participant reached age 55,
• Made to an alternate payee under a qualified domestic relations order (QDRO),
• Made to a participant for medical care up to the amount allowable as a medical expense deduction (determined without regard to whether the participant itemizes deductions),
• Timely made to reduce excess contributions,
• Timely made to reduce excess employee or matching employer contributions,
• Timely made to reduce excess elective deferrals, or
• Made because of an IRS levy on the plan.
• Made on account of certain disasters for which IRS relief has been granted.

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/401k-Resource-Guide-Plan-Participants-General-Distribution-Rules

 

[Julian Brennan]

Do you struggle to put the $23.5k in usually and therefore the savings account doesn't get much action?

My favorite part here ;-) Man, I'd love to sock away that kind of money a year!

If my company would offer a 401(k) and a match I think I'd pretty much do what @Bill A has laid out - except #4 I'd switch for a brokerage account loaded with ETFs consisting of muni, high quality corporate or government/treasury bonds. A savings account shouldn't get any attention in this market environment other than having liquid funds available for emergencies or short term savings. And even for that there are better options than a 0.01% inflation trap.

 

[Matt]

My favorite part here ;-) Man, I'd love to sock away that kind of money a year!

Don't get me wrong, not saying that is easy, the question was designed to illicit more information about the size and type of step #4 savings. The vacilation between funding the 401K gave me the impression that we weren't looking at a case where someone was able to easily fund the full $18K +$5500 so that might mean the last part (savings) was a low balance.

The low balance in the savings would tie into questions on how to allocate it.

IE If a person has a nice 401(k) but low savings maybe there is an Emergency Fund threat - maybe savings is that, and advising munis or other investments in brokerage wouldn't be suitable.

Whereas, if the 23.5K was easy, I would imagine it more likely that savings had a high balance and strong replacement ratio, meaning taking on more risk would be a wiser move.

The steps seemed a little illogical, and later we learned that this is how he started out saving, but isn't really indicative of what he currently does. As he mentions here (and you agree with)

that's how I started and just keep upping the % over the years. I think someone who's just starting out should at least do #1 and #2.

This sounds reasonable - it is just when I see someone doing a step 3 and 4 on top of that where I ask what's going on, as it seems odd. Current steps would be:

1. Fund 401k 18K
2. Fund Roth 5.5K
3. Fund Savings

Unless something was funky (and they couldn't fund 23.5K...)

 

[El Turk]

Is there a general consensus that if your employer has an after-tax (non-Roth) option in their 401(k), up to 53K it should be:

1. Fund 401K 18K
2. Fund Roth IRA 5.5K (granted this might not be possible)
3. Fund After-Tax 401(k) 29.5K (or 35K if 2 wasn't possible)
4. Fund Savings

 

[Matt]

Is there a general consensus that if your employer has an after-tax (non-Roth) option in their 401(k), up to 53K it should be:

1. Fund 401K 18K
2. Fund Roth IRA 5.5K (granted this might not be possible)
3. Fund After-Tax 401(k) 29.5K (or 35K if 2 wasn't possible)
4. Fund Savings

You should consider if a HSA fits in there also.

 

[El Turk]

You should consider if a HSA fits in there also.

Perhaps I don't understand it entirely, but I don't think it applies in my case, since I get free (and tax free) health care as my wife is a medical resident (so, no High Deductible Plan).