Monday, February 24, 2014

Maxing 401k, Roth IRA, HSA...What Next?

Over at Bogleheads we came across the following discussion:   Maxing 401k, Roth IRA, HSA...What Next?by lyner » Sat Feb 22, 2014 7:32 pm
Age: 20s
Gross Income: Low 80k range
Federal Tax: 25%
State Tax: 4%


Retirement Accounts
Roth IRA: $28,000
401k: $98,000


Other Savings - Emergency Fund, House Down Payment, Car Fund, etc.
Checking (0.01%): $5,000
Online Savings (0.9%): $30,000


Debt
None


Right now, I am maxing out my 401k ($17,500), Roth IRA ($5,500), and HSA ($3,300) for 2014. Cruise control is set, and I just plan on dumping whatever money that is left over each month into my Online Savings Account. Do you folks have suggestions for what else I can be doing with the left over money (~1,000+) that may benefit in the long run? I do not have a taxable investing account.


Presently, I have no definitive timeline on my first house purchase, and I think I am still a few years out until I call it quits with my current car. Consequently, I do not forecast any major purchases on the horizon.


Overall, I'm just looking for other investment vehicles I should consider and research considering my situation. Thanks in advance!

Re: Maxing 401k, Roth IRA, HSA...What Next?by retiredjg » Sat Feb 22, 2014 7:50 pm

There are not a lot of options.


1) You can start saving in your taxable account for a certain goal - car, house, whatever. You can do better than just a savings account, but this might be money you don't want to invest at the same stock to bond ratio as your retirement investments.


2) You can start saving in your taxable account for retirement - you would fold this money into your already decided retirement asset allocation and use tax-efficient stock index funds in your taxable account. (Yes, there is a little BH revolution going on about what goes in taxable.)


3) You could start a 529 plan for children you might have or your own future education. I would not go that route, but some might.


4) You can check to see if your employer allows employees to make after-tax contribution (aka "employee contributions") to your 401k. This is not the same thing as Roth 401k, it is something different. If you can do this and if they let you roll the money out on a regular basis, you could get a lot of money into Roth IRA each year.


5) Go to Europe or Africa for a month....?
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Re: Maxing 401k, Roth IRA, HSA...What Next?by scamper » Sun Feb 23, 2014 11:05 am

I faced the same dilemma a few years ago. Here's my tax-advantaged retirement savings plan.


1) Social Security - no choice but to pay for it.
2) Company's pension - no choice, automatic.
3) Company 401k - contribute maximum before tax.
4) Backdoor Roth IRA for spouse & I. After tax contributions, but no tax on earnings in retirement.
5) HSA - Before tax contributions. Saving receipts to withdraw funds tax free in retirement; then withdraw with taxes like the 401k.
6) 529 plan - no longer contributing as our child is now in college with full funding - receives OK income tax deduction (no Federal deduction), no taxes on earnings.
7) Donor Advised Fund - saving before tax funds annually to donate to charity when in retirement. Allows the avoided taxes to accumulate tax free.
8) I-bonds - purchasing with aftertax funds, but no taxes due on earnings until withdrawal. This is our emergency funds also.
9) Bite the bullet, pay the taxes and invest in regular brokerage account.


The first 4 methods allow full freedom of use in retirement; the I-bonds can be used anytime; the HSA, 529, and DAF have use restrictions.
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Re: Maxing 401k, Roth IRA, HSA...What Next?by retiredjg » Sun Feb 23, 2014 11:27 am

scamper wrote:5) HSA - Before tax contributions. Saving receipts to withdraw funds tax free in retirement; then withdraw with taxes like the 401k.


You can save receipts from now and withdraw many years later based on those receipts?
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Re: Maxing 401k, Roth IRA, HSA...What Next?by ajcp » Sun Feb 23, 2014 11:41 am

retiredjg wrote:
scamper wrote:5) HSA - Before tax contributions. Saving receipts to withdraw funds tax free in retirement; then withdraw with taxes like the 401k.


You can save receipts from now and withdraw many years later based on those receipts?



Yes. Some people prefer to deal with the recordkeeping and save receipts, others figure their medical expenses in retirement will be enough to use the HSA anyway and it's not worth the hassle.
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Re: Maxing 401k, Roth IRA, HSA...What Next?by cherijoh » Sun Feb 23, 2014 12:11 pm

Are you saving an excess of $1000/month in your savings account? Wow!


Allocate at least 6 months of expenses in your savings account as an emergency fund. Then make a SWAG on various short term goals. For example, save $25K to buy a new car in 3 years. I'm sure some Bogleheads would recommend a lesser amount to buy a used car.  


For these short-term goals:
-You could look at i-bonds as mentioned above. You have to hold for 12 months and there is a maximum $10K/year. No state taxes and you can opt to wait and pay taxes when they are redeemed. http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm
- You could look into higher yield CDs. The increased interest vs. your savings account would likely exceed any penalties for breaking the CD early provided you don't immediately turn around and cash them out. But I would look at trying to match the CD period to the estimated time frame for your goal. Or if you want to hedge against rising rates, you could get some staggered durations.
- I'm not sure you are in a high enough tax bracket to make a tax-exempt bond fund a good option


But you still might want to use a portion of this excess savings towards a tax-efficient stock index fund. Just keep in mind that you run the risk of a downturn in the market when you want to redeem the funds.

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