401k and HSA + general savings confusion
Hi everyone,
I am 27 and really trying to get my financial life in order and under control. I started using YNAB in January, and budgeting finally feels clear and in control to me, however the one part of my financial life that still feels like a confusing mess is my 401 K, HSA, and general retirement savings. I have a handful of questions about them and how they could work with YNAB.
1. What exactly does it mean to max out your 401k? I understand that there’s a limit to what you can contribute each year, but I don’t understand what it means beyond this in terms of a workflow. Let’s say the max for 2020 is 19,000. I am currently automatically contributing 12% to the 401k. How would I know I can afford to increase my 401k contribution to max it out? If I increased the % contribution, all of a sudden my take home pay would be less and my budget categories would be messed up. My YNAB brain wants to create a budget category to save to contribute to the 401k, but I know that doesn't make sense. Currently, I do not have my 401k in YNAB.
2. I have a similar question regarding my HSA. I am not regularly putting anything in here, but I have it set up as tracking account in YNAB. My employer puts $125 in here every quarter if we fulfill certain health requirements. For my 2019 taxes, my CPA told me I could contribute about 2,000 more to max it out and get more in my tax return. I moved some money from my savings to do this. In the future, how would I handle this? Should I budget to put aside money for HSA contributions to reach the max? What about medical expenses that can be reimbursed with it.
3. Beyond my 401k and HSA, I am not doing anything else to really save for retirement. Should I have a savings category and goal for retirement from the TBB income I get from my paycheck? Or is that overkill with already saving with a 401k? I always hear stuff like you should save 15-20% of your income for retirement. Does that include a 401k?
Thank you!
-
jeffg92 said:
I always hear stuff like you should save 15-20% of your income for retirement. Does that include a 401k?Those are general rules. I highly recommend a book, The One Page Financial Plan by Carl Richards as a start on this journey. What I like about the very short book is the focus on the reader and not present %'s. I'd also recommend waiting until YNAB and budgeting becomes boring before making changes. That is, when your true expenses are known and being funded every month with goals, etc. Then, you have more information to make long term decisions and more time to spend learning about options.
-
1. Figure out if you can budget with less money. Each percent increase will be that much less money per paycheck (well, not quite if you do Traditional contributions because of reduction in taxes). If you can budget with less money you can increase your contribution. The max for 2020 is $19,500.
2. I would max out an HSA before maxing out the 401k. Ideally you would make contributions via payroll deduction to your HSA, which avoids having to pay Social Security and Medicare taxes. If you aren't doing that, then budget for the contribution.
3. You should also contribute to an IRA. My recommended contribution order is as follows:
1. 401k up to employer max match
2. HSA
3. IRA, probably Roth contrabutions
4. Max out 401k
5. Taxable investing
There's room in there for debt paydown priorities as well depending on the type of debt. -
nolesrule said:
I would max out an HSA before maxing out the 401k.Assuming you are at least getting your full 401k match. I see you address that in your contribution order.
-
Superbone agreed.
-
-
The only thing I would add is a $1 increase in your 401k or HSA contributions will not result in a $1 decrease in your paycheck. Because these dollars are taken out pre-tax $1 might mean $0.80 less in take home pay. A lot of employers have calculators to figure out the the take home pay impact.
Because most people do 401k and HSA contributions pre-tax they don’t have them in YNAB.
-
nolesrule said:
1. 401k up to employer max match 2. HSA 3. IRA, probably Roth contrabutions 4. Max out 401k 5. Taxable investingThe order of items 3 and 4 depend on income level. Some people make too much money and do not qualify for an IRA. If you are in a high income tax bracket you should max out the 401K including contributing after tax money to the 401K. I think the max 401K contribution including after tax money is around 54K. If you still have money left over after that you could do an after tax contribution to a traditional IRA and possibly convert it to a Roth. If Im not mistaken I think the after tax IRA is still limited to 7K. Also some 401K's allow you to roll your after tax contributions over to a Roth.
-
ynaber2613
ynaber2613 said:
I think the max 401K contribution including after tax money is around 54K.$57k this year.
ynaber2613 said:
If Im not mistaken I think the after tax IRA is still limited to 7K.The IRA contribution limit is $6k.
401k, HSA and IRA also have catch-up contribution provisions when you reach a certain age (50 for the retirement accounts, 55, for HSA) that allow you to contribute additional funds beyond the limit.ynaber2613 said:
Some people make too much money and do not qualify for an IRA.This is true of a Roth IRA, but you can still make non-deductible contributions to a Traditional IRA regardless of income. However, if your income trajectory puts you on that course, I would recommend going with a Roth IRA, and then do Backdoor Roth when income gets too high (non-deductible contribution to Traditional and conversion). In this case you want to avoid having deductible money in a Traditional IRA because it makes the conversion step expensive in terms of taxes.
ynaber2613 said:
The order of items 3 and 4 depend on income level.I don't disagree necessarily, but I was trying to keep it simple for the OP, who didn't seem to be in that position.... though I could be wrong.
-
nolesrule Thanks for clarifying those limits, have not kept up with them lately (I indicated 7K on IRA since I am in the catch up bracket, well was in the catchup bracket but retired last year so I just contributed my last 14K for the wife and I to our Roth's).
There are so many nuances with 401K's and I wish companies would better educate employees on those and I am not sure how many of the rules are company/401K rules vs federal government rules. For example my 401K would allow for partial roll overs while I was still employed but will not allow partials after retirement. After I retired I was going to roll my after tax money over to my Roth but was told I would have to roll the entire 401K since I am no longer working, oh well I missed that one.
Also there is something called Net Unrealized Appreciation (NUA). This rule allows company stock to be rolled over to a regular investment account and pay tax on the original purchase price and then pay regular capital gains tax in the future on the rolled amount. If I had know this early in my career I might have kept my company stock.
Another thing I discovered after retiring when I was going to roll all of my 401K to my IRA's is that 401K's have a special protection from the federal government against law suits and bankruptcy, IRA's are protected by state government and every state is not the same. The state I am in does not protect Roth's at all and only protects traditional IRA's to a certain amount. If you move to a different state I am not sure which state protection you fall under, does it follow you? 401K's are protected regardless of how much you have in there.
I highly recommend that people do a lot of research about these topics early in life and plan accordingly. Luckily my 401K provider has low fees and decent index fund selections so I am OK leaving my money with them.
Bottom line is that this is a complex topic that requires a lot of study.
-
ynaber2613
ynaber2613 said:
Also there is something called Net Unrealized Appreciation (NUA). This rule allows company stock to be rolled over to a regular investment account and pay tax on the original purchase price and then pay regular capital gains tax in the future on the rolled amount. If I had know this early in my career I might have kept my company stock.Yeah, it's advantage, but on the other hand it's risky holding so much in company stock because you have much of your employment and retirement tied up in a single company.... and additionally you may not have the money to pay the ordinary income tax at time of rollover (or it might not be worth the lump sum tax hit). Not to mention if your company is a large cap or a MegaCorp, you might already be holding a decent amount of it in your other investments.
Mrs. nolesrule gets her employer match in company stock, and while her company is in the S&P500 and has slightly outperformed the stock market in general, we limit it to 5% of our portfolio. The sales are unfortunately considered FIFO, so that raises the cost basis everytime we sell, which likely will make NUA not worth it.
So NUA is one of those things where you need to assess your own situation.
-
-
This article is an excellent place to start :)
https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/
-
smella The one thing I don't like about that article is the assumption of the 4% safe withdrawal rate being applied for longer retirements. There is no evidence that it is a safe withdrawal rate for periods longer than 30 years. It's using the results of a study designed to answer one question and applying it to another scenario that does not match the criteria. The blog article kinda just hand-waves away this issue with nothing mathematical to back up the assertion, which I think is a major disservice to MMM's readers.
-
-
Khaki Storm said:
presentShould be "pre-set %'s"
-
For your 401(k), at a minimum, contribute the percentage where the employer gives a match. This is effectively free money. If you have other priorities, like debt, it might not make sense to max out your 401(k). The benefit to a traditional 401(k) is that you take the money out tax free, reducing your taxable income. However, if you want to maximize your retirement savings (that 15% you've heard), i'd actually recommend opening a Roth IRA to contribute after tax money to instead of increasing your 401(k) contribution, unless you really need to lower your taxable income.
For the HSA, I would HIGHLY recommend contributing as much as possible. Again, this money comes out pre-tax and reduces your taxable income. The money is YOURS to take with you if you leave the company. It can be used to reimburse you at any time for your qualified medical expenses. You never know when you'll have a medical event, so it's great to have. If you don't spend your HSA, it can be used as a retirement vehicle, but i have kids so just assume I'll use it.-
Heatskitchen
Heatskitchen said:
However, if you want to maximize your retirement savings (that 15% you've heard), i'd actually recommend opening a Roth IRA to contribute after tax money to instead of increasing your 401(k) contribution, unless you really need to lower your taxable income.The decision point for making Traditional or Roth, regardless of 401k or IRA, is the tax rate on the contribution now vs. what the tax rate would be upon withdrawal of the money in retirement. This maximizes the amount of money after taxes are paid.
There is an argument for Roth in some cases (low tax bracket now but expect to be in a high tax bracket later like a resident doctor), but otherwise generally speaking the now vs. later marginal rate on contributions is what matters. The marginal rate comparison includes accounting for the saver's credit now. Additionally, at certain levels of income, deductible contributions to a Traditional IRA are no longer possible.Heatskitchen said:
You never know when you'll have a medical event, so it's great to have. If you don't spend your HSA, it can be used as a retirement vehicle, but i have kids so just assume I'll use it.
Bear in mind that upon death of an HSA account owner, unless the beneficiary is a spouse, the HSA balance is immediately taxable in its entirety at the beneficiary's marginal tax rate. -
nolesrule Thanks for these comments - very true!
I do like the IRA as I have better options/returns.And I wasn't aware of what happened with the HSA if it went to a non-spouse. I messaged my mom right away as I know they've been socking away their HSAs :P
-
-
I ended up moving my traditional IRA into my 401k. First of all, my 401k is excellent so no qualms there although I would have left it at Vanguard all things being equal. But the main reason was it allowed me to take advantage of a mega backdoor Roth.
