401k and HSA + general savings confusion
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?
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
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.
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.
1. 401k up to employer max match 2. HSA 3. IRA, probably Roth contrabutions 4. Max out 401k 5. Taxable investing
The 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.
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.