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401k/403b, IRA's, HSA and others: Do you max them out?

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Billy_McSkintos:
Good morning all,

Now that I am in a good financial position (emergency fund, buffered, debt free (except mortgage) I have begun looking at maximising my investments/retirement savings. I am struggling to find a way to maximize them (you know, life) so I am curious are you all?


* Who is using what investment vehicles?

* Are you maxing out annual contributions?

* How old are you (if willing to share)?

Individual Max Annual Contributions (2017):
401k: $18,000
Roth IRA: $5500
HSA: $3400

Total: $26900

Over 50/55 Additional Catch up (2017):
401k (50yrs): $6,000
Roth IRA (50yrs): $1000
HSA (55yrs): $1000

Total: $8000

Joel:
My wife and I are maxing our 401ks, Roth IRAs, and HSA. It equates to $53,750. We live in California, so our marginal tax rate is 34.3% (25% federal and 9.3% state). That means it only actually costs us $39,087 out of our take-home pay to max our contributions (avoiding $14,663 in taxes - $42,750 * 34.3%). We are both 28, no children, no home loan or other debt. This equates to roughly 30% of our annual income.

As we start talking about having children (wife wants 3) and buying a house, I'm not sure if we will be able to maintain this level of contributions but it definitely is our goal. We did this by increasing our contributions with every raise instead of increasing our cost of living. It also helps I received a $40k pay bump in January 2016. Prior to the pay bump, I was maxing my own retirement accounts but my wife was not maxing hers (we got married October 2015 and my income is roughly 70% of total income).

I've got dreams to retire no later than 50.

In doing this exercise, I realized without any retirement contribution at all, our federal marginal tax rate would be 28% instead of 25%. So technically a bit more tax savings in there that I calculated.

Billy_McSkintos:
@Joel Nice! Thats fantastic. Buying a home and kids/education will hinder but not kill that contribution.

Am I correct in thinking that an added benefit of saving for retirement is that my effective tax rate today could be reduced?

Joel:

--- Quote from: Billy_McSkintos on February 15, 2017, 12:03:23 PM ---@Joel Nice! Thats fantastic. Buying a home and kids/education will hinder but not kill that contribution.

Am I correct in thinking that an added benefit of saving for retirement is that my effective tax rate today could be reduced?

--- End quote ---

Our goal was to get our retirement contributions maxed out as soon as possible, and then future raises and bonuses can go to increasing the cost of living (house, children, etc). We would like more house downpayment savings but we will slowly get there. We aren't at a point in our careers where we want to tie ourselves to a specific city in the greater metropolitan area that we live in yet. As some career moves happen in the next 3-5 years, we will hopefully get there. I'm also hoping for a dip in real estate prices as they are at 2007 levels in our area now days, and it's looking like the absolutely minimum we would pay right now for a house would be $500k. :(

And yes, the added benefit of saving for retirement (in your 401k, HSA, and traditional IRA) is that you reduce taxes paid now by your marginal tax rate. If you are in the federal 25% marginal tax bracket now, you should almost always take advantage of avoiding the taxes now as you will highly unlikely be taxed at a 25% marginal tax rate in retirement. You have to save up a large amount of tax-deferred savings (over 2m) to produce enough ordinary income to get into the 25% marginal tax bracket in retirement due to preferential tax treatment of social security income.

For most people, at a 15% marginal tax bracket it could be a wash. Someone early in their career who expects significant pay increases in the future may want to contribute to a roth at that time. But someone who has a stable career and doesn't expect much in the way of future raises who is in the 15% bracket is likely better off contributing to their traditional tax-deferred accounts.

For roth accounts, you pay taxes now and get tax-free withdrawal. So depending on your situation, it may be better off to put the money into your 401k that you were putting into your Roth IRA.

Billy_McSkintos:
So, for the purposes of calculating my Fed annual taxable income and tax liability can I assume:

Salary - Std deduction - (Exemptions * #of exemptions) - Pre Tax Deductions (401k/HSA)

e.g. Single with 2 additional exemptions means I would only be taxed on:

$100,000 - $6350 - ($4050 *2) - $18000 = $67550

With a total liability of $12,788 and an effective tax rate of ~13%

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