bbqcoder
Recycles dryer sheets
Yes, she has a small amount of student loans. Around $25K to have some skin in the game as we paid for most of their private college education. No, she's not on a IBR plan and probably doesn't qualify for one.One more consideration - does she have student loans? If yes, is she using any of the IBR plans?
Whole thing with those plans are in limbo right now, but hopefully will be sorted out in 2-3 months. Just in case if she in any of those plans, going full on t401k will significantly reduce her monthly payments next year.
I would do 100% pre-tax 401k, HSA, backdoor Roth, and taxable in that order. This is with the mindset that she should retire early and then start Roth conversions in a lower tax bracket.
I don't understand the big push for Roth. It is all about taxes now or taxes later. There is nothing magical about a Roth. Your DD is in a decently high tax bracket now.
Her employer does offer an HSA and I'll encourage her to sign up for it while she's young & healthy. The nice thing about having a mix of Roth & non-roth accounts is that it gives you flexibility on withdrawals in the future.
Agreed. Her employer will match up to 6% of her contributions, dollar for dollar. They do automatically enroll all employees in the retirement plans at 6% contribution, increasing it by 1% each year. I'll encourage her to start with a higher amount than 6%.Employers don't provide any recommendations.. they just inform employees of their options.
Based on my situation, I don't see how she'll end up in a lower tax bracket at retirement. I'm a few years away from retirement and I can see that I will be in the 24% tax bracket based on my current assets and the 4% rule.Now that I'm back at my laptop I just wanted to provide some details.
Let's say someone is going to contribute $23,500 to either t401k or Roth 401k. OP's DD is well into the 22% tax bracket and slightly in th 24% tax bracket, so I'll use 22% to keep it simple. Also let's assume that contributions grow 10x over the next 30 years (that's about 8% annually) and that she is in the 22% tax bracket in retirement.
If she goes with Roth those $23,500 of contributions will grow to be $235,000 in 30 years that can be withdrawn and spent.
If she goes with the traditional the same thing, her $23,500 of contributions will grow the t401k to $235,000 and when she withdraws that then the tax will be $51,700. However, the $23,500 of tIRA contributions will result in a $5,170 tax benefit which will also grow over 30 years to $51,700 that can be used to pay the tax, leaving her $235,000 to spend ($235,000 t401k + $51,700 taxable account - $51,700 taxes paid).
So if her tax bracket is unchenged, either way she ends up the same there is no benefit from compounding.
The real benefit will come if it ends up that in retirement she is in the 12% tax bracket. In that case, the tax on the t401k withdrawal is only $28,300 and she comes out $23,400 ahead.
Some will pick a nit and say that the $51,700 of tax savings will not grow tax-free. There could be some leakage there unless she invests in municipal bonds or low/no dividend equities or something else with no-tax growth but at most the leakage is $11,374 if she is continually in the 22% tax bracket.