25 y/o beginning of career

[alanaspapa]

1) $85K salary (+8% bonus) as of 2023 LCoL
2) 401K fully matched (my 6% gets me 4%)
3) HSA just started but it’s $3850 w/ next year being $4100
4) $30K in investments
5) Bought new (used) car in full
6) in my MBA program getting paid in full by work
7) No credit card debt with 6y history and a high credit limit.
8) Rent+Util is $700/mo
9) 3 months of savings
10) Churning credit cards right now

I get that i’m doing alright, but I’m lacking knowledge on Roth’s and whatever the mega-backdoor is. Can I get some insight ?

 

[nae64]

@alanaspapa The Roth IRA income limits for 2023 are less than $153,000 for single tax filers, and less than $228,000 for those married, and filing jointly.

So you can definitely open a Roth IRA (Vanguard, Fidelity, and Schwab are great for brokerages) and invest $6500 for 2023. Once you put money in there, you can allocate the money to whatever stocks/mutual funds you want.

Once you fully find your Roth IRA, people recommend then fully funding your 401k (22,500 for 2023) if you can financially do so. This matters now when you’re starting your career. Later, you may need to decrease because life gets in the way (save for house, marriage, kids, etc). The more money you save when you’re younger, it’ll grow for 40 years and you’ll be fine if you can’t contribute as much later on.

You’re in great shape so far! Best of luck with your MBA.

 

[alanaspapa]

@nae64 Thank you for giving me info! I’ll have to do some research but this clears up some cloudiness.

I’m engineering undergrad so MBA is not too bad.

 

[glendajoanne]

@alanaspapa I would fully fund your 401K.

Get used to not having that cash in your check now. You can always decrease the amount later, but your gains will grow more and more each year.

 

[dannleavitt]

@alanaspapa

1. Awesome, congrats!
2. All should be contributed to Roth 401k on your part (I think your company's portion is tax-deferred) at your salary level until which time your salary is high enough that puts you into higher tax bracket like 24%ish (or you become double-income, aka better half) that you can use the tax credit from contributing to tax-deferred. Also, it should be all equity index funds if your 401k has it.
3. Awesome since you are young! HSA has a triple tax-benefits!
4. Awesome again.
5. Just remember that the car only use is to get you from point A to point B. No need of fancy smancy.
6. Triple awesome! Don't forget to continue to take on challenges and upward movements
7. Nice!
8. Nice!
9. Get it to 6 mos. With the job market slowing down, you may need the additional buffer!
10. As long as you can pay off all cc every month.
    
    No need to worry about mega backdoor Roth right now since you don't have a lot (if any) tax-deferred 401k or IRA. You are in a great spot with 1-10, continue forward. One thing I don't see is a mention of a budget. Also, look into learning more about personal finance. If you still have extra money, contribute the max $6500 to Roth IRA.The wiki on this sub is excellent resource as well! Good luck my young friend.

 

[kyle713]

@alanaspapa Regarding the mags backdoor Roth rollover, it is difficult to get this to work in most cases. Your 401(k) plan must allow for additional after tax contributions (most plans don’t allow for this) if it does allow for this then it is subject to testing. Considering you are not an highly compensated employee (makes more than $150k yr) that works in your favor but to maximize the benefit you would need to put a considerably larger amount into 401(k) plan.

Considering your age and income it may be good to do some kind of split between pretax and Roth salary deferrals into your 401(k). The maximum for 2023 is $22,500. Many 401(k) plans allow for you to take a loan of 50% of your vested account balance up to $50k from the plan. If your plan allows for this that’s a great way to have money invested in the market but available if needed. You do pay interest on 401(k) loans but you pay the interest back to yourself.

 

[alanaspapa]

@kyle713 Hmm i’ll have to look into my 401(k) plan but looking into upping contributions and the loan aspect actually may be very beneficial. Thank you for the info !