New to financial planning, I wasted 8 years of my 401K employment matching only 3%. Is it too late for me (30 F)?

[shanewp1988]

Hi everyone, I am new to financial planning, but I really want to be on the right track for retirement and overall be financially savvy. For the first 8 years of my employment, I was making roughly $135,000/year. During that time I had only contributed 3% of my company match 3%. I also had taken out a $19,000 loan from my 401k to help fund a down payment on a home. Needless to say, all dumb mistakes on my part. I now currently have approximately $49,000 in my 401k. I have a house with a $3500.00 mortgage/month (utilities, property tax, and HOA all included), and an average of $4,000.00 in credit card spending a month (card is used for all bills/ subscriptions/ car payment). I recently got a new job that pays me now $210,000 and I have set my contributions to 15% with a 4% company match. I get taxed just about 25-30% so my after tax income comes out to $9,500.00/ a month. I have also recently transferred all of my savings ($30,000) into a HYSA instead of a measly credit union savings and try to put away $1,000 a month for emergency purposes. I plan to also start contributing to a traditional IRA account next year, but this year I am saving up for a wedding (saving up an additional $800/a month in addition to the emergency savings account). I don’t have any other investments set up, and I feel like I’m trying to catch up from the mistakes I made when I was younger. I only have my school debt of $30,000 but that will be completely reimbursed by my employer. How can I better set myself up for success and maximize my savings?

 

[williams36]

@shanewp1988 You make a good income, so it’s not too late. As the other posted stated, max out your 401k and try to back door Roth as much as you can.

I actually have a pretty similar situation to you, with the same base pay and almost the same expenses. If it’s helpful, annually I am able to max my 401k, save ~$25k back door Roth, and save ~$30k towards a down payment (still renting unfortunately).

 

[shanewp1988]

@williams36 That’s super helpful to hear! And sorry I’m still learning my terminology with things- but with IRAs either roth or traditional, isn’t the max contribution only $6500?

 

[allroads]

@shanewp1988 Do you have access to an HSA? If so, max that out before IRA.

 

[shanewp1988]

@allroads I wasn’t previously offered that at my last employer, but my current one now provides it- I will definitely look into it!

 

[allroads]

@shanewp1988 Note: you’ll need to elect a high-deductible health plan to participate.

Use the HSA like retirement fund; don’t pay current healthcare costs with it. Use already-taxed dollars for that.

 

[christie12]

@allroads Wouldn't I want to use my HSA since it's tax free regardless if it's now or when I retire? ( paid into an HSA for a few years without knowing and don't know what to do with it now lol)

 

[picklerelations]

@christie12 the idea is that you can invest the HSA into the market, it grows, and the. you can take that money out tax free a couple decades in the future. it gives you more “free money” that way

 

[thelearner92]

@allroads But save your receipts. You can always cash out of HSA the amount you already spent with after tax dollars.

 

[aryehyehudah]

@shanewp1988 Good rule of thumb for HSA, if the medical need it Able to be paid within the amount of money in your checking account or with small damage to emergency fund. Then pay for it out of pocket.

If this isn’t the case then at that point it is a reasonable choice to use the HSA to cover the bill.

Retirement is cool but debt is worse imo

Also Ik most medical debt is interest free but it always is situation to situation.

 

[blueberry25]

@shanewp1988 No better investment account than an HSA. Quadruple tax advantaged.

1. Its FICA pretax...401k and IRA cant do that.
2. Its fed/state pretax (401k/IRA can do that
3. Its tax sheltered growth which all retirement accounts do
4. Its tax free with qualified withdrawls like a Roth

Most say its triple tax advabtaged but I say quadruple as I like to emphasis its FICA free too.

and...added bonus...at 65 you can basically use it like a pretax account and withdraw from it just paying income tax even if it isnt medical expenses with no penalty.

Also there is no time limit on reimbursement. Meaning if you have a $500 medical bill at age 30 you can reimburse yourself $500 right then OR you could let it sit in an investment for 35 years THEN reimburse yourself $500.

It isnt quite as good as an account that eas both pretax and Roth at the same time (which doesnt exist)...but its pretty close

If you can get one definately get one.

 

[williams36]

@shanewp1988 It is for traditional Roth contributions. However, like me, you will be unable to contribute to Roth directly due to income limitations. Fortunately, you can save up to $43,500 after tax and are able to “back door” that money from a traditional IRA to a Roth IRA.

 

[lisneige]

@williams36 You can still only contribute up to $6,500 into an IRA account in 2023. The $43,500 is the mega back door Roth and that has to go into your 401k as post tax contributions after maxing out the $22,500 of the 401k. The other thing to note is if you get an employer match you need to take that out of the $43,500

https://www.nerdwallet.com/article/investing/mega-backdoor-roths-work

 

[williams36]

@lisneige I have done this for years through my IRA

 

[lisneige]

@williams36 Then what you are doing is illegal

 

[anederson]

@williams36 “Back door Roth” what does this mean?

 

[lisneige]

@anederson The are income limits to contribute directly to a Roth IRA. There are also income limits to take the tax deduction for regular IRA contributions. But the law allows a person to contribute to an IRA and not take the deduction and then roll that money into a Roth IRA.

If there is already money in the IRA that you took the deduction on, then you need to follow the prorata rule where they’re going to take a cut of taxes based on the proportion of IRA funds that are taxed vs tax deducted

 

[csmatyi]

@shanewp1988 No I didn't have a dime saved until I was like 32.

You're way ahead and I'm shooting for 800k-1mil, which isn't as much as i'd like but im doing the best I can.

 

[njp]

@shanewp1988 Beauty of hitting 30: You get to realize the mistakes of your 20s and you still have plenty of time to correct them.

It sounds to me like the biggest thing you need is a financial plan. Read some financial literacy books, and maybe give The Money Guys on YouTube a look.

 

[thangvi96]

@njp Great you are now taking steps to do this! Get a realistic budget. It doesn’t have to be detailed (Pay yourself - saving - first, then monthly fixed expenses, and then the rest , is simple). Watch out for spending. Maybe put some guidelines in place for the large purchases.

I Was going to share some podcasts - money guy, her money by jean chatzky , stacking Benjamin’s .

Visit personal finance and financial independence subreddits. See any of their wiki.

Have a good day! Mid America Mom