Savings Goals

[ashley2014]

Hello all,

I'm new to the boards and appreciate any advice you have for me.

As of April 1st of this year, I will be debt free!

As of then, I will have saved the following:

$12K in emergency fund (6 months expenses)
$6500 in HSA (maxed out for the year)
$7000 in other savings accounts (some set aside for car repairs, vacation, etc)

I will have about $2000/month to add save.
DH currently has $800 in a SB Roth Ira,
I have $700 in a Roth IRA
I have about $6000 in a 401K from an old job.

I would like to build up my emergency fund and retirement accounts. What should I do with the old 401K from my previous job? (We don't have retirement accounts through current employers). I do still earn interest on this account.

I'm thinking $1K in emergency fund and the other 1K in retirement accounts through the end of this year. Sound ok?

[lorraineb]

If your current emergency fund is 6 moths of expenses, I would concentrate on the retirement accounts.

[mholl95]

Hi Ashley...Congrats on becoming debt free! I would suggest rolling over the 401k amount into a traditional IRA. This way the tax implications will not change, but you'll have a ton more options as far as how and where you can invest your money. Other than that, I would do max contributions to the Roths.

There's really nothing more to do with the emergency fund. In fact, I think you have too much in the fund if all of that cash is basically sitting in a savings account. But I have a different view about emergency funds than most people. I think if you're debt free, there's no need to have huge piles of cash sitting around and not working for you. But I don't want to get you off your path.

Finally, you may want to also take a step back and take a big picture look at your finances. Here are some of the pertinent questions?

1. How much do you want to have saved up when you reach retirement age? (There are calculators online that can help with this. But once you have this number, you'll know how much to start putting aside each month.)

2. Do you have kids? (If so, and you anticipate that they will attend college, you may want to start looking into 529 plans. In addition, you should protect your family by looking into term life insurance.)

3. Do you plan on buying a home or making a major acquisition in the future? (If so, you should determine how much you will need and start saving for it.)


Cheers,
Michael

[ashley2014]

If I were to roll the 401K into a traditional IRA would I be hit with any taxes or anything?

Also, with the ira's what is the limit for married couples? It looks like it's $5500 total per year for both of us is that right? I would like to start maxing this out every year along with my HSA (which I think I can use as a retirement account when the time comes, right?)

I do have 2 kids, but my inlaws are funding their colleges

We would like to buy a house one day, but I don't see it happening in the near future as we have a really good deal at our place now. How should we save for this? Just normal savings account?

[mholl95]

Hi Ashley...congrats, you lucky dog for having in-laws that will pick up the kids college costs! :-)

Now with regard to rolling over the 401k to a traditional IRA, your taxes will still be deferred if you do it correctly. The best way to handle it is to have the 401k money transferred directly into the traditional IRA. Don't ask for a check to be sent to you.

For peace of mind, just talk to the parties involved (401k plan holder and Traditional IRA company representative) and they will coordinate to make everything go smoothly. It's pretty simple. But if something does go wrong and you're sent a check, no need to panic. Just make sure to get that money into the Traditional IRA within 60 days. Also, make sure no money was held back by the 401k plan holder for taxes.

With regard to contributing to the Roth, the $5500 is correct for 2014. I assume you're under age 50, otherwise it's $6500.

And both spouses can each have a Roth and contribute the maximum if filing jointly, as long as both of you earn an income (of at least $5500 each) and your joint modified adjusted gross income doesn't exceed $181,000. The rules are a little different if your tax filing status is different, income is higher, or one spouse doesn't work.

And as far as buying a home years down the road, it could be just a matter of having a standalone mutual fund or two that you only contribute house buying money to. But I wouldn't tie up thousands of dollars in a simple savings account. Dollar cost averaging into a mutual fund or two should suffice. The mutual fund(s) can be as aggressive or conservative as you want, depending on when you think you might need the money.

Cheers
Michael

[Eagle]

I'm thinking $1K in emergency fund and the other 1K in retirement accounts through the end of this year. Sound ok?

Congrats on becoming debt free! That’s great too that your in-laws are going to pay for kids college.

I would agree with others that 6 months of an e-fund is probably sufficient. I’d focus on increasing your investments. Max out your Roth IRA (5.5k each) and perhaps open up a mutual fund?

We had 3 mutual funds : UBS, Fidelity, Vanguard. We cashed in 2 of them in 2012. We used a good portion of one for finishing my wife’s education and the rest for a down payment on a house.

[ashley2014]

Thanks for the advice!

A few more questions:

On the IRA's is it a max of $5500 per person and IRA type? So $5500 my roth, $5500 tradtional and the same for my husband or $5500 per person?

Also, a friend was telling me that we could pull money out of the IRA's to purchase a house without any penalties, is that right?

[mholl95]

Yes, it's $5500 per type, per person. But just to clarify....the key is that each of you can't exceed the $5500 no matter how you mix and match. For example, you could open one Roth and one Traditional IRA for yourself as long as you don't exceed a grand total of $5500 for the year.

As far as pulling money out of an IRA for a home, this is allowed but there are limitations. For example, the Roth rules state that you can withdraw up to $10,000 if you're a first time home buyer. A first time home buyer is someone who has not owned or had an ownership interest in a residence within the last couple of years.

In addition, the $10,000 is a lifetime limit. What this means is that you can be a first time home buyer multiple times in your life. There simply has to be at least a two year gap where you didn't own a home.

And the $10k works likes this. Let's say that you buy your first home in 3 years and decide to withdraw $7000 from your Roth for the down payment. That leaves another $3000 that can be used for future downpayments if you sell the home and later on in your life become a first time home buyer again.

I hope that makes sense...lol

(Note: Keep one thing in mind for your Roth in particular. You can withdraw your personal contributions to it anytime without penalty. The only time an issue could arise is if you withdraw profits that your investments have earned.)

[Petunia 100]

Yes, it's $5500 per type, per person. But just to clarify....the key is that each of you can't exceed the $5500 no matter how you mix and match. For example, you could open one Roth and one Traditional IRA for yourself as long as you don't exceed a grand total of $5500 for the year.

As far as pulling money out of an IRA for a home, this is allowed but there are limitations. For example, the Roth rules state that you can withdraw up to $10,000 if you're a first time home buyer. A first time home buyer is someone who has not owned or had an ownership interest in a residence within the last couple of years.

In addition, the $10,000 is a lifetime limit. What this means is that you can be a first time home buyer multiple times in your life. There simply has to be at least a two year gap where you didn't own a home.

And the $10k works likes this. Let's say that you buy your first home in 3 years and decide to withdraw $7000 from your Roth for the down payment. That leaves another $3000 that can be used for future downpayments if you sell the home and later on in your life become a first time home buyer again.

I hope that makes sense...lol

(Note: Keep one thing in mind for your Roth in particular. You can withdraw your personal contributions to it anytime without penalty. The only time an issue could arise is if you withdraw profits that your investments have earned.)

You're getting your IRA withdrawal rules mixed up.

Roth contributions are ALWAYS available to you tax and penalty free, for any purpose. If you want to withdraw earnings to use for a first time home purchase, your Roth must be at least 5 years old or the penalty applies.

Traditional IRAs allow penalty free (but not tax free)withdrawals up to 10k for first-time home purchase.

Please see IRS Publication 590 for more details. http://www.irs.gov/publications/p590/index.html

[snafu]

Ashley, good on you for clearing debt, and paying off CCs. You haven't mentioned Insurance and I'm hoping it's straight up term. If you have patience for a quick read, I suggest The Automatic Millionaire [Bach] available at most libraries or used on-line.

Buying a home: I thought Suze Orman set out a clear criteria for home purchase. It isn't suitable for everyone and needs important financial measurements. 1st, it's important to measure the cost of buying against rental costs. These include mortgage payments, interest rates, property tax, HOA, utilities, Insurance and 1% for maintenance. Mortgage insurance is incredibly expensive and can only be avoided if you can save 20% minimum for a down payment. Rule of thumb.. costs listed should not exceed 28% of your income.

Retirement Accounts: Retirement savings will be needed for the senior years, now estimated at 35 plus years. Not a good idea to borrow for housing or losing sums to taxation or worse still penalty. Retirement savings need to work for you as efficiently as possible with the level of risk that allows you to sleep at night. While the stock market moves up and down like a rollercoaster it needs time to work for you. You will need to invest a little time to understand the basics. You have to know what you hold in your existing 401K [previous employer] and your ROTHS. You need to know fees, costs and Management Expense Ratio [MER]. You'll often see recommendations for Vanguard Index Fund because it's so successful. At this time cash is not keeping up with inflation so from my viewpoint it's an extremely risky holding.

[mholl95]

Hi Petunia...Actually in my post, I did say that personal Roth contributions are always available without penalty. I left out the standard tax part because I presume people know that personal contributions to their Roths have already been taxed. And I did say that an issue could arise when withdrawing earnings. I didn't mention the 5 year rule, but what I said is accurate. I just cut off how far I wanted to go down the rat hole. I never addressed Traditional IRA withdrawals since I was just giving a quick example to show the limits. Cheers.