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What should my next step be?

I apologize in advance for the length of the post. I consider myself to be in a good standing, but I'm always looking for ways to improve.

Student loans:

I graduated college in June 2014 with 32k in student loans. After graduation, I immediately started working. I am currently living with my parents. I currently only have 8.5k left on my student loans (at 3.4%)

Savings:

I have 30k in my 401k through work and 20k in my personal Roth IRA. I'm doing above my company match: putting in 22% to max out my $18,000 limit for the year. I am also contributing $5500 to my Roth IRA each year.

Credit Cards:

I have two credit cards: - Discover: 5% cash back rotational, else 1% cash back. I have a $4300 credit limit. - CapitalOne Quicksilver: 1.5% cash back. I have a $10000 credit limit.

Neither credit card has an annual fee. I do not have any credit card debit.

Current plan:

After understanding more about me, this is my current plan: 1) pay off my student loans ASAP. 2) keep putting money in my 401k/Roth IRA until I have ~100k between my bank account and Roth IRA so that I can buy a house.

When a buy a house, I would withdraw as much money as possible from my Roth IRA and use it as a down payment on the house. At that point, I would continue to add money to my Roth IRA until I have 6 months worth of my salary. I would then stop contributing to my Roth IRA and only contribute to my 401k (my Roth IRA would be my emergency money - everyone should have an emergency fund that's roughly 6 months worth of expenses).

My overall questions are:

1) Should I abandon my Roth IRA once I buy a house and saved 6 months worth of expenses and put money I would have put in my Roth into my 401k instead? If I have $10k that I can apply each year to savings, should it all go to 401k or split between? What are the benefits to each?

2) Should I get additional credit cards? Is getting additional cards just for the reward bonuses worth it? Would the more inquires reduce my credit score that much?

3) Does anyone have any recommendations on anything? Something I should take a look at that might be beneficial? For example, if you haven't heard of a program called Quicken, take a look. Its makes it easy to consolidate you bank accounts and finances so you just have to use one program to see all of your accounts.

Thanks for taking the time to read the post!

  • 5
    I think you should edit your question to remove the parts where you explain things like what a Roth IRA is and what its advantages are. If you already know that information, you don't need to ask about it. – BrenBarn Mar 5 '15 at 19:44
  • You are doing a decent job of planning, but when it comes to retirement accounts you need to keep the end goal in mind. At what age do you expect to retire? How much income do you need from your investments during retirement? How long do you estimate you will live (i.e. be in retirement)? – JohnFx Mar 5 '15 at 21:01
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You are kicking butt and taking names, especially compared to most people in your age bracket. I wish I'd had the opportunity (and the sense) to live rent-free and max out my 401(k) when I was 23. Keep doing what you're doing and you'll be able to pull off a Mr. Money Mustache style retirement.

I think you might have misunderstood the question and answer nature of this site. Typically, questions aren't laden with answers, explanations, and suggestions; it should just be the question! You can always ask the question and answer it yourself down below, as some SEers do.

To answer your questions towards the end of the post:

  1. You have to weigh the pros of being debt-free at mortgage application time against the cons of having a smaller down payment. When they pore over your finances they typically compare your income to your expenses, and a mandatory monthly student loan payment will count against you, lowering the total amount you can borrow. However, a larger down payment will likely get you a better interest rate, and obviously the more you put down the less you'll have to borrow. Since you've already knocked down your student loans by 75% and you're apparently very disciplined, I would pay them off and then keep saving!
  2. As I've mentioned in another comment, pre-tax money grows faster than post-tax money, simply because there's more of it, so yes. However, if you're already maxing out your 401(k), it's kind of a moot point, no? You'll have to find other savings and investment vehicles for your overflow, whether that be a CD ladder or a brokerage account or continuing to use your Roth IRA until you reach the income limit.
  3. This is a matter of preference and circumstance. It doesn't sound like you spend a lot of money—LOL—so getting a bunch of cards to maximize your cash back rewards might be overkill, especially since it does impact your credit and some of those cards charge annual fees. Other people should avoid having too many credit cards because they can't stop themselves from using them.
  4. The best advice I can give is to keep reading other questions and answers on this site. I've learned a great deal since I started participating last year. Also, these folks frequently post things that will lead you to other sites and sources as information as well.

Good luck, and again, keep doing what you're doing!

  • Very thorough response, that helped a lot! I will probably finish off my student loans then. I didn't actually think about it, but you are correct, since it is pretax money, there is more of it. Sorry if I wasn't clear: my point was if/when I cant max out my 401k and contribute to my roth, which is better? But from your response, it seems like the 401k is the way to go. And I'll have to keep looking on this site :) – CollegeGrad14 Mar 6 '15 at 0:10
  • Happy to help. And yes, I think what I said about 401(k) money growing faster is true, but since I said it I'm starting to wonder. Hopefully one of the gurus will come by and confirm or correct my assertion. – mwp Mar 6 '15 at 0:11
  • Oh, I think the standard advice is to 1. contribute the minimum to your 401(k) to maximize the match, then 2. contribute to your Roth IRA up to the limit, and then 3. increase your 401(k) contributions up to the limit. – mwp Mar 6 '15 at 0:16
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You seem to be treating your Roth IRA as a sort of savings account for use in emergency situations. I would use a savings account for savings as withdrawing money from an IRA will have penalties under various circumstances (more than contributions, Roth IRA less than 5 years old, more than $10k for a down payment).

Also, you mention folding your IRA into your 401k so that it will "grow faster". However, this will not have that effect. Imagine you have $30k in an IRA and $100k in a 401k and you are averaging a return of 8% / year on each. This will be identical to having a single 401k with $130k and an 8% / year return.

This is not one of your questions, but employer matches are not counted in the 401k contribution limit. If your 22% calculation of your salary includes the match to reach the max contribution, you can still contribute more.

  • Removal of contributions less than 5 years old have a penalty for a Roth only for conversions, not regular contributions. – jmg229 Mar 5 '15 at 21:25
  • @jmg229 Thanks. I clarified that it is if your Roth IRA is less than 5 years old. – Eric Mar 5 '15 at 21:51
  • It's actually ok to withdraw contributions only immediately, though in a Roth IRA. See wsj.com/articles/SB125754645803734655 – jmg229 Mar 5 '15 at 22:49
  • The pre-tax money in the 401(k) will grow faster than the post-tax money in the Roth, simply because there will be more of it. – mwp Mar 5 '15 at 23:40
  • Sorry I should have clarified, my 22% does not include my company match. And you are correct, it doesn't "grow faster", I was mistaken. I guess that means that I will continue to contribute to both my roth and 401k to ensure diversity? – CollegeGrad14 Mar 5 '15 at 23:52

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