A few years later... guidance/advice? Early 30's

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_invest4life_
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A few years later... guidance/advice? Early 30's

Post by _invest4life_ » Thu Sep 12, 2019 1:20 pm

It’s been a few years since I last posted, and apart from adding into my savings account and 401k, I haven't changed my investments. So I'm a bit scared I might be making mistakes.

Emergency funds: Yes, 6-12 months

Debt: None

Tax Filing Status: Single

Tax Rate: 24% Federal, 9.3% State

State of Residence: California

Age: 31

Desired Asset allocation: 75% stocks / 25% bonds
Desired International allocation: 15-25% of stock? (Not sure to be honest…)

Portfolio:
Total savings: including cash, appx $430,000.
Total portfolio: only taxable investments and retirement accounts, appx $260,000

Image

Contributions

Annual Contributions
$1,400/month into my 401k
$0 into my investment accounts since a few years ago, I've been keeping everything in a savings account (1.85% APY)

Available funds

Available funds in my current employer’s retirement plan (ForUsAll):
Fidelity Mid Cap Index (0.05%)
Fidelity Small Cap Index Premium (0.05%)
Fidelity Total Market Index Premium (0.04%)
Schwab S&P 500 Index (0.03%)
Vanguard Short-Term Bond Index Adm (0.09%)
Vanguard Institutional Target Retire 2020 (0.09%)
Vanguard Institutional Target Retire 2025 (0.09%)
Vanguard Institutional Target Retire 2030 (0.09%)
Vanguard Institutional Target Retire 2035 (0.09%)
Vanguard Institutional Target Retire 2040 (0.09%)
Vanguard Institutional Target Retire 2045 (0.09%)
Vanguard Institutional Target Retire 2050 (0.09%)
Vanguard Institutional Target Retire 2055 (0.09%)
Vanguard Institutional Target Retire 2060 (0.09%)
Vanguard Institutional Target Retire 2065 (0.09%)
Vanguard Institutional Target Retire Income Fund (0.09%)
Vanguard Short-Term Bond Index Adm (0.07%)
Vanguard Total Bond Market Index Adm (0.05%)
Vanguard Total Intl Stock Index Admiral (0.11%)
Vanguard Treasury Money Market Investor (0.09%)


Questions:
1. Am I making any glaring mistakes? I'm worried about the fact that I'm not regularly adding money into my stocks but instead keeping it in my savings account and whether or not that's ill advised. Initially I was doing that to save for a down payment, but now I'm not sure anymore.
2. I am diversified overall… but when I look at it from a retirement vs taxable investment account, I have most of my taxable investments in international stock. Is that ok? I am also confused about how much allocation to have in international stock.
3. I haven’t rolled my retirement into one account; is there a huge benefit to moving my Fidelity 401k into Vanguard.
4. Last, but not least— I am planning to leave my job next year and take time off to travel and explore some other interest areas, and this will eat into my savings. I want to be responsible about it and not burn through too much. Have any of you done this before, and if so are there are any learnings or recommendations you can share.

If there’s anything additional I can provide that will be helpful, please let me know. Thank you, everyone!

Flyer24
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Re: A few years later... guidance/advice? Early 30's

Post by Flyer24 » Thu Sep 12, 2019 1:33 pm

Disregard. I see that you were saving for a house.
Last edited by Flyer24 on Thu Sep 12, 2019 1:50 pm, edited 1 time in total.

sharx
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Re: A few years later... guidance/advice? Early 30's

Post by sharx » Thu Sep 12, 2019 1:42 pm

Downpayment: I just went through that process myself. It was awkward for a few years having so much money in a high yield savings account and feeling eager to invest it, but when you buy you'll be glad you did. You could consider taking some risk with that money if you're okay with the possibility of renting longer in a down equity market.

International: I think the forum is all over the place on proper allocation. I do about 65/35 but some people are 100% on US. Market weighting I think would have you less than 50% US I'm not sure. I wouldn't worry about it too much. It's good you have your international allocation in taxable because you might get foreign income tax credit on it.

401k: For the pre-tax money you should keep it out of vanguard so you can utilize backdoor roth contributions without needing to pro-rate your tax based on pre-tax IRA balance. You can probably roll one of your 401ks into the other if that simplifies your life though.

traveling: I don't have great advice on your exact questions but you might want to consider doing some roth conversions if you're going to have a year of low income tax. The conversions would be taxed at lower marginal rates and even 0% for some of it if you have no other income.

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Meg77
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Re: A few years later... guidance/advice? Early 30's

Post by Meg77 » Thu Sep 12, 2019 2:04 pm

Hi there!

Overall things look pretty good, but you could definitely optimize some things.

1. I wouldn't hold bonds at all given your large cash cushion. Cash and bonds offer about the same returns and diversification risk (arguably, though cash is even safer), so until/unless you buy a house or invest most of your cash, I'd transition your bond holdings to stocks. Even if you DO want to hold bonds, I wouldn't do so in your Roth IRA. Traditionally that's the account you'll tap last for retirement spending so you want the most growth in that account - aka stock holdings. (The exception would be if you just funded a Roth and are using it as a dual savings account until you rebuild savings, but that's not your situation). I keep my small cap allocation in my Roth and use 401k for total stock/S&P 500. I don't own bonds but also have a very large cash cushion. I'm 36 for reference.

2. It's great you're maxing your 401k, but I would definitely max out your Roth for 2019. Just move $ from taxable to do this if it's not in the budget. Preferably though you're be putting 10% into retirement as a bare minimum unless you're paying off high rate debt (again, not your situation). Consider ramping it back up to 15-20% if you aren't even sure you'll buy a home any more. There's no hard and fast rule on how much to have in international. Some say zero (since many US companies have a large portion of international sales), some say 50%ish (for a true global allocation).

3. I like that you hold your international allocation in taxable - that's smart so you can benefit from the international income tax credit.

4. If you roll your 401k, I'd roll it to your current employer instead of to Vanguard since your current plan has good options with low fees. This will enable you to do Backdoor Roth IRA contributions if/when you make to much to make direct Roth contributions. Once you have high Traditional IRA balances, the tax issues make doing backdoor Roth contributions unfeasible. You could keep it at the former employer, but it gets hard to manage especially over years/decades if you accumulate multiple old 401ks.

5. The cash cushion makes sense if you're planning a sabbatical. I'm no expert there, and it's risky depending on your industry and career trajectory, but if you want to do it you can certainly afford to by the looks of it. I'd just have some kind of reentry plan and make sure to keep up with your network if possible. And/or do something in that time off you can explain and that will show well in future interviews (wrote a book, started a business, led volunteer efforts, or what have you).
"An investment in knowledge pays the best interest." - Benjamin Franklin

Topic Author
_invest4life_
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Joined: Thu Jan 09, 2014 6:23 pm

Re: A few years later... guidance/advice? Early 30's

Post by _invest4life_ » Thu Sep 12, 2019 3:00 pm

Thanks so much for your response!
sharx wrote:
Thu Sep 12, 2019 1:42 pm
Downpayment: I just went through that process myself. It was awkward for a few years having so much money in a high yield savings account and feeling eager to invest it, but when you buy you'll be glad you did. You could consider taking some risk with that money if you're okay with the possibility of renting longer in a down equity market.
Congratulations! I saw in your housing post you might have ended up investing in Vanguard California Intermediate-Term Tax-Exempt Fund Admiral Shares. Did you end up doing that / was it helpful?
sharx wrote:
Thu Sep 12, 2019 1:42 pm
401k: For the pre-tax money you should keep it out of vanguard so you can utilize backdoor roth contributions without needing to pro-rate your tax based on pre-tax IRA balance. You can probably roll one of your 401ks into the other if that simplifies your life though.
I get SO confused with roth and pre-tax and how they work when I've done both in the same account. I did that in my Fidelity account and in my current ForUsAll account. So for example, I think I did a year of post-tax, and a year of pre-tax and switched off that way. But I don't understand how that is being recorded because it's all in the same account and looks like it's part of the same group of money. When I end up withdrawing later, how is that all calculated? Are there any resources you'd point me to for help with this?

I looked up backdoor roth contributions after reading this response and it wasn't immediately obvious to me why I might want to do this. If it's not too much trouble can you explain it a bit more?

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banhbao
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Re: A few years later... guidance/advice? Early 30's

Post by banhbao » Thu Sep 12, 2019 3:25 pm

Question: Have you thought about reducing or eliminating your savings account and moving it over to your Vanguard settlement fund? We pulled the plug on that recently once we realized VMFXX return is +2% for the past 12 months. It totally beat the return we were getting from our bank. And you can set up check writing which comes in handy for that eventual down payment!

In general it seems like you have good investment choices with very low ERs. Regarding question no.3: are you being charged any "record keeping" fees in your old 401(k) that might be "hidden"? That 0.01% ER is phenomenally low, but a lot of 401(k) administrators subtract a percentage directly from your holdings every quarter and you can only see this by carefully looking at your statements. If that is the case, you could be better off moving it to a Vanguard IRA. But there is a downside, with a Trad IRA you would have problems if you tried to do a backdoor Roth in the future. Just keep that in mind.

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banhbao
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Re: A few years later... guidance/advice? Early 30's

Post by banhbao » Thu Sep 12, 2019 3:35 pm

sharx wrote:
Thu Sep 12, 2019 1:42 pm
traveling: I don't have great advice on your exact questions but you might want to consider doing some roth conversions if you're going to have a year of low income tax. The conversions would be taxed at lower marginal rates and even 0% for some of it if you have no other income.
This is a great idea, if you plan to have little to no income, at least convert up to the standard deduction! That way your future earnings are tax free.

sharx
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Re: A few years later... guidance/advice? Early 30's

Post by sharx » Thu Sep 12, 2019 5:41 pm

_invest4life_ wrote:
Thu Sep 12, 2019 3:00 pm
Thanks so much for your response!
sharx wrote:
Thu Sep 12, 2019 1:42 pm
Downpayment: I just went through that process myself. It was awkward for a few years having so much money in a high yield savings account and feeling eager to invest it, but when you buy you'll be glad you did. You could consider taking some risk with that money if you're okay with the possibility of renting longer in a down equity market.
Congratulations! I saw in your housing post you might have ended up investing in Vanguard California Intermediate-Term Tax-Exempt Fund Admiral Shares. Did you end up doing that / was it helpful?
You might have me mixed up with another poster unfortunately :happy although I am considering buying some NY muni bonds in my taxable account. I think with yields this low i'd be better off doing that than using tax advantaged space on bonds.
_invest4life_ wrote:
Thu Sep 12, 2019 3:00 pm
sharx wrote:
Thu Sep 12, 2019 1:42 pm
401k: For the pre-tax money you should keep it out of vanguard so you can utilize backdoor roth contributions without needing to pro-rate your tax based on pre-tax IRA balance. You can probably roll one of your 401ks into the other if that simplifies your life though.
I get SO confused with roth and pre-tax and how they work when I've done both in the same account. I did that in my Fidelity account and in my current ForUsAll account. So for example, I think I did a year of post-tax, and a year of pre-tax and switched off that way. But I don't understand how that is being recorded because it's all in the same account and looks like it's part of the same group of money. When I end up withdrawing later, how is that all calculated? Are there any resources you'd point me to for help with this?

I looked up backdoor roth contributions after reading this response and it wasn't immediately obvious to me why I might want to do this. If it's not too much trouble can you explain it a bit more?
I haven't done a rollover or a withdrawal so I'm not sure how pretax/post tax mix in a 401(k) is handled. So I have the same question you do.

Backdoor roth contributions are a way of contributing to a Roth IRA even when your income is above the limits. You may or may not be hitting the limit at this point in time but if you expect your income to rise over time you might want to keep your traditional IRA empty so you can take advantage of it with maximum effectiveness. The Bogleheads Wiki on it is pretty good if you haven't seen that yet.

HomeStretch
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Re: A few years later... guidance/advice? Early 30's

Post by HomeStretch » Thu Sep 12, 2019 6:22 pm

Current employer 401k - increase your pretax contribution to the max ($19k this year) versus the $16.8k you are currently contributing.

Prior employer 401k plan - rollover the pretax 401k prior balance into your current employer 401k plan, if it accepts rollovers in, for simplification. Don’t rollover the prior 401k to a traditional IRA as you may want to do a back door Roth. You noted that your prior employer 401k plan includes post-tax contributions which should be rolled over into your Roth IRA so earnings can grow tax free.

Roth IRA - I would hold equities here for highest expected growth. Hold your bonds in your 401k. Make the max Roth IRA contribution directly or, if you are over the income limit, via back door Roth. Use the cash in your savings account to max the 401k and IRA. The Roth IRA will grow tax free whereas you pay taxes on earnings in your Taxable account.

Cash - invest the excess according to your desired asset allocation. Given your high state tax rate, you will get a higher tax equivalent yield on the bulk of your cash in a Vanguard money market fund (MMF) like state-tax exempt VUSXX Treasury MMF. VUSXX’s current compound 7-day SEC yield is 2% before taking into account the state tax exemption.

Topic Author
_invest4life_
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Joined: Thu Jan 09, 2014 6:23 pm

Re: A few years later... guidance/advice? Early 30's

Post by _invest4life_ » Thu Sep 12, 2019 8:04 pm

banhbao wrote:
Thu Sep 12, 2019 3:25 pm
Question: Have you thought about reducing or eliminating your savings account and moving it over to your Vanguard settlement fund? We pulled the plug on that recently once we realized VMFXX return is +2% for the past 12 months. It totally beat the return we were getting from our bank. And you can set up check writing which comes in handy for that eventual down payment!
I have not considered this, but I will look into it. Thanks for the tip.
banhbao wrote:
Thu Sep 12, 2019 3:25 pm
In general it seems like you have good investment choices with very low ERs. Regarding question no.3: are you being charged any "record keeping" fees in your old 401(k) that might be "hidden"? That 0.01% ER is phenomenally low, but a lot of 401(k) administrators subtract a percentage directly from your holdings every quarter and you can only see this by carefully looking at your statements. If that is the case, you could be better off moving it to a Vanguard IRA. But there is a downside, with a Trad IRA you would have problems if you tried to do a backdoor Roth in the future. Just keep that in mind.
That's a great question, and I will have to look into the statements. I contributed a mix of pre and post tax to my Fidelity 401k, so I guess I will need to contact Fidelity or Vanguard to figure out which funds will rollover to Roth IRA vs. which I need to do a backdoor roth conversion? (If this paragraph doesn't make sense, it's because I don't fully understand the backdoor roth or rollovers yet. I have some homework to do tomorrow.)

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_invest4life_
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Re: A few years later... guidance/advice? Early 30's

Post by _invest4life_ » Thu Sep 12, 2019 8:11 pm

Meg77 wrote:
Thu Sep 12, 2019 2:04 pm
1. I wouldn't hold bonds at all given your large cash cushion. Cash and bonds offer about the same returns and diversification risk (arguably, though cash is even safer), so until/unless you buy a house or invest most of your cash, I'd transition your bond holdings to stocks. Even if you DO want to hold bonds, I wouldn't do so in your Roth IRA. Traditionally that's the account you'll tap last for retirement spending so you want the most growth in that account - aka stock holdings. (The exception would be if you just funded a Roth and are using it as a dual savings account until you rebuild savings, but that's not your situation). I keep my small cap allocation in my Roth and use 401k for total stock/S&P 500. I don't own bonds but also have a very large cash cushion. I'm 36 for reference.
This makes so much sense and I feel like an idiot that I've had bonds in my retirement account for 3+ years now.
Meg77 wrote:
Thu Sep 12, 2019 2:04 pm
2. It's great you're maxing your 401k, but I would definitely max out your Roth for 2019. Just move $ from taxable to do this if it's not in the budget. Preferably though you're be putting 10% into retirement as a bare minimum unless you're paying off high rate debt (again, not your situation). Consider ramping it back up to 15-20% if you aren't even sure you'll buy a home any more.
Ok, I'll make sure to max it out.
Meg77 wrote:
Thu Sep 12, 2019 2:04 pm
3. I like that you hold your international allocation in taxable - that's smart so you can benefit from the international income tax credit.
Thanks, although I believe I've had to pay for a premium edition of TurboTax each year just to handle the international income tax credit, which ends up making things slightly more expensive than the credit itself. It's annoyed me every year... :oops:
Meg77 wrote:
Thu Sep 12, 2019 2:04 pm
4. If you roll your 401k, I'd roll it to your current employer instead of to Vanguard since your current plan has good options with low fees. This will enable you to do Backdoor Roth IRA contributions if/when you make to much to make direct Roth contributions. Once you have high Traditional IRA balances, the tax issues make doing backdoor Roth contributions unfeasible. You could keep it at the former employer, but it gets hard to manage especially over years/decades if you accumulate multiple old 401ks.
Thank you. I need to read more about the traditional IRA/backdoor Roth situation. I don't know why it's so confusing to me :(
Meg77 wrote:
Thu Sep 12, 2019 2:04 pm
5. The cash cushion makes sense if you're planning a sabbatical. I'm no expert there, and it's risky depending on your industry and career trajectory, but if you want to do it you can certainly afford to by the looks of it. I'd just have some kind of reentry plan and make sure to keep up with your network if possible. And/or do something in that time off you can explain and that will show well in future interviews (wrote a book, started a business, led volunteer efforts, or what have you).
I've been thinking along the same lines. Thank you so much, Meg!

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_invest4life_
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Re: A few years later... guidance/advice? Early 30's

Post by _invest4life_ » Fri Sep 13, 2019 12:05 am

Meg77 wrote:
Thu Sep 12, 2019 2:04 pm
4. If you roll your 401k, I'd roll it to your current employer instead of to Vanguard since your current plan has good options with low fees. This will enable you to do Backdoor Roth IRA contributions if/when you make to much to make direct Roth contributions. Once you have high Traditional IRA balances, the tax issues make doing backdoor Roth contributions unfeasible. You could keep it at the former employer, but it gets hard to manage especially over years/decades if you accumulate multiple old 401ks.
One more question: should I be doing roth contributions to my current 401k? I've been doing only traditional, pre-tax contributions this year. But most people in this thread are suggesting I do a Roth IRA... so I'm wondering if the same applies to my 401k (and why or why not)?

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_invest4life_
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Re: A few years later... guidance/advice? Early 30's

Post by _invest4life_ » Fri Sep 13, 2019 12:06 am

HomeStretch wrote:
Thu Sep 12, 2019 6:22 pm
...
Thank you for your clear and straightforward advice. I really appreciate it!

sharx
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Re: A few years later... guidance/advice? Early 30's

Post by sharx » Fri Sep 13, 2019 8:25 am

_invest4life_ wrote:
Fri Sep 13, 2019 12:05 am
Meg77 wrote:
Thu Sep 12, 2019 2:04 pm
4. If you roll your 401k, I'd roll it to your current employer instead of to Vanguard since your current plan has good options with low fees. This will enable you to do Backdoor Roth IRA contributions if/when you make to much to make direct Roth contributions. Once you have high Traditional IRA balances, the tax issues make doing backdoor Roth contributions unfeasible. You could keep it at the former employer, but it gets hard to manage especially over years/decades if you accumulate multiple old 401ks.
One more question: should I be doing roth contributions to my current 401k? I've been doing only traditional, pre-tax contributions this year. But most people in this thread are suggesting I do a Roth IRA... so I'm wondering if the same applies to my 401k (and why or why not)?
The suggestions for Roth IRA should not be interpreted as nudging you to a Roth 401(k) as well. The reason Roth IRAs are standard around here is because the income limits to claim the tax deduction for contributing to a traditional IRA are very low ($63k/yr for a single person). I believe you're above that limit in your bracket so the ONLY way you can contribute meaningfully to an IRA is to do a Roth (backdoor or otherwise depending on your income, but the net result is the same).

Whether traditional or roth 401(k) makes sense is an entirely different matter and it's hard to know which option will come out ahead for you because it depends on future tax rates and withdrawal rates in retirement. There are plenty of threads and wiki pages on that subject. If you think your tax rate in retirement will be lower than it is now then traditional generally makes sense, otherwise roth.

HomeStretch
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Re: A few years later... guidance/advice? Early 30's

Post by HomeStretch » Fri Sep 13, 2019 8:46 am

OP - if you think your marginal tax bracket in retirement will be higher than your current brackets (24%/9.3%), then you should make all Roth contributions. If less, then pretax contributions now.

My guess is given your current tax brackets, pretax 401k makes sense now. Then, even if your are eligible to make pretax IRA contributions, consider making Roth IRA contributions for tax diversification. If you are not eligible to make a direct Roth IRA contribution and you can save more after maxing your 401k, then saving via a back door Roth (if no pro rata rule issues) makes more sense than a Taxable account as your Roth IRA earnings are tax free while earnings in a Taxable account are taxed.

Check the wiki and read up on back door Roth, pretax v Roth, tax efficient asset location, etc. so you can more thoroughly understand these concepts as it will be useful knowledge throughout your investing career.

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Meg77
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Re: A few years later... guidance/advice? Early 30's

Post by Meg77 » Mon Sep 16, 2019 12:30 pm

sharx wrote:
Fri Sep 13, 2019 8:25 am
_invest4life_ wrote:
Fri Sep 13, 2019 12:05 am
Meg77 wrote:
Thu Sep 12, 2019 2:04 pm
4. If you roll your 401k, I'd roll it to your current employer instead of to Vanguard since your current plan has good options with low fees. This will enable you to do Backdoor Roth IRA contributions if/when you make to much to make direct Roth contributions. Once you have high Traditional IRA balances, the tax issues make doing backdoor Roth contributions unfeasible. You could keep it at the former employer, but it gets hard to manage especially over years/decades if you accumulate multiple old 401ks.
One more question: should I be doing roth contributions to my current 401k? I've been doing only traditional, pre-tax contributions this year. But most people in this thread are suggesting I do a Roth IRA... so I'm wondering if the same applies to my 401k (and why or why not)?
The suggestions for Roth IRA should not be interpreted as nudging you to a Roth 401(k) as well. The reason Roth IRAs are standard around here is because the income limits to claim the tax deduction for contributing to a traditional IRA are very low ($63k/yr for a single person). I believe you're above that limit in your bracket so the ONLY way you can contribute meaningfully to an IRA is to do a Roth (backdoor or otherwise depending on your income, but the net result is the same).

Whether traditional or roth 401(k) makes sense is an entirely different matter and it's hard to know which option will come out ahead for you because it depends on future tax rates and withdrawal rates in retirement. There are plenty of threads and wiki pages on that subject. If you think your tax rate in retirement will be lower than it is now then traditional generally makes sense, otherwise roth.
I agree with the above. Roth IRAs are kind of a no-brainer since most people (on this forum at least) make too much to deduct a Traditional IRA contribution. The income limit for a single person with access to a workplace retirement plan is $74K this year and the deduction starts to phase out at $64K. Since you're in the 24% bracket I know you make more than that, so your IRA option is pretty much only Roth (or backdoor Roth, if you make too much to contribute directly to a Roth IRA).

Given your age it's wise to consider putting at least some portion of your 401k contribution into Roth as opposed to Traditional. I did roth 401k contributions until I got married and went up into the 30%+ tax bracket range. I still wonder if I should be doing Roth. It just gives you so much flexibility in retirement with regard to income. Lots of retirees have most/all their assets in Traditional accounts which means all their distributions are fully taxable as income. It can really jack up your tax bracket. Of course none of us know where tax rates will be in 30 years though, so the usual advice is that it's best to have a bit of both.
"An investment in knowledge pays the best interest." - Benjamin Franklin

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