Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

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MikesChevelle
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Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by MikesChevelle » Mon Feb 12, 2018 10:03 am

Have a couple part question.

How does one decide whether you should have 3 or 6 months of an emergency fund? I know that more is better....

My initial plan is to get quickly to 3 months and then slowly get to 6 months.

My big question is should I lower my 401k contribution from 14% down to my employer match for a few months get get a good chunk of the 3 months saved up?

We are a family of 4 (2 kids) with no car or other loans (currently renting a house) Healthy with no on going medical issues...

My contribution is currently at 14% as I am doing my best to catch up after not saving at all from age 20 to 30.

Thanks

an_asker
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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by an_asker » Mon Feb 12, 2018 10:14 am

There is not enough information in your post to answer the question. What is your household income, expenditure, savings, 401k balance, taxable accounts, etc?

And why did you think of the emergency fund when the market tanked and not before that?

RRAAYY3
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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by RRAAYY3 » Mon Feb 12, 2018 10:15 am

keep hitting the 401K and build over time

I do 6 months for peace of mind - for a family I'd do at least 6 months.

KlangFool
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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by KlangFool » Mon Feb 12, 2018 10:17 am

MikesChevelle wrote:
Mon Feb 12, 2018 10:03 am

My big question is should I lower my 401k contribution from 14% down to my employer match for a few months get get a good chunk of the 3 months saved up?
MikesChevelle,

That does not work. You have to pay tax on every dollar that you do not contribute to the 401K. Depending on your Federal marginal tax rate and state income tax rate, you may find that it is counterproductive.

KlangFool

MikesChevelle
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Joined: Wed Apr 12, 2017 11:55 am

Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by MikesChevelle » Mon Feb 12, 2018 10:18 am

an_asker wrote:
Mon Feb 12, 2018 10:14 am
There is not enough information in your post to answer the question. What is your household income, expenditure, savings, 401k balance, taxable accounts, etc?

And why did you think of the emergency fund when the market tanked and not before that?
Household is about $55k. Rent is $1150. Savings is about $2500. 401k is at $20k (Im 33) No other accounts outside our checking account for monthly expenses.

We have been slowly working on an emergency fund over the past year.

MikesChevelle
Posts: 60
Joined: Wed Apr 12, 2017 11:55 am

Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by MikesChevelle » Mon Feb 12, 2018 10:19 am

KlangFool wrote:
Mon Feb 12, 2018 10:17 am
MikesChevelle wrote:
Mon Feb 12, 2018 10:03 am

My big question is should I lower my 401k contribution from 14% down to my employer match for a few months get get a good chunk of the 3 months saved up?
MikesChevelle,

That does not work. You have to pay tax on every dollar that you do not contribute to the 401K. Depending on your Federal marginal tax rate and state income tax rate, you may find that it is counterproductive.

KlangFool
Good point.

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dm200
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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by dm200 » Mon Feb 12, 2018 10:20 am

n my opinion, just keep doing what you are doing.

KlangFool
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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by KlangFool » Mon Feb 12, 2018 10:29 am

MikesChevelle wrote:
Mon Feb 12, 2018 10:18 am
an_asker wrote:
Mon Feb 12, 2018 10:14 am
There is not enough information in your post to answer the question. What is your household income, expenditure, savings, 401k balance, taxable accounts, etc?

And why did you think of the emergency fund when the market tanked and not before that?
Household is about $55k. Rent is $1150. Savings is about $2500. 401k is at $20k (Im 33) No other accounts outside our checking account for monthly expenses.

We have been slowly working on an emergency fund over the past year.
MikesChevelle,

https://www.irs.gov/credits-deductions/ ... -next-year

https://www.bogleheads.org/wiki/Saver%27s_credit

Do you qualify for Earned Income Tax Credit or Savers's Credit if you contribute more to the 401K?

KlangFool

CurlyDave
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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by CurlyDave » Mon Feb 12, 2018 10:31 am

Some here may disagree with me, but during my accumulation phase I always had a "layered" emergency fund. Even in retirement, I still have layers.

A couple weeks worth of "house money" in smaller bills in case of earthquake, hurricane, blizzard, civil disturbance -- any kind of disaster. This is the first layer. Note that it is accessible even if financial institutions are closed -- either due to weekend/holiday or disaster. Do not keep it all in one place. Both for security during a break-in, and to allow others remote access to moderate amounts of cash. If we are traveling, I can get money for a vet bill or emergency repair to a house sitter or neighbor by describing where to access a portion over the phone.

1-2 months in savings as the second layer layer. Easy and painless to access.

My taxable portfolio, was, and still is margin-enabled. This is the third layer. I can sell from it or borrow against it and get cash in 2 business days or less. Still pretty fast, but not as painless.

The fourth layer was borrowing from my 401(k), or selling from my IRA now that I am retired.

A fifth layer is selling other assets, anywhere from vehicles to real estate. This may take weeks or months, but is always a possibility.

A lot of people think that 3-6 months in savings is better for an EF, but I don't think they are considering the issue of "cash drag" on a portfolio. There are very, very few credible scenarios where several months worth of expenses are going to be required at a moment's notice.
Last edited by CurlyDave on Mon Feb 12, 2018 10:38 am, edited 2 times in total.

soccerrules
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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by soccerrules » Mon Feb 12, 2018 10:31 am

MikesChevelle wrote:
Mon Feb 12, 2018 10:18 am
an_asker wrote:
Mon Feb 12, 2018 10:14 am
There is not enough information in your post to answer the question. What is your household income, expenditure, savings, 401k balance, taxable accounts, etc?

And why did you think of the emergency fund when the market tanked and not before that?
Household is about $55k. Rent is $1150. Savings is about $2500. 401k is at $20k (Im 33) No other accounts outside our checking account for monthly expenses.

We have been slowly working on an emergency fund over the past year.
hard to really answer without more information.
are you a single income family ? spouse work ? (guessing single income)
EF are for Emergencies. Mainly a job loss to allow for you to have a little time to look for other employment. (you might also receive unemployment benefits)
$2500 is 2 weeks living expenses for you, it appears.

How much can you cut your monthly expenses, leaving more cash to save for EF each month? I would choose this route first over reducing 401K.
Another option would be to cut back 401K to 10% and reduce your monthly expenses and see if that doesn't increase your EF. I would shoot to get to $25K in your EF. That's probably 6 months worth. If you lost your job, you would start cutting out anything and everything you didn't need.
good luck and let us know what progress you make in the next 3-6 months.
Don't let your outflow exceed your income or your upkeep will be your downfall.

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Pajamas
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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by Pajamas » Mon Feb 12, 2018 10:35 am

You can control gross income and total expenses both to one degree or another and you can shift expenditures from one budget item to another to some extent.

Look at your overall budget and see if there are other ways you could reallocate money to your emergency fund such as reducing spending on something.

Also think about ways that you could increase your income.

MikesChevelle
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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by MikesChevelle » Mon Feb 12, 2018 10:40 am

KlangFool wrote:
Mon Feb 12, 2018 10:29 am
MikesChevelle wrote:
Mon Feb 12, 2018 10:18 am
an_asker wrote:
Mon Feb 12, 2018 10:14 am
There is not enough information in your post to answer the question. What is your household income, expenditure, savings, 401k balance, taxable accounts, etc?

And why did you think of the emergency fund when the market tanked and not before that?
Household is about $55k. Rent is $1150. Savings is about $2500. 401k is at $20k (Im 33) No other accounts outside our checking account for monthly expenses.

We have been slowly working on an emergency fund over the past year.
MikesChevelle,

https://www.irs.gov/credits-deductions/ ... -next-year

https://www.bogleheads.org/wiki/Saver%27s_credit

Do you qualify for Earned Income Tax Credit or Savers's Credit if you contribute more to the 401K?

KlangFool
We do not qualify for EIC. I need to research more on the savers credit. I am contributing 14% of a household income of about $55k, so it would appear we do qualify, I just know nothing about it.

MikesChevelle
Posts: 60
Joined: Wed Apr 12, 2017 11:55 am

Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by MikesChevelle » Mon Feb 12, 2018 10:47 am

soccerrules wrote:
Mon Feb 12, 2018 10:31 am
MikesChevelle wrote:
Mon Feb 12, 2018 10:18 am
an_asker wrote:
Mon Feb 12, 2018 10:14 am
There is not enough information in your post to answer the question. What is your household income, expenditure, savings, 401k balance, taxable accounts, etc?

And why did you think of the emergency fund when the market tanked and not before that?
Household is about $55k. Rent is $1150. Savings is about $2500. 401k is at $20k (Im 33) No other accounts outside our checking account for monthly expenses.

We have been slowly working on an emergency fund over the past year.
hard to really answer without more information.
are you a single income family ? spouse work ? (guessing single income)
EF are for Emergencies. Mainly a job loss to allow for you to have a little time to look for other employment. (you might also receive unemployment benefits)
$2500 is 2 weeks living expenses for you, it appears.

How much can you cut your monthly expenses, leaving more cash to save for EF each month? I would choose this route first over reducing 401K.
Another option would be to cut back 401K to 10% and reduce your monthly expenses and see if that doesn't increase your EF. I would shoot to get to $25K in your EF. That's probably 6 months worth. If you lost your job, you would start cutting out anything and everything you didn't need.
good luck and let us know what progress you make in the next 3-6 months.
My wife works part time for about $5k a year (part of the $55k total mentioned)

Our monthly expenses are around $2,600 (not including payroll deductions for 401k(14%) and health insurance ($400), or including extra curricular for the kids)
Last edited by MikesChevelle on Mon Feb 12, 2018 10:48 am, edited 1 time in total.

KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by KlangFool » Mon Feb 12, 2018 10:48 am

MikesChevelle wrote:
Mon Feb 12, 2018 10:40 am
KlangFool wrote:
Mon Feb 12, 2018 10:29 am
MikesChevelle wrote:
Mon Feb 12, 2018 10:18 am
an_asker wrote:
Mon Feb 12, 2018 10:14 am
There is not enough information in your post to answer the question. What is your household income, expenditure, savings, 401k balance, taxable accounts, etc?

And why did you think of the emergency fund when the market tanked and not before that?
Household is about $55k. Rent is $1150. Savings is about $2500. 401k is at $20k (Im 33) No other accounts outside our checking account for monthly expenses.

We have been slowly working on an emergency fund over the past year.
MikesChevelle,

https://www.irs.gov/credits-deductions/ ... -next-year

https://www.bogleheads.org/wiki/Saver%27s_credit

Do you qualify for Earned Income Tax Credit or Savers's Credit if you contribute more to the 401K?

KlangFool
We do not qualify for EIC. I need to research more on the savers credit. I am contributing 14% of a household income of about $55k, so it would appear we do qualify, I just know nothing about it.
MikesChevelle,

If you qualify for saver's credit, you may contribute more to 401K and get more tax credit in the process.

KlangFool

retiredjg
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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by retiredjg » Mon Feb 12, 2018 10:49 am

Here are some things to consider.

Is this a one income family or two? If one, fill the EF faster.

Are you in a solid job in a solid career/industry? If you are in a position that frequently sees layoffs, fill the EF faster.

In the event you lose your job, how fast can you get another one? If your job is the kind that takes awhile to get another, fill the EF faster.

Supporting 4 people on $55k is tough. If jobs come and go and you'd have to use excessive amounts of credit to get by for awhile, the emergency fund is more important than retirement savings because it is the emergency fund that will help keep you out of trouble, the downward spiral of CC debt.

Keep in mind that money in some retirement accounts can be used for emergencies.

Also, consider putting some money into Roth IRA and invest it in short term bonds and/or money market. This could be a second tier to your emergency fund (Roth contributions, not earnings, are available any time for any reason) not part of your Retirement money.

Do check out the saver's credit if you are not already getting that and if eligible.

https://www.bogleheads.org/wiki/Saver%27s_credit

KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by KlangFool » Mon Feb 12, 2018 10:50 am

MikesChevelle wrote:
Mon Feb 12, 2018 10:47 am
soccerrules wrote:
Mon Feb 12, 2018 10:31 am
MikesChevelle wrote:
Mon Feb 12, 2018 10:18 am
an_asker wrote:
Mon Feb 12, 2018 10:14 am
There is not enough information in your post to answer the question. What is your household income, expenditure, savings, 401k balance, taxable accounts, etc?

And why did you think of the emergency fund when the market tanked and not before that?
Household is about $55k. Rent is $1150. Savings is about $2500. 401k is at $20k (Im 33) No other accounts outside our checking account for monthly expenses.

We have been slowly working on an emergency fund over the past year.
hard to really answer without more information.
are you a single income family ? spouse work ? (guessing single income)
EF are for Emergencies. Mainly a job loss to allow for you to have a little time to look for other employment. (you might also receive unemployment benefits)
$2500 is 2 weeks living expenses for you, it appears.

How much can you cut your monthly expenses, leaving more cash to save for EF each month? I would choose this route first over reducing 401K.
Another option would be to cut back 401K to 10% and reduce your monthly expenses and see if that doesn't increase your EF. I would shoot to get to $25K in your EF. That's probably 6 months worth. If you lost your job, you would start cutting out anything and everything you didn't need.
good luck and let us know what progress you make in the next 3-6 months.
My wife works part time for about $5k a year (part of the $55k total mentioned)

Our monthly expenses are around $3k (not including payroll deductions for 401k(14%) and health insurance ($400))
MikesChevelle,

Because of EITC, you may make more money if your wife does not work. Or, if your wife works less.

KlangFool

MikesChevelle
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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by MikesChevelle » Mon Feb 12, 2018 10:50 am

KlangFool wrote:
Mon Feb 12, 2018 10:48 am
MikesChevelle wrote:
Mon Feb 12, 2018 10:40 am
KlangFool wrote:
Mon Feb 12, 2018 10:29 am
MikesChevelle wrote:
Mon Feb 12, 2018 10:18 am
an_asker wrote:
Mon Feb 12, 2018 10:14 am
There is not enough information in your post to answer the question. What is your household income, expenditure, savings, 401k balance, taxable accounts, etc?

And why did you think of the emergency fund when the market tanked and not before that?
Household is about $55k. Rent is $1150. Savings is about $2500. 401k is at $20k (Im 33) No other accounts outside our checking account for monthly expenses.

We have been slowly working on an emergency fund over the past year.
MikesChevelle,

https://www.irs.gov/credits-deductions/ ... -next-year

https://www.bogleheads.org/wiki/Saver%27s_credit

Do you qualify for Earned Income Tax Credit or Savers's Credit if you contribute more to the 401K?

KlangFool
We do not qualify for EIC. I need to research more on the savers credit. I am contributing 14% of a household income of about $55k, so it would appear we do qualify, I just know nothing about it.
MikesChevelle,

If you qualify for saver's credit, you may contribute more to 401K and get more tax credit in the process.

KlangFool
I did some research on Turbo Tax and it looks like it was automatically calculated when I did my return with them.

MikesChevelle
Posts: 60
Joined: Wed Apr 12, 2017 11:55 am

Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by MikesChevelle » Mon Feb 12, 2018 10:51 am

One more piece of info. We are expecting about $2500 in a tax return. That is going straight into savings as well

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Pajamas
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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by Pajamas » Mon Feb 12, 2018 10:54 am

MikesChevelle wrote:
Mon Feb 12, 2018 10:51 am
One more piece of info. We are expecting about $2500 in a tax return. That is going straight into savings as well
That's a free loan you made to the government.

You might want to adjust the amount withheld from your paycheck and then direct the extra money into your 401(k) and/or your emergency savings on a regular basis.

MikesChevelle
Posts: 60
Joined: Wed Apr 12, 2017 11:55 am

Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by MikesChevelle » Mon Feb 12, 2018 10:57 am

Pajamas wrote:
Mon Feb 12, 2018 10:54 am
MikesChevelle wrote:
Mon Feb 12, 2018 10:51 am
One more piece of info. We are expecting about $2500 in a tax return. That is going straight into savings as well
That's a free loan you made to the government.

You might want to adjust the amount withheld from your paycheck and then direct the extra money into your 401(k) and/or your emergency savings on a regular basis.
Maybe I used the wrong term in refund. We claimed exempt last year. This is mostly from state (Idaho)

My job is about 50% commission and as soon as I come off exempt, 40% of my commission is withheld. Id rather claim exempt and save incase there is a tax bill, which at my income level and family size doesnt seem to be the case, vs get some huge refund at years end.

I do feel I have good job security.

Jags4186
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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by Jags4186 » Mon Feb 12, 2018 10:59 am

KlangFool wrote:
Mon Feb 12, 2018 10:17 am
MikesChevelle wrote:
Mon Feb 12, 2018 10:03 am

My big question is should I lower my 401k contribution from 14% down to my employer match for a few months get get a good chunk of the 3 months saved up?
MikesChevelle,

That does not work. You have to pay tax on every dollar that you do not contribute to the 401K. Depending on your Federal marginal tax rate and state income tax rate, you may find that it is counterproductive.

KlangFool
In the OPs case I would not contribute to 401k past the match since he pays no federal income taxes based on his income and family situation. He’s volunteering to potentially paying taxes later while forgoing guaranteeing not paying taxes now.

MikesChevelle
Posts: 60
Joined: Wed Apr 12, 2017 11:55 am

Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by MikesChevelle » Mon Feb 12, 2018 11:02 am

Jags4186 wrote:
Mon Feb 12, 2018 10:59 am
KlangFool wrote:
Mon Feb 12, 2018 10:17 am
MikesChevelle wrote:
Mon Feb 12, 2018 10:03 am

My big question is should I lower my 401k contribution from 14% down to my employer match for a few months get get a good chunk of the 3 months saved up?
MikesChevelle,

That does not work. You have to pay tax on every dollar that you do not contribute to the 401K. Depending on your Federal marginal tax rate and state income tax rate, you may find that it is counterproductive.

KlangFool
In the OPs case I would not contribute to 401k past the match since he pays no federal income taxes based on his income and family situation. He’s volunteering to potentially paying taxes later while forgoing guaranteeing not paying taxes now.
Interesting point, so do I take the 10% I am paying over match (company match) and go IRA?

edit, you are correct, I currently do not have a federal tax liability

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Pajamas
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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by Pajamas » Mon Feb 12, 2018 11:06 am

MikesChevelle wrote:
Mon Feb 12, 2018 10:57 am
Pajamas wrote:
Mon Feb 12, 2018 10:54 am
MikesChevelle wrote:
Mon Feb 12, 2018 10:51 am
One more piece of info. We are expecting about $2500 in a tax return. That is going straight into savings as well
That's a free loan you made to the government.

You might want to adjust the amount withheld from your paycheck and then direct the extra money into your 401(k) and/or your emergency savings on a regular basis.
Maybe I used the wrong term in refund. We claimed exempt last year. This is mostly from state (Idaho)

My job is about 50% commission and as soon as I come off exempt, 40% of my commission is withheld. Id rather claim exempt and save incase there is a tax bill, which at my income level and family size doesnt seem to be the case, vs get some huge refund at years end.

I do feel I have good job security.
So basically you claim exempt from taxes so none is withheld but reserve the amount that would have been withheld in case you do have a tax bill?

Okay, that would be appropriate. "Refund" usually means that too much was withheld or otherwise prepaid for taxes due.

an_asker
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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by an_asker » Mon Feb 12, 2018 11:08 am

CurlyDave wrote:
Mon Feb 12, 2018 10:31 am
Some here may disagree with me, but during my accumulation phase I always had a "layered" emergency fund. Even in retirement, I still have layers.

A couple weeks worth of "house money" in smaller bills in case of earthquake, hurricane, blizzard, civil disturbance -- any kind of disaster. This is the first layer. Note that it is accessible even if financial institutions are closed -- either due to weekend/holiday or disaster. Do not keep it all in one place. Both for security during a break-in, and to allow others remote access to moderate amounts of cash. If we are traveling, I can get money for a vet bill or emergency repair to a house sitter or neighbor by describing where to access a portion over the phone.

1-2 months in savings as the second layer layer. Easy and painless to access.

My taxable portfolio, was, and still is margin-enabled. This is the third layer. I can sell from it or borrow against it and get cash in 2 business days or less. Still pretty fast, but not as painless.

The fourth layer was borrowing from my 401(k), or selling from my IRA now that I am retired.

A fifth layer is selling other assets, anywhere from vehicles to real estate. This may take weeks or months, but is always a possibility.

A lot of people think that 3-6 months in savings is better for an EF, but I don't think they are considering the issue of "cash drag" on a portfolio. There are very, very few credible scenarios where several months worth of expenses are going to be required at a moment's notice.
If you've already retired, you probably didn't have Roth IRAs when you were in your accumulation phase (or at least the early part of that). For folks like OP, I would definitely suggest using a Roth IRA as the first layer of the emergency fund. But that should come after enough has been contributed to the 401(k) to bring him/her down to the lowest tax bracket possible. And there might be further considerations - which I am unaware of, but which KlangFool has referred to - such as Tax Credits etc.

The nice thing about the Roth IRA is that you can always withdraw your contributions without any penalty. And if you keep your emergency fund equivalent in cash, the rest can be in equities.

MikesChevelle
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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by MikesChevelle » Mon Feb 12, 2018 11:09 am

Pajamas wrote:
Mon Feb 12, 2018 11:06 am
MikesChevelle wrote:
Mon Feb 12, 2018 10:57 am
Pajamas wrote:
Mon Feb 12, 2018 10:54 am
MikesChevelle wrote:
Mon Feb 12, 2018 10:51 am
One more piece of info. We are expecting about $2500 in a tax return. That is going straight into savings as well
That's a free loan you made to the government.

You might want to adjust the amount withheld from your paycheck and then direct the extra money into your 401(k) and/or your emergency savings on a regular basis.
Maybe I used the wrong term in refund. We claimed exempt last year. This is mostly from state (Idaho)

My job is about 50% commission and as soon as I come off exempt, 40% of my commission is withheld. Id rather claim exempt and save incase there is a tax bill, which at my income level and family size doesnt seem to be the case, vs get some huge refund at years end.

I do feel I have good job security.
So basically you claim exempt from taxes so none is withheld but reserve the amount that would have been withheld in case you do have a tax bill?

Okay, that would be appropriate. "Refund" usually means that too much was withheld or otherwise prepaid for taxes due.
That is correct. I have not found a way to come off exemption with out having a huge chunk of my commission withheld, so we stayed on exempt and saved a little just incase. Federally it worked out as I am getting $200 from Fed. State is about $2,300.

My hope in the next year or so is a role change that moves me to salary.

Nate79
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Location: Portland, OR

Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by Nate79 » Mon Feb 12, 2018 11:17 am

I agree with the others I would fund a Roth IRA as a second tier emergency fund and lower the 401k contribution to speed up the building of an emergency fund. 3 months emergency fund is really light. Having a good strong emergency fund in my mind is more important than contributions to 401k above a match. Yes it is a little bit of sacrifice you are doing to be prepared for an emergency. But when you need it you will be glad you had it and don't have to raid the 401k at a much worse penalty/tax. Some day if you have a really big Roth's and brokerage maybe you don't need to have as much money in cash but personally I think that "cash drag" is greatly exaggerated.

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Epsilon Delta
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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by Epsilon Delta » Mon Feb 12, 2018 11:23 am

MikesChevelle wrote:
Mon Feb 12, 2018 11:02 am
Jags4186 wrote:
Mon Feb 12, 2018 10:59 am
In the OPs case I would not contribute to 401k past the match since he pays no federal income taxes based on his income and family situation. He’s volunteering to potentially paying taxes later while forgoing guaranteeing not paying taxes now.
Interesting point, so do I take the 10% I am paying over match (company match) and go IRA?

edit, you are correct, I currently do not have a federal tax liability
If you have a zero marginal tax rate a Roth IRA is clearly best. You can do $11,000 between the two spouses which should be more than enough to absorb any savings, It is also possible to consider a Roth IRA as part of your emergency fund. I think theres a wiki on that but I can't find it.

However even if you pay zero income taxes refundable tax credits you could still not have a zero marginal rate. Decreasing taxable income may still be beneficial if it increases refundable credits. For example it in some cases it can be worthwhile to use a deductible IRA or 401(k) to reduce taxable income to get to a higher tier of savers credit. The savers credit is not in itself refundable, but it can make more of the child tax credit refundable. Horribly complicated, and they just changed the tax code so all my rules of thumb are off.

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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by MikesChevelle » Mon Feb 12, 2018 11:36 am

Epsilon Delta wrote:
Mon Feb 12, 2018 11:23 am
MikesChevelle wrote:
Mon Feb 12, 2018 11:02 am
Jags4186 wrote:
Mon Feb 12, 2018 10:59 am
In the OPs case I would not contribute to 401k past the match since he pays no federal income taxes based on his income and family situation. He’s volunteering to potentially paying taxes later while forgoing guaranteeing not paying taxes now.
Interesting point, so do I take the 10% I am paying over match (company match) and go IRA?

edit, you are correct, I currently do not have a federal tax liability
If you have a zero marginal tax rate a Roth IRA is clearly best. You can do $11,000 between the two spouses which should be more than enough to absorb any savings, It is also possible to consider a Roth IRA as part of your emergency fund. I think theres a wiki on that but I can't find it.

However even if you pay zero income taxes refundable tax credits you could still not have a zero marginal rate. Decreasing taxable income may still be beneficial if it increases refundable credits. For example it in some cases it can be worthwhile to use a deductible IRA or 401(k) to reduce taxable income to get to a higher tier of savers credit. The savers credit is not in itself refundable, but it can make more of the child tax credit refundable. Horribly complicated, and they just changed the tax code so all my rules of thumb are off.
Im not sure how I determine that, but I can share my path when filing this year. In the beginning of the filing Turbo Tax showed that I owed about $500 (federally), after putting in dollar amounts for childcare and heath insurance premiums I went from -$500 to +$200. Maybe that means I am not a zero marginal rate?

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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by soccerrules » Mon Feb 12, 2018 11:48 am

MikesChevelle wrote:
Mon Feb 12, 2018 10:47 am
soccerrules wrote:
Mon Feb 12, 2018 10:31 am
MikesChevelle wrote:
Mon Feb 12, 2018 10:18 am
an_asker wrote:
Mon Feb 12, 2018 10:14 am
There is not enough information in your post to answer the question. What is your household income, expenditure, savings, 401k balance, taxable accounts, etc?

And why did you think of the emergency fund when the market tanked and not before that?
Household is about $55k. Rent is $1150. Savings is about $2500. 401k is at $20k (Im 33) No other accounts outside our checking account for monthly expenses.

We have been slowly working on an emergency fund over the past year.
hard to really answer without more information.
are you a single income family ? spouse work ? (guessing single income)
EF are for Emergencies. Mainly a job loss to allow for you to have a little time to look for other employment. (you might also receive unemployment benefits)
$2500 is 2 weeks living expenses for you, it appears.

How much can you cut your monthly expenses, leaving more cash to save for EF each month? I would choose this route first over reducing 401K.
Another option would be to cut back 401K to 10% and reduce your monthly expenses and see if that doesn't increase your EF. I would shoot to get to $25K in your EF. That's probably 6 months worth. If you lost your job, you would start cutting out anything and everything you didn't need.
good luck and let us know what progress you make in the next 3-6 months.
My wife works part time for about $5k a year (part of the $55k total mentioned)

Our monthly expenses are around $2,600 (not including payroll deductions for 401k(14%) and health insurance ($400), or including extra curricular for the kids)
sorry I missed that on expenses. 2 more thoughts
1) I would get to 6 months living expenses in EF and then increase 401K to try and hit the $18,500 max.
2) You are on salary + commission for your income. Most positions like this you should see decent increases in your income, the longer you are in the position. Sometimes these commissions can grow rapidly in just a few short years. If that is not the case for your industry/company, you might consider taking your sales skills elsewhere.
Don't let your outflow exceed your income or your upkeep will be your downfall.

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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by ruralavalon » Mon Feb 12, 2018 11:54 am

MikesChevelle wrote:
Mon Feb 12, 2018 10:03 am
Have a couple part question.

How does one decide whether you should have 3 or 6 months of an emergency fund? I know that more is better....

My initial plan is to get quickly to 3 months and then slowly get to 6 months.

My big question is should I lower my 401k contribution from 14% down to my employer match for a few months get get a good chunk of the 3 months saved up?

We are a family of 4 (2 kids) with no car or other loans (currently renting a house) Healthy with no on going medical issues...

My contribution is currently at 14% as I am doing my best to catch up after not saving at all from age 20 to 30.

Thanks
MikesChevelle wrote:
Mon Feb 12, 2018 10:18 am
Household is about $55k. Rent is $1150. Savings is about $2500. 401k is at $20k (Im 33) No other accounts outside our checking account for monthly expenses.

We have been slowly working on an emergency fund over the past year.
MikesChevelle wrote:
Mon Feb 12, 2018 10:47 am
My wife works part time for about $5k a year (part of the $55k total mentioned)

Our monthly expenses are around $2,600 (not including payroll deductions for 401k(14%) and health insurance ($400), or including extra curricular for the kids)
MikesChevelle wrote:
Mon Feb 12, 2018 10:51 am
One more piece of info. We are expecting about $2500 in a tax return. That is going straight into savings as well
MikesChevelle wrote:
Mon Feb 12, 2018 10:57 am
Maybe I used the wrong term in refund. We claimed exempt last year. This is mostly from state (Idaho)

My job is about 50% commission and as soon as I come off exempt, 40% of my commission is withheld. Id rather claim exempt and save incase there is a tax bill, which at my income level and family size doesnt seem to be the case, vs get some huge refund at years end.

I do feel I have good job security.
To summarize -- you state that you have no debt, are a family of four, basically a one income family, you are on commission, and have good job security. Those are all factors for you to consider in deciding the size of emergency fund to aim for. I suggest an emergency fund closer to 6 month's worth of expenses than to 3 months.

You now have almost one month's worth of expenses set aside, and will have almost two months once you get the tax refund. In my opinion it's better for a few months to drop the 401k contributions down to the level needed to get the full employer match, until you get up to 3 month's worth in your emergency fund.

After that continue to contributing enough to your 401k to get the full employer match, and start contributing to a Roth IRA at a low cost provider like Vanguard. Regular contributions to a Roth IRA can be withdrawn without penalty at any time so can be used for an emergency if absolutely necessary. Roth IRA contributions can be counted as part of an emergency fund.

If the emergency doesn't happen, then you still have made contributions toward retirement savings in a tax-advantaged account. Please see the wiki article "Prioritizing Investments".

. . . . .

How much (in dollars) do you have to contribute annually to your 401k in order to get the full employer match each year?

About how much (in dollars) do you feel you might be able to add to savings for emergency fund and investing annually (total, all accounts)?
Last edited by ruralavalon on Mon Feb 12, 2018 12:03 pm, edited 1 time in total.
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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by dm200 » Mon Feb 12, 2018 11:58 am

Based on other posts, I might modify my opinion to reduce the 401k to get the full employer match. Put that into long term taxable equities.

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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by MikesChevelle » Mon Feb 12, 2018 12:00 pm

soccerrules wrote:
Mon Feb 12, 2018 11:48 am
MikesChevelle wrote:
Mon Feb 12, 2018 10:47 am
soccerrules wrote:
Mon Feb 12, 2018 10:31 am
MikesChevelle wrote:
Mon Feb 12, 2018 10:18 am
an_asker wrote:
Mon Feb 12, 2018 10:14 am
There is not enough information in your post to answer the question. What is your household income, expenditure, savings, 401k balance, taxable accounts, etc?

And why did you think of the emergency fund when the market tanked and not before that?
Household is about $55k. Rent is $1150. Savings is about $2500. 401k is at $20k (Im 33) No other accounts outside our checking account for monthly expenses.

We have been slowly working on an emergency fund over the past year.
hard to really answer without more information.
are you a single income family ? spouse work ? (guessing single income)
EF are for Emergencies. Mainly a job loss to allow for you to have a little time to look for other employment. (you might also receive unemployment benefits)
$2500 is 2 weeks living expenses for you, it appears.

How much can you cut your monthly expenses, leaving more cash to save for EF each month? I would choose this route first over reducing 401K.
Another option would be to cut back 401K to 10% and reduce your monthly expenses and see if that doesn't increase your EF. I would shoot to get to $25K in your EF. That's probably 6 months worth. If you lost your job, you would start cutting out anything and everything you didn't need.
good luck and let us know what progress you make in the next 3-6 months.
My wife works part time for about $5k a year (part of the $55k total mentioned)

Our monthly expenses are around $2,600 (not including payroll deductions for 401k(14%) and health insurance ($400), or including extra curricular for the kids)
sorry I missed that on expenses. 2 more thoughts
1) I would get to 6 months living expenses in EF and then increase 401K to try and hit the $18,500 max.
2) You are on salary + commission for your income. Most positions like this you should see decent increases in your income, the longer you are in the position. Sometimes these commissions can grow rapidly in just a few short years. If that is not the case for your industry/company, you might consider taking your sales skills elsewhere.
I would love to hit the max 401k, but that means 30%+ of my current income. The answer has to be more income as we could not afford a that high a % at our current take home.

I have seen an increase. I started a few years back at around $40k take home.

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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by MikesChevelle » Mon Feb 12, 2018 12:12 pm

ruralavalon wrote:
Mon Feb 12, 2018 11:54 am

To summarize -- you state that you have no debt, are a family of four, basically a one income family, you are on commission, and have good job security. Those are all factors for you to consider in deciding the size of emergency fund to aim for. I suggest an emergency fund closer to 6 month's worth of expenses than to 3 months.

You now have almost one month's worth of expenses set aside, and will have almost two months once you get the tax refund. In my opinion it's better for a few months to drop the 401k contributions down to the level needed to get the full employer match, until you get up to 3 month's worth in your emergency fund.

After that continue to contributing enough to your 401k to get the full employer match, and start contributing to a Roth IRA at a low cost provider like Vanguard. Regular contributions to a Roth IRA can be withdrawn without penalty at any time so can be used for an emergency if absolutely necessary. Roth IRA contributions can be counted as part of an emergency fund.

If the emergency doesn't happen, then you still have made contributions toward retirement savings in a tax-advantaged account. Please see the wiki article "Prioritizing Investments".

. . . . .

How much (in dollars) do you have to contribute annually to your 401k in order to get the full employer match each year?

About how much (in dollars) do you feel you might be able to add to savings for emergency fund and investing annually (total, all accounts)?
I just check a few things. My employer also offers a Roth through the same avenue as the 401k (Fidelity) and has a 4 percent match with either the 401k or the Roth. So then should I (until I make more $$) move all 14% to the Roth.

As far as how much I have to contribute to get the 4% that I am not sure of. I do know that I contributed enough last year to get it. It is also a one time, annual contribution. I just got 2017's about a month ago.

This is the wording from the Fidelity site ""Your employer matches up to 4% of your eligible compensation that you elect as Pre-tax or Roth contributions.""

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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by soccerrules » Mon Feb 12, 2018 12:21 pm

MikesChevelle wrote:
Mon Feb 12, 2018 12:00 pm
soccerrules wrote:
Mon Feb 12, 2018 11:48 am
MikesChevelle wrote:
Mon Feb 12, 2018 10:47 am
soccerrules wrote:
Mon Feb 12, 2018 10:31 am
MikesChevelle wrote:
Mon Feb 12, 2018 10:18 am


Household is about $55k. Rent is $1150. Savings is about $2500. 401k is at $20k (Im 33) No other accounts outside our checking account for monthly expenses.

We have been slowly working on an emergency fund over the past year.
hard to really answer without more information.
are you a single income family ? spouse work ? (guessing single income)
EF are for Emergencies. Mainly a job loss to allow for you to have a little time to look for other employment. (you might also receive unemployment benefits)
$2500 is 2 weeks living expenses for you, it appears.

How much can you cut your monthly expenses, leaving more cash to save for EF each month? I would choose this route first over reducing 401K.
Another option would be to cut back 401K to 10% and reduce your monthly expenses and see if that doesn't increase your EF. I would shoot to get to $25K in your EF. That's probably 6 months worth. If you lost your job, you would start cutting out anything and everything you didn't need.
good luck and let us know what progress you make in the next 3-6 months.
My wife works part time for about $5k a year (part of the $55k total mentioned)

Our monthly expenses are around $2,600 (not including payroll deductions for 401k(14%) and health insurance ($400), or including extra curricular for the kids)
sorry I missed that on expenses. 2 more thoughts
1) I would get to 6 months living expenses in EF and then increase 401K to try and hit the $18,500 max.
2) You are on salary + commission for your income. Most positions like this you should see decent increases in your income, the longer you are in the position. Sometimes these commissions can grow rapidly in just a few short years. If that is not the case for your industry/company, you might consider taking your sales skills elsewhere.
I would love to hit the max 401k, but that means 30%+ of my current income. The answer has to be more income as we could not afford a that high a % at our current take home.

I have seen an increase. I started a few years back at around $40k take home.
It is going to be a little painful to squeeze to hit the $18,500. But as you stated you are a little behind where you should be for retirement savings. Your 50+ year old self will thank you one day. (trust me, I'm there) The good news is you have probably 30 years to make it happen. Also as your income increases that will make hitting the $18.5 a little easier.

I would also push yourself at your work. More calls, more sales, more training. Be the expert! Now is also the time to invest in yourself and your career. If you do this your income will rise.
If your income doesn't increase then you need to take a look at your company/industry or if you are in the right position.
Don't let your outflow exceed your income or your upkeep will be your downfall.

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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by ruralavalon » Mon Feb 12, 2018 12:35 pm

MikesChevelle wrote:
Mon Feb 12, 2018 12:12 pm
ruralavalon wrote:
Mon Feb 12, 2018 11:54 am

To summarize -- you state that you have no debt, are a family of four, basically a one income family, you are on commission, and have good job security. Those are all factors for you to consider in deciding the size of emergency fund to aim for. I suggest an emergency fund closer to 6 month's worth of expenses than to 3 months.

You now have almost one month's worth of expenses set aside, and will have almost two months once you get the tax refund. In my opinion it's better for a few months to drop the 401k contributions down to the level needed to get the full employer match, until you get up to 3 month's worth in your emergency fund.

After that continue to contributing enough to your 401k to get the full employer match, and start contributing to a Roth IRA at a low cost provider like Vanguard. Regular contributions to a Roth IRA can be withdrawn without penalty at any time so can be used for an emergency if absolutely necessary. Roth IRA contributions can be counted as part of an emergency fund.

If the emergency doesn't happen, then you still have made contributions toward retirement savings in a tax-advantaged account. Please see the wiki article "Prioritizing Investments".

. . . . .

How much (in dollars) do you have to contribute annually to your 401k in order to get the full employer match each year?

About how much (in dollars) do you feel you might be able to add to savings for emergency fund and investing annually (total, all accounts)?
I just check a few things. My employer also offers a Roth through the same avenue as the 401k (Fidelity) and has a 4 percent match with either the 401k or the Roth. So then should I (until I make more $$) move all 14% to the Roth.
I don't think that you can withdraw Roth 401k contributions at any time without penalty. The ability to withdraw contributions without penalty applies to Roth IRA contributions.

I suggest continuing enough contributions to your 401k to get the full employer match. The employer match is like free money, never turn down free money. I also suggest opening to a Roth IRA at a low cost provider like Vanguard or Fidelity, and contributing the extra 10% to that account.

MikesChevelle wrote:As far as how much I have to contribute to get the 4% that I am not sure of. I do know that I contributed enough last year to get it. It is also a one time, annual contribution. I just got 2017's about a month ago.

This is the wording from the Fidelity site ""Your employer matches up to 4% of your eligible compensation that you elect as Pre-tax or Roth contributions.""
It sounds like if you contribute 4% ($2k) then your employer matches that by contributing $2k. Ask HR at your employer or call, and ask Fidelity, or both to be sure.

How much (in dollars) total do you believe you might be able to add to saving for emergency fund and contribute to investing annually (total, all accounts)?
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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by MikesChevelle » Mon Feb 12, 2018 12:43 pm

If I dont plan on using an IRA as part of the emergency fund, should I still move to a Roth 401k given my current tax liability?

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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by MikesChevelle » Mon Feb 12, 2018 12:44 pm

We have set our lifestyle around $50k a year, we plan to have any money over that amount this year go to EF and retirement

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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by Epsilon Delta » Mon Feb 12, 2018 1:25 pm

MikesChevelle wrote:
Mon Feb 12, 2018 11:36 am
Epsilon Delta wrote:
Mon Feb 12, 2018 11:23 am

However even if you pay zero income taxes refundable tax credits you could still not have a zero marginal rate. Decreasing taxable income may still be beneficial if it increases refundable credits. For example it in some cases it can be worthwhile to use a deductible IRA or 401(k) to reduce taxable income to get to a higher tier of savers credit. The savers credit is not in itself refundable, but it can make more of the child tax credit refundable. Horribly complicated, and they just changed the tax code so all my rules of thumb are off.
Im not sure how I determine that, but I can share my path when filing this year. In the beginning of the filing Turbo Tax showed that I owed about $500 (federally), after putting in dollar amounts for childcare and heath insurance premiums I went from -$500 to +$200. Maybe that means I am not a zero marginal rate?
If you still have your turbo tax return then the easiest way is to try a dummy return. Make a copy of your return and then reduce the income on line 1 by $100 (to simulate what would happen if you made an extra $100 contribution to your 401(k)) and see how the tax and the refund change. I suspect this will increase your refund by $10-$15. That would mean a 10-15% marginal tax rate, so you still get some benefit for a 401(k). It might still be better to do a Roth instead of deductible, but it's less clear cut.

If you look at the taxable income break points on for the savers credit on form 8880, you might also find that if you simulate a larger 401(k) contribution reducing your AGI (line 38) below $40,000 or $37,000 you get a fairly large increase in your refund. Unfortunately this will only tell you about 2017 and there are changes for 2018. The same sorts of things work, but all the numbers are scrambled.

Since it's not been mentioned, to capture the maximum savers credit both you and your spouse need to contribute $2000 to an appropriate retirement plan. If your spouse is not contributing you might consider reducing your 401(k) contribution by $2000 and making a $2000 deductible IRA contribution for your spouse. That may pick up an extra $100 or more in credits. Again playing with a dummy return in TT is a good way to try this out.

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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by an_asker » Mon Feb 12, 2018 2:22 pm

MikesChevelle wrote:
Mon Feb 12, 2018 12:43 pm
If I dont plan on using an IRA as part of the emergency fund, should I still move to a Roth 401k given my current tax liability?
Note that a Roth 401k uses your after-tax earnings. So, to put the same amount, you will have less take home pay after a Roth 401k as compared to a traditional 401k; however, you won't pay taxes upon withdrawal, which is a very good thing. Having said that, like I said in my previous response, if you are able to move yourself into a lower tax bracket by contributing to the traditional 401k, you ought to do that; once you are in the lower bracket, you can then contribute to the Roth 401k.

But, like someone else said, I also doubt you can withdraw your contributions to the Roth 401k. So, for the emergency fund, you might still need to go the Roth IRA route. Does that make sense?

To summarize:

step 1 - put enough in the 401k to at least get the match
step 2 - of the amount set aside for 401k in step 1, start with the traditional 401k until you move to a lower tax bracket, then contribute to the Roth 401k
step 3 - now that you've got your match, contribute to the Roth IRA up to three month's emergency fund (for now)
step 4 - add more the the Roth 401k, until you reach the 401k limit (adding traditional and Roth 401k) or you run out of saved money
step 5 - complete the Roth IRA for both yourself and your spouse

At the end of step 5, you should have socked away $18.5k plus $11k. Based on your income, you are likely to stop at a previous step. Note one thing though, you don't HAVE to use money from this year's income to fund any of them. Remember, money is fungible, so if you have previously saved money that you have kept in savings, you should fund year 2017 Roth IRA rightaway (at least before the tax deadline of April 15th). This would be your first step at an emergency fund.

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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by nisiprius » Mon Feb 12, 2018 2:40 pm

The canonical emergency is "job loss." In thinking about job loss, the most important number to establish is "will I get unemployment benefits if that happens, and how much will they are likely to be?" The answer varies quite a bit by state. Assuming that your chief risk of job loss is your company hitting business problems and having a layoff, you can guess the answer to the first question if you can find out what they did before.

It's not the easier number to obtain, and, frankly, the people most likely to know--the HR department--are people I would not care to ask. But if you are going to plan seriously, it's a number you should try to get.

The last time I lost a job, it took me 5-3/4 months to get a new one, i.e. my benefits were within weeks of running out. During that time, since I was making good wages, my state's fairly generous unemployment program paid me about $500/week. That's probably the high end of what's likely. It's a lot more than zero, and a lot less than my job was paying.
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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by retiredjg » Mon Feb 12, 2018 3:27 pm

MikesChevelle wrote:
Mon Feb 12, 2018 12:43 pm
If I dont plan on using an IRA as part of the emergency fund, should I still move to a Roth 401k given my current tax liability?
That depends on what it does to your taxable income and the saver's credit if you find you qualify for it.

Traditional 401k lowers your taxable income. If you make $50k and put $4k into traditional 401k, your taxable income goes down to $46k. Then you decide if/how much saver's credit you can get based on $46k instead of $50k.

Roth 401k does not lower your taxable income. Using Roth 401k may mean you have to pay income tax (which you don't pay now) or that you lose some or all of the saver's credit.

You have to run through the different tax scenarios to know exactly which is the best idea. If you decide to use traditional 401k, then you can put the money saved in taxes into Roth IRA if you want. Or put more into the 401k.

I'm not sure what happens when you have no federal tax liability. Is there some buffer there where you could make more money and still not owe in taxes? That might argue for using Roth 401k.

Losing the saver's credit might argue for not using Roth 401k. Or you might have some wiggle room there to work with.

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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by MikesChevelle » Mon Feb 12, 2018 3:33 pm

As far as us renting, is there any wisdom in buying a home before you have some foundation of an emergency fund?

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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by RRAAYY3 » Mon Feb 12, 2018 3:44 pm

MikesChevelle wrote:
Mon Feb 12, 2018 3:33 pm
As far as us renting, is there any wisdom in buying a home before you have some foundation of an emergency fund?
https://www.nytimes.com/interactive/201 ... lator.html

i wouldn't enter that kind of commitment without an emergency fund ... but i'm quite debt averse

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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by MikesChevelle » Mon Feb 12, 2018 3:51 pm

RRAAYY3 wrote:
Mon Feb 12, 2018 3:44 pm
MikesChevelle wrote:
Mon Feb 12, 2018 3:33 pm
As far as us renting, is there any wisdom in buying a home before you have some foundation of an emergency fund?
https://www.nytimes.com/interactive/201 ... lator.html

i wouldn't enter that kind of commitment without an emergency fund ... but i'm quite debt averse
Thank you for that link, very detailed and helpful

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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by MikesChevelle » Tue Feb 13, 2018 10:45 am

So my plan is to keep contributing any overages in pay to EF, investigate and like switch to Roth since Im currently in a status of exemption.

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Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by Edie » Tue Feb 13, 2018 2:43 pm

Don't contribute to just one Roth IRA. I would actually have your wife open one as well and contribute there first.

Your 401k contributions qualify you for the saver's credit, but you can get saver's credit for her contributions as well (the credit is calculated off the first $2000 contribution from each spouse).

The first 2000 dollars you guys contribute to a Roth IRA should go to your wife's account, so that you get the saver's credit for her as well. This should be done going forward until you stop being eligible for the credit, or until you can fund both fully. Fund hers first (at least the first 2000 dollars you plan to save in Roth IRAs), and then yours, to max your saver's credit.

MikesChevelle
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Joined: Wed Apr 12, 2017 11:55 am

Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by MikesChevelle » Tue Feb 13, 2018 3:49 pm

Ok, so if I understand this correctly.

Fund the Roth 401k up to my company match, open a Roth IRA under the wife and get that up to $2k, lastly open my own ROTH IRA and fund that to $2k or more.

Along with that, have an initial layer (primary layer) of cash in a savings account for the first part of the emergency fund.

OR do I do a pre tax company 401k?

MikesChevelle
Posts: 60
Joined: Wed Apr 12, 2017 11:55 am

Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by MikesChevelle » Tue Feb 13, 2018 3:54 pm

Other question, do I do anything with the $20k already have in the pre tax 401k other than leave it to keep growing till retirement?

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ruralavalon
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Location: Illinois

Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by ruralavalon » Tue Feb 13, 2018 4:25 pm

MikesChevelle wrote:
Tue Feb 13, 2018 3:49 pm
Ok, so if I understand this correctly.

Fund the Roth 401k up to my company match, open a Roth IRA under the wife and get that up to $2k, lastly open my own ROTH IRA and fund that to $2k or more.

Along with that, have an initial layer (primary layer) of cash in a savings account for the first part of the emergency fund.

OR do I do a pre tax company 401k?
If you truly have a zero marginal federal tax rate, then you should make Roth contributions to your 401k, rather than traditional contributions to your 401k. As mentioned be aware of the savers credit.
MikesChevelle wrote:
Tue Feb 13, 2018 3:54 pm
Other question, do I do anything with the $20k already have in the pre tax 401k other than leave it to keep growing till retirement?
Yes keep that $20k invested and growing until retirement. What funds is your $20k currently invested in? What other funds are offered in your 401k? Please give fund names, tickers and expense ratios.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

MikesChevelle
Posts: 60
Joined: Wed Apr 12, 2017 11:55 am

Re: Emergency fund question - 3 vs 6 months and should I lower my 401k contribution to get there...

Post by MikesChevelle » Tue Feb 13, 2018 4:40 pm

ruralavalon wrote:
Tue Feb 13, 2018 4:25 pm

Yes keep that $20k invested and growing until retirement. What funds is your $20k currently invested in? What other funds are offered in your 401k? Please give fund names, tickers and expense ratios.
I have currently (using Fidelity's Brokerage Link)

$10k in FSELX(FIDELITY SELECT SEMICONDUCTORS PORT) expense ration gross/net - .77%/.77%
$3200 in FSTMX (FIDELITY TOTAL MKT INVESTOR CLASS) expense ration gross/net - .09%/.09%
$5600 in FTIGX (FIDELITY TOTAL INTL INDEX FD INVESTOR CL) expense ration gross/net - .17%/.17%

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