I think there are too many variables to promote a single standard approach.
Off the top of my head, variables that could affect the response:
– How stable are current earnings and employment outlook?
– Is person saving for a home purchase, wedding, car, grad school, etc, in immediate to intermediate future?
–Future projected income stream and therefore future marginal tax rate. (Save now in Roth while in lower tax bracket and save more in 401K later when in higher bracket.)
–Current earnings compared to the Federal IRA limits and to current spending needs.
I am sure there are many other factors I have not mentioned.
For your child who could return home in the event of job loss, a large emergency fund may not be necessary.
I agree there’s no standard approach. The challenge is that in this case there’s no expectation of a wedding, car or grad school in the foreseeable future and accruing the downpayment for a home purchase would require many years of dedicated saving, and diverting substantial amounts that would otherwise go towards retirement savings. Earnings will clearly increase rapidly, probably beyond the Roth limits in the next 2-3 years, but for the moment, retirement savings likely won’t reach the $30K maximum in 2024, even if we decide to do a 529 transfer to cover the Roth contribution (and its probably a bad idea to do this too soon anyway, since we could wait until his income exceeds the Roth limits).
I think the Roth IRA is fine, since that allows the principal to be withdrawn, but the decision about how much to put into a 401K, whether Roth or otherwise, that is going to be essentially locked up for the next ~40 years, is much more difficult.
We have purchased mutual funds every month since 1999. Treated it like a normal bill. I have always wanted have access to funds if needed that weren’t retirement funds. Not really emergency funds but not tied up as retirement. If the right large investment ever came along there would a way to fund it. There are some tax advantages of those funds if never spent and are passed down to heirs. They will get a step up in basis at the time of receipt unlike an IRA.
I would say that amount is around 20% of what I am looking at for retirement.
If his income exceeds the Roth limit, he can open a non-deductible IRA and then convert it as a Backdoor Roth so that’s not a huge concern at the moment, but who knows if that loophole will close some day.
I wasn’t certain that the final instructions on the 529 rollover to Roth had been issued yet as I have some unused 529 money sitting around.
In the situation you described for you son–will earn $150K+ in a couple of years, not saving for house/car/wedding, and I assume living ‘below his means’ – I would go all in on the Roth 401K while his marginal tax rate is lower.
I am repeating myself from earlier in this thread, but Fed rates will tick up at the end of 2025. Current 22% will become 25% and current 24% will become 28%. The current 24% range is $89K - $170K for single, and those are probably last year’s figures.
I readily admit that this is not a luxury that most can afford, but if one has the extra cash flow, I am all in favor of funding the Roth early.
@huango, our situation is probably different but relevant. Two kids. One is more likely to be the helper – she told me when she was 22 that she would ask for my help to buy a two-family house so that we could help her take care of her kids when we were younger and she could take care of us when we were older. She now has a two-family house although our current home has an in-law suite wing built when an older couple had their youngest daughter and her family move into the main house.
Financially, we have a dynasty trust whose beneficiaries are us, our kids and our progeny and focuses on health, housing, education and welfare. This allows the funds to be used for us but what is not used will go to the kids as they need it. A properly drawn up trust can direct the use of funds as you see fit.
You definitely need a good trust lawyer and a tax accountant. You will need to integrate the trust you establish (or that someone establishes on your behalf) with your overall estate plan so you probably also need an estate planning attorney – they can be the same as the trust lawyer but the trust lawyers I’ve dealt with are more highly specialized. I’ve worked with a lot of professional service providers over the years (mostly for my job) and most professional service providers are mediocre. Mediocre accountants and lawyers will often spend a lot of their time telling you what you can’t do. Good ones will start with your goals and objectives and figure out how to achieve them and give you several options. Our accountant lays out the options and then tells me the risk of each.
No taxes are always better than taxes. But, low tax states may have worse health care systems or weaker public services. Massachusetts has mid-level taxes (despite its reputation) but does have an estate tax but is thought to have the best K-12 school systems. The services may matter to your child if they are going to have kids in school or to you if you need to go to a hospital or find specialist medical care. I love Colorado but could not convince my wife to move there.
Where to live? No income tax states can be good. However, you may care, when you get older, about the quality of medical care in the state (and near where you would be willing to live).
I was looking at this today and discovered that few if any states have made a decision on how to treat these rollovers from a tax perspective. Just like some (e.g. CA) have not conformed to the prior change allowing use of 529 money for K-12 tuition (and treat it as a non-qualified withdrawal), it is likely that some states will impose taxes on the rollovers. So its not just that the federal government is behind on issuing instructions.
I have given my adult kid cash gifts. I don’t hold anything over his head. He is not beholden to me in any way, and I don’t ask him questions about his finances or what he does with the money. That isn’t how gifts work.
I’ve said this here before, we gift generously to our adult kids (one late 20s, one early 30s). Both are very responsible savers, in professional careers, and (so far) staying in our high COL area. No strings on that though. Or any of the gifts.
We are fortunate to be in the position to be able to do that. One big reason is that we maxed out our retirement savings starting at a very young age, and it’s important to H that our kids do the same.
Another reason is that H’s mom passed away a few years ago and left an inheritance we didn’t really need. It’s nice to give while the kids can use the money and we can see them enjoy it. Or they can enjoy it with us (vacations, etc.)
One can reflect back to the situation we had on our financial/personal/professional/faith journey (now older generation, and often w/o relatives older living anymore), and how the paradigm has changed for our young adult children.
DH and I jumped into our first home purchase which happened 3 months after our marriage (we were both 22); then we moved several times in 5 years - purchased another home in another city, rent home in another city and state then 6 months later into 3rd purchased home. We stayed in that home for 7 1/2 years, rented a home, then built the home we have lived in the last 30 years in a suburban city that has the best public schools in our area (which is great for our property value). We didn’t earn a lot over our careers (I was out of job market for 18 years), as on one income when DDs were 3 and 5 due to DH’s work travel (national and international); I had a sunset career for almost 5 years and retired at 65, earned enough periods to have my own SS checks (slightly more than what would be off of DH’s). We had ‘the time value of money’ with utilizing 401k when they became available, and built up a nest egg some prior to having children after 15 years of marriage - also did some great financial management work with DH’s significantly growing 401k. Got the financial planner to decrease our portfolio risk (we have no pensions, so have annuities to decrease our stock portfolio on overall risk). We ‘have enough’ when it comes to money.
The family ties are strong.
I will see if I will find the hospital experience good/great when I have outpatient surgery the end of the month (parathyroid surgery…). We have a very strong medical community and medical services. Navigate it all very well.
I think our part of Colorado has a good balance of excellent healthcare (locally as for us well as access to Denver options) AND reasonable state taxes (4.4% flat rate; some years a rebate). However there are more desolate areas of the state that are quite beautiful but limited on healthcare facilities.
Fidelity Investments estimates that a 65 year old person will need to spend $157,000 for health care costs (presumably over remaining lifetime, not per year): How to plan for rising health care costs | Fidelity
Do people here consider that a realistic estimate, or too high, or too low?
That seems very low. Are they including Medicare, IRMAA, Part D and prescription drug costs?
It also says, “Of course, the amount you’ll need will depend on when and where you retire, how healthy you are, and how long you live. The amount you need will also depend on which accounts you use to pay for health care—e.g., 401(k), HSA, IRA, or taxable accounts; your tax rates in retirement (see chart); and potentially even your gross income.” Can you use 401(k) or other funds to pay for medical costs directly (like charitable contributions) or do they just mean that you will have to pay income tax on the withdrawal before you pay the medical expense?
I consider it much too low if it’s meant to be expenses for the remaining lifetime. We spent at least that much in one year when one of our children had a health care crisis, years ago. Too many health care expenses are not covered by insurance, or at least that was our experience with BCBS.
Maybe some of the things I’d consider health care costs would not be included in that figure, but I think of mobility aids, specialty clothing and shoes, and home modifications needed to assist an elderly person with arthritis and/or mobility problems. I used to purchase items for my parents and in-laws to make their lives more comfortable and to help with basic daily activities that were not covered by their insurance.
It may also be over a larger population including people with not much money, so they go without many of these items that are not absolutely required (and perhaps skimping on some stuff that really is required to solve whatever medical problem).
Median individual net worth for 65 year old people seems to be between $200k and $300k (median household net worth for 65 year old people seems to be around $400k). So the median retiree probably cannot spend that much more than $157k ($314k for a couple) for medical costs over the rest of life.