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How To Calculate Front Loading Taxable Accounts

New year, time to update savings contributions!

Last year was the first year I decided to front load my 401k and HSA accounts. This year will be no different. It is important to update your online enrollments.

Step 1: Understanding Max Contribution Limits

The first step is to understand the max contribution limits for both your 401k and HSA accounts. Each year these contribution limits seem to be changing. This is a good thing, especially if they end up increasing!

The new max for your 401k in 2020 is $19,500. The new max for a Health Savings Account (HSA) is $3,550 for 2020. In total, this will be $23,050 of taxable deferred account contributions!

Step 2: Determine Living Expenses For Each Month

Next, you will want to understand how much you need to live off of each month! This will help you better understand the max amount of money you can afford having deducted.

For me, my typical spend is $1,200-1,500 per month. To be more conservative, I will use the higher of the two numbers for the calculation. If you don’t already, tracking your monthly expenses is something you should do.

Step 3: Calculate How Much Free Cash Flow After Expenses

Looking back at last years first paychecks, I can see a 20% tax taken out of my checks. I can use this number to begin deducting from my paycheck to understand how much money I have to work with.

Here is the calculation I do to figure out how much I can contribute

As you can see, I take the total paycheck and deduct living expenses and taxes. Since I receive income bi-weekly, I know my living expenses will be $1,500 divided by 2 paychecks, or $700.

Step 4: Determine How You Want To Divide Contributions

Since the max contribution limits for the 401k are 5.5 times that of the HSA, the majority of my contributions will go there. Here is the breakdown of my contributions.

I have also gone an extra step to determine how long it will take me to max out each account. At the rate of savings outlined above, I will have maxed out my 401k on 3/19/20. My HSA should be maxed out on 2/6/20. Not too shabby!

Why Front Load?

There are many different viewpoints on whether to frontload your taxable accounts. Here are the main reasons I do it:

  • Money not invested today can’t earn interest! You can peanut butter spread your contributions, but will miss out on interest!
  • If you contribute now, just wait till you are maxed out. Your paychecks will skyrocket! I went from having paychecks around $1,600 to paychecks being $4,400 after each account was maxed. This allows you to go even more aggressive with investing early in the year!
  • My company will still match throughout the year regardless of when I contribute. This is one to be careful with. My company will continue matching to the 6% salary max no matter when I contribute. This means I continue to see $350-450 per paycheck matched by my company when I am contributing $0.
  • There isn’t a 100% chance of front loading being better than dollar cost averaging. Why try to time the market? Automate and be done with it!

Key Takeaways:

  • Max contribution limits change each year! With this in mind, you should re-evaluate contributions each year.
  • Determine how you can live paycheck to paycheck to try and max out your accounts as early as possible.
  • Make sure your company will continue matching your contributions if you front load. If they don’t, then you should work to determine if this makes the most sense.
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