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Financial Independence – Step by Step Guide on Contributing to Retirement Accounts

Welcome!  So, you want to gain financial independence but don’t know where to start investing your money.

A question you might have includes:

Which retirement account should I contribute to first?

What should I do with this money that I have saved up?  Roth vs. Traditional vs. Taxable?

The amount of information out there can be daunting so I thought I would put together a simple introduction.

(Standard disclaimer: This is my opinion. Consult a financial advisor to discuss your specific scenario.)

Look closely at your budget and decide how much you can cut back to fund your investments. Common wisdom is to pay yourself first. This means put money into savings or investments before it sits in your checking account and you spend it on something. Live on your reduced budget for a month or two and see if you can cut back even more. You might surprise yourself with how much you can save.  The easiest way to do this and that worked very well for us is to have the amount pulled in pre-tax accounts.

Figure out what your tax rate is.  Here is the 2018 Withholding Tables now available from the IRS

Once you know how much you can invest, plan how to do it. Some investments can be made with a payroll deduction, and some are made using the money in your accounts.


Step 1: Pre-Tax Paycheck deduction –  HSA – Self-only $3,450 or Family $6,900

If you have a High Deductible health care plan with a Health Savings Account available to you, you should work on contributing to this account first.  I suggest putting in some money and then continue to Step 2.  The goal is to MAX out the HSA.   This will lower your Modified Adjusted Gross Income (MAGI).

Thanks to Madfientist research he calls this the Ultimate Retirement Account.  The reason is, it doesn’t take FICA taxes out.  It is truly tax free.   Most employers also contribute to this account.    The max in 2018 is Self-only: $3,450 Family: $6,900.   This amount includes what your employer contributes too.  You can use this account for health related costs at anytime even years from now so keep your receipts.

How to do it?  This is taken out of your pay check automatically.  Talk to your employer to set it up.

Step 2: Pre-Tax Paycheck deduction – Contribute up to company’s match – 401k, 401(a), 403(b), 457(b), TSP

Fund 401k, 401(a), 403(b), 457(b), TSP, or other pre-tax account up to your company’s match.  Find out what the matched amount is and do that.    This is free money because your employer is automatically contributing when they match what you put in.    The goal here is to MAX this account.  Again, it will lower your MAGI.

How to do it? This is taken out of your paycheck automatically so talk to your employer to set it up.

If you are NOT covered by a pre-tax account like a 401k-type account at work, go to Step 5, then you can contribute to a Traditional deductible IRA.

Step 3:  ROTH IRA – Personal account (after-tax money) $5,500 – Skip if your income is to high 

Fund a Roth IRA next, if you are below the standard deduction. Here is a calculator to help you. 

Roth IRA is an after tax retirement account that allows you to contribute up to $5,500, in 2018.  It will grow tax free and will never be taxed because you already paid taxes on it. (Unless the law changes.)  It is a huge advantage if you are already in a lower income tax bracket because you aren’t paying many taxes so it is best to save up in a ROTH while your taxes are low.  There are no penalties on withdrawals of Roth IRA contributions. There’s a 10% federal penalty tax on withdrawals of earnings.

When you are in the higher income tax bracket it makes sense to do Step 4 next because the pre-tax account lowers your MAGI.

The ROTH does have an income limit based on your MAGI.

How to do it?  You will have to create an account to start a Roth IRA.  I highly recommend create one at Vanguard.

Step 4: MAX Pre-Tax Accounts – Up to $18,500 and HSA see Step 1

Finish funding the 401k-type plan to the max.  This is helpful because it lowers your income (MAGI).  For those with higher incomes, this can be funded instead of the Roth IRA.   This is taken out of your pay check automatically.  The max you can contribute in 2018 is $18,500 for 401k and 403b.  If you are married, and both have pre-tax accounts with an employer you can both contribute up to $18,500 each.  If you haven’t already Max out the HSA account in Step 1.

Step 5:  Traditional Deductible IRA – Personal account (after-tax money that you can deduct on your taxes) – Skip if you did Step 3  – $5,500 Max 

After you MAX out your 401k-type account fund a Traditional (deductible) IRA , you can also do a traditional deductible IRA, if your MAGI qualifies see the chart at the IRS.

If you are NOT covered by a pre-tax account like a 401k-type account at work, then you can contribute to a Traditional deductible IRA.  See the chart at the IRS.

Note: You can contribute to both a Roth and Traditional IRA but combined you can only contribute MAX $5,500 in 2018. More information about IRAs can be found here at the IRS.

How to do it?  You will have to create a Traditional IRA.  I recommend create a Traditional IRA at Vanguard.

Step 6:  Traditional Deductible IRA – If your Spouse doesn’t work or doesn’t have a Pre-Tax Retirement account – $5,500 MAX

If your spouse doesn’t work you can contribute $5,500 to their traditional IRA this is called a spousal IRA.  I recommend create a Traditional IRA at Vanguard.   This isn’t a joint account or a special IRA it is just a Traditional IRA in the spouse’s name.   More information at Vanguard about spousal IRA.  This is something a lot of families miss out on so don’t miss out.

How to do it?  You will have to create a Traditional IRA in your spouse’s name.  I recommend create a Traditional IRA at Vanguard.


Step 7: Personal Taxable Investment Account – after tax money 

I suggest funding a taxable account with any money left.  This money you can use at anytime and can be what you live off immediately when you are considering Financial Independence.   Most bloggers in the Financial Independence community will agree you will need at least 5 years of living expenses while waiting to do Traditional IRA to Roth conversions the waiting period is 5 years after you convert from a Traditional IRA to the Roth.  Investing is the best way to make that money grow faster.

How to do it?  You will have to create a taxable brokerage account and I recommend creating it at Vanguard.

Additional Information and answers to questions I had:

I make more then the low tax bracket for the Roth that you mentioned but make more then the Traditional (deductible) IRA, what should I do?   Should I contribute to a Roth since I still qualify?

As long as you have MAXed out ALL of your pre-tax accounts then you have 3 options:

1. Yes, you can contribute to a Roth.   It is a great way to save.   Note:  It is already taxed money and will be tax free when you retire.    You can take out the contributions of a Roth out at anytime.  A lot of bloggers talk about this.

2.  Contribute to a taxable account Step 7.  I highly recommend doing this option.   As a lot of bloggers point out the taxable account needs to be looked at because there is no limit how much you can contribute or how much is taken out.  You will get taxed on dividends and when you sell.  Most of the time, you will let it sit and grow.  The big point is you will need at least 5 years of expenses to live on while you are doing Roth conversions (see below) and having a taxable account is the best place to keep it.

3.  Do both 1 and 2!   The more you save the sooner you will be financially independent.

What is the amount of income that you can receive that is so low that you will pay little or no taxes?

It does depend on your deductions.  In 2018, the standard deduction has increased so most people will not itemize but you still will have “above the line” deductions and credits.   There is a very good tax calculator that can help you figure this out.   The more you put in the 401k pre tax account, the lower your adjusted income and thus the lower your taxes will be.

What are Roth Conversions?

Roth Conversions is simply converting money from a Traditional IRA to a Roth IRA.   You will pay income tax on the amount you convert.  More information about Roth Conversions can be found here at Vanguard.   Check out Madfientist  article – How to Access Retirement Funds Early.

For more details I highly recommend reading:

The Simple Path to Wealth by JL Collins – Stock Series

The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books. Big Profits) Hardcover by John C. Bogle

The Bogleheads’ Guide to Retirement Planning by Taylor Larimore,‎ Mel Lindauer,‎ Richard A. Ferri,‎ Laura F. Dogu

The Bogleheads’ Guide to Investing by Taylor Larimore,‎ Mel Lindauer,‎ and Michael LeBoeuf

Traditional IRA vs. Roth IRA – Madfientist

Note: These are my opinions. I’m not a tax professional or financial advisor.  Do this at your own risk.

I hope this answers some of your questions just like the ones I had.

Happy Savings!   Holly

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ING Direct Offering Specials on 7/1/10-7/2/10

I’m a huge fan of ING Direct.  It is simple to use and it is the best way to save automatically.  I’m a firm believer of paying your self first by automatically saving from each paycheck or per month.  Then I pay the rest of the bills with what I have. That way I can’t overspend.

In my email this week, I got a hint to a new sale ING Direct Financial Independence Days Sale that ING Direct is going to offer July 1-2.

Check out who wrote an article with more details about the sale.  Back in November last year they had a great Thanksgiving Sale that offered money after signing up for their FREE e-checking account.  Super easy to do and a great account to use as a debt account.

I love referring people to ING Direct and I get a little something in return when I do refer others as well as the new customer!  If you are interested in being referred especially during this event please email me with the email account you wish to sign up for to redberrydeals (at) gmail (dot) com and I will send you the referral link.

Posted on – Check it out! Get Organized for 2010!

Organization is a never ending battle.  No matter what life throws at you, you will be disorganized at one time or another.  There have been times I have been so organized it felt great, but life does happen and that planner gets left at home, or the monthly to-do list gets misplaced on the kitchen table with the mail.  Now, that I’m a working outside the home Mom, being organized is a dream!  Even in my About Me I mention my struggle with organization – “I hope as time goes by I will have the opportunity to learn to organize my time better and post deals as well as shopping trips.”

I was a Day-Timer fan for years.  I still have a place in my heart for the Day-Timer concept, it has a very nice simple layout and using the binder I could move pages to different sections at will.  The last year I used it I started having more and more problems being able to move pages without getting frustrated with the binder.

A dear friend of ours introduced me to Levenger Circa, which I had never seen before.  Basically think of a Rolodex but in a notebook.  You can carefully pull the pages out and then put them anywhere you want!  The down fall is the Levenger brand paper is a bit expensive and the Circa punch at a silly cost ($58!).   Levenger has a couple stores including one in the Northern Virginia area at Tysons Corner Mall, and you can ask (nicely, of course) for a FREE sample and they will create for you a sample (I prefer junior size) to try it out!  It is wonderful!  What a great concept!

Me being the savvy shopper that I am wanted to find a deal and back in the fall Levenger had a sale on Circa products on their website.  I was able to get some of the items on sale and then I ordered the $40 sampler packet with the $40 gift card I could put that towards the Circa punch.

Now, I have all of the tools to create my very own planner! The best place to check out is, that has lots of templates and even a simple program to create your very own planner.  I can have a daily calendar as well as a monthly calendar exactly as I like it.

Speaking of a great site to learn about planners it also has my next favorite subject -financial planning.  This link has some templates to create envelopes to help you with your financial planning!

Since it is tax time and the beginning of the year what a perfect time to mention this stuff.

What do you think?  Have you heard of or Levenger Circa?

Img Source:  All You

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2010 Savings Challenge

I’m a huge fan of so many bloggers including Mrs. MoneySaver and  It is so inspirational to read about each of their goals for 2010!

I’m so excited because if you read my earlier post from last year about our financial goals 2009 I’m excited to say that we’ve done everything on the list and then some!   We’ve done a lot and we continue to stay on track!

This is what we did in 2009!

1. Continue to pay our credit cards each month!

2. 6+ months of expenses for emergency fund

3. Increased each of our life insurance policies!

4. Got an umbrella policy.

5. I’m super excited to say that we maxed out on our retirement accounts!

6. We started a 529k for our daughter and family has even helped with some gifts.

7.  We refinanced our mortgage 2 months ago and lowered our mortgage payment by 9% per month!  That might not sound like a lot but for us that is a decent amount.  Of course that means we went back to a 30 year mortgage but I’m pleased with that.  Here is a great article from Ric Edelman — 10 reasons to Keep a Big – Large Mortgage.

8.  We are going to keep our extra stock and keep it until it rebounds a little bit more.  The advisor fees are too high to keep it after that. We are going to put this money towards our next savings goal.

9.  Get a home equity line of credit – Still looking into this option.  At this point we are comfortable with our current options.

10. Go on vacation!

Financial Goals 2010

Woohoo!  We only have our mortgage debt!  Not bad!    After a quick milkshake with the hubby we came up with these goals.

1.  Continue to pay off credit cards each month!

2.  Try to spend only $40 a week on groceries and try and spend less on eating out.

3. Max out our retirement accounts and look at other options to save even more into retirement.

4.  Continue to save each month into our daughter’s 529k plan.

5.  With the extra savings from our mortgage each month we are going take it and invest.   We will include stock that we were going to sell last year into this fund.  We have a goal and so far we have about 40% saved up!

6.  We went on vacation!  Woohoo!  Thanks to saving and being frugal at Christmas we went on vacation.  More about that soon.

7.  Save towards landscaping our front yard.  We need to get a couple estimates to figure out how much we need to save. We plan on doing some of it ourselves and having someone come and help too.

8.  Save towards remodeling our master bathroom.  Our bathroom is fine for now but it needs some tile work and we’ve thought long and hard and realized that it needs a good makeover and we plan on getting some estimates.

Keep Saving!

What are your goals for 2010?

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Free Download of David Bach’s New Book –

Click HERE to download David Bach’s New Book – Start Over, Finish Rich 10 Steps to Get You Back on Track in 2010 for FREE!  Today only – started 1/4/09  and will stop sometime today – 1/5/09!   Hurry!

From David Bach:

Now that is a great question! And the answer is I truly want to help millions of you make 2010 your best year ever. I know many of you may not be able to afford a book at this time and this was my best way to give back in 2010 and help as many of you as possible. We know that giving away this book five days after it is released is risky and may hurt book sales, but I’m willing to take the risk. I told my publisher, trust me, the more people we help in 2010, the better! I know many of you will still buy the book, love reading the paperback and enjoy the free bonuses we’re giving away (only when you purchase it.) But for those of you who can’t, here’s your chance to enjoy it today!

Thanks for being a part of my community and sharing Start Over, Finish Rich with those you love. And thank you again for reading my past books (and this one) and letting me be your trusted financial coach.

Happy New Year!

David Bach

Copyright © 2010 FinishRich Media 295 Greenwich St. Suite 529, New York, NY 10007

I like a lot of the financial writers and advisers like  Ric Edleman, Dave Ramsey,and David Bach.   They all have very sound advice and some of it I’ve accepted and used wisely and some I’ve listened to and made my own decisions.

David Bach was the first to introduce me to having a frugal mindset before I even knew who Dave Ramsey was!  David Bach introduced me to the “Latte Factor” – stop spending extra on things you could live without – “find out what investing your small savings can do for you.”   I strongly suggest you take a look at his books and learn more about how you can “Finish Rich.”

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How do you calculate your grocery or drugstore savings?

I’m curious, how do you calculate your grocery or drugstore savings?

  1. Do you calculate it based on regular retail prices?
  2. Do you calculate it based on sale prices?
  3. How do you calculate it using your reward points /bucks/ rewards?

I’ve been trying to figure this out for a while.  We save a lot each year on so many things!  We don’t ever buy toothpaste, razors, and other household products just because I can get it FREE or really cheap.   I know I’m saving a lot because of that but how much am I really saving per trip? What formula do you use?  I plan to find a couple formulas and post them here.

Source Img:  All You magazine

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Happy New Year! and Donations!

Happy New Year!  I’m so excited even though the weather today isn’t the prettiest it sure is nice to to be home and rest with the family.   Plus we are going to make my version of the Starbucks Ginger Bread Latte!  Cheers!

I just wanted to send a quick reminder to everyone that it is Dec 31st, which means you should complete any 2009 donations today!   There are so many charities that need help and even it is a, $1 or $5 it is so appreciated by those that don’t have much.   Plus, most charities are tax-deductible which can help with 2009 taxes.  Giving is worth it!

Happy New Year!

Img Source:  Justin Newitter

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Merry Christmas!

From my family to yours – Merry Christmas, and see you in the New Year!

I will continue to do the best I can and post any interesting deals as I find them.  I will be taking a break like most bloggers and enjoying the holiday season, but when I find interesting tidbits to share I will do the  best I can.

A couple reminders!   This coming weekend will have the P&G insert-December 27 – so don’t forget to get your local paper.

Keep an eye out for some great deals on December 26 for next year’s Christmas season like candles, wrapping paper, cards and ribbon.  Remember to create a budget and stick to it.

That reminds me!   It is time to start thinking about financial goals for 2010.   What are your savings goals for 2010?

Posted on – free personal financial tracking!


Since it’s the beginning of the year its that time again to start getting taxes ready and organize my financial information. I used to be a big fan of Quicken and Money but both programs have limitations and require a lot of work in my opinion.  I usually would have to spend 1 to 3 hours a month to add all of the account information and figure out my financial situation.  In addition, I prefer not to pay $30 to $60 for software that I didn’t think really helped me much.  So, I did some research a couple weeks ago and I discovered

What is is a personal online financial tracking system for free!  That’s right free!  You create a secure account online and add your login and passwords for your individual accounts – checking, savings, investments etc.   This is similar to what Quicken and Money offer, however, automatically categories the transactions.  Then it takes that information and tells you how you are doing financially with simple to understand pie charts, and bar charts.  You get a quick picture of your financial health.

Does help you budget?

Yes!  This makes me very excited.  The problem with Quicken and Money is neither software programs could help you “budget” because it was after the fact rather than before the fact. does it differently.  It immediately will check your accounts and tell you via alerts or when you login, if you go over your budget.  You can change your budget very easily too.

Does notify you have changes to your accounts?

Yes!  This is the best part in my opinion, because you can setup alerts that can be emailed to you.

How does make money?

They have a section on their site that offers you suggestions to save more money by applying for a different checking account or credit card for example.   If you decide to take an offer then they will get referral fee from the company.

How secure is is very secure.  More details about the security is on their site.   I recommend you always use a strong password – at least 8 characters that include numbers and symbols.

Let me know how you budget and what your opinion is of personal software programs.  Do you have a favorite?  Would love to hear your opinions.