Slightly Overwhelmed

[channant]

Hello Jeremy, family, and fellow forum followers!

I'm hoping I can present an interesting case study for you all and get some advice on my (maybe) unique situation. So here it is:

I'm 30 years old and began saving for retirement a few years ago with a Roth IRA through Vanguard thinking I'd work hard until becoming a happy millionaire at age 59.5. I'm self employed and make about $75k/year before taxes and have since been maxing out the Roth where I currently have about $27k 100% in VTSAX. I've also been stashing some away in a high-yield online savings account. Right now I have about $40k in there. I owe $209,000 on my home with a $1400/month mortgage with no other debt.

I have one other source of income: this year I started to Airbnb my house and projected earnings at this time are in total $15k. Next year I should be able to get around $30k in rental income alone.

Just last week I discovered the exotic and exciting world of early retirement/financial independence and I've been obsessing over the concept and scanning the blogs of Go Curry Cracker, Mr. Money Mustache, Mad Fientist, and the like. Holy crap, this is all so for me. I'm willing and able to limit my spending and cram as much money into investments as I can.

At first I thought this would be as simple as continuing to max out my Roth and moving over my $40k savings into a taxable Vanguard account, and then just throwing as much as possible into that. It's going to be so easy! Not...

As I read through these blogs, I realized how much more complicated and nuanced this world actually is. For one, being I'm currently in the 25% tax bracket, maybe even 28% next year, it would actually be far more wise for me to be using a Traditional IRA instead of the Roth. And then come the (rhetorical) questions: Should I open a Traditional and relocate those funds? Or should I keep the Roth and let that $27k cook and open a Traditional to fund instead? Wait...what's this Solo 401k for the self employed?? Should I have that too?? How much should I be putting into each? What about the taxable account?

Not sure if I should even open the can of worms on how confused I am at the best effort to minimize taxes...input is welcome on that too.

But what it really boils down to here is this:

I've got $27k in a Roth
I've got $40k to invest (I'm totally down with 100% VTSAX)
I am unsure on how to now allocate between Roth, Traditional, Solo 401k, Taxable.
I'm hoping to be putting away $20-$30k ever year after this.
Would love to be financially independent by 45, long enough to get me to 59.5.

And, finally, should I even be thinking about it that way? I sort of see it in two stages. Stage 1: Save for 15 years and then live off those investments until Stage 2: begin withdrawing from IRAs/401k. But I also have been reading about ways to withdrawal from an IRA early. What the heck is the best move here?

If you can't tell, I'm slightly overwhelmed!

[prognastat]

Hi Channant, welcome to the forums.

It sounds like you've been really been putting some thought in to this. The first big question is which tax advantaged options does your job offer? Can you invest in HSA, do you have the option for a 401k, maybe an Employee Stock Purchase Program(ESPP) that provides a discount etc. If so those can be some powerful tax advantaged investing vehicles.

[channant]

Hey Pro, and thanks!

Yes...lots of thought indeed. I'm self-employed, so my only option here would be a Solo 401k which is certainly something I'm considering!

[gocurrycracker]

At first I thought this would be as simple as continuing to max out my Roth and moving over my $40k savings into a taxable Vanguard account, and then just throwing as much as possible into that. It's going to be so easy! Not...

No, it really is that easy. If you did this and nothing else you would reach your goal.
Could you do a little better? Sure, we all can. But you are 90% of the way there.

If you spend less than $30k/year I suppose you could even be FI today living off your rental income?

One thing you could do is open your solo401k. An 18k contribution to a Traditional 401k will save you nearly 5k in fed taxes, which is about enough for a free Roth IRA every year.

[channant]

Awesome to hear from you, Jeremy! Unfortunately I still owe $209k on the home with a $1400 mortgage so no FI just yet. Would it behoove me to throw that $30k/year at the mortgage instead? I have a pretty good interest rate at 3.5% so I still feel like maybe it would be better to be investing?

Submitting my paperwork for an Individual 401k with Vanguard today. Ready to put my lazy money to work!

[gdubb85]

Hey Channat... I registered on this forum after reading your post, because you sound a little like me  .  I am in a similarish boat at age 33, but have a salaried job on top of side self employment.

Since you have two forms of self employment income that make up your entire income (75K + 30K) you should really look into making an S corp for your 1 person company.  It will save you on taxes.  As an S corp, you play two roles.  You can give yourself a fair salary (something less than your total income) as an employee of your own business based on what the market might pay, your duties, hours worked etc... and then reward yourself as the entrepreneur you are by paying the difference in the form of dividends essentially, saving the ~15% SS/Medicare on that portion.  So you might pay yourself 40K a year and get the rest as dividends.  I don't know if you could lump both activities into one business structure though...talk to an accountant.  A little more paperwork and you will have to look into unemployment insurance, but doing it now will probably pay dividends over the coming years if you keep making $$ in your business on the side as the years go by.

After that, you can sock away $18.5K in the solo 401k as an employee and up to either 20 - 25% additionally as a percent of your total business income.  20% I think for sole proprietor status and 25% if you go S corp.  If you go S corp however, your business income is now equal to the salary you paid yourself, since the dividend distribution does not count.  If you can live without the money now, I would find every avenue to defer taxes.  But also keep in mind you need a substantial cushion in your after tax accounts before doing IRA conversions etc.

I personally would not pay a cent more down on the mortgage.  I also have a 3.5% rate and a $2200 mortgage and the markets have paid me handsomely for investing there instead of the house.

Lots of rambling ideas there, but just so you are aware of options in case you weren't. Of course, I am not an accountant and this is not official advice, DYOR and consult an accountant etc.

What is your self employment gig making 75K/year?  Can you keep doing that/would you be willing with minimal effort throughout the years?

[channant]

Yo gdubb!

I've looked into an S corp before and definitely still taking that into consideration. As for my entire income, it's about 75k total. Last year my personal business brought in about 60k after business deductions and this year I'm expecting about the same plus 15k from Airbnb to total somewhere around 75k.

I've already maxed out my solo 401k this year with 18.5k and also put in another employer contribution of 16k. I'm a little nervous that the employer contribution will be more than my allowed contribution amount but I'll be going over that with my CPA soon and understand that I can make a correction before the end of the tax year if necessary. I'm already obsessed with tax deferral. My final income after all deductions this year should be under 30k and for once I'm actually looking forward to tax season!

I'm a photographer/videographer. Most of my income is from making cinematic wedding films but I also do short promo material, documentary work, and some surf and travel stuff. I should be able to do this stuff for a while, but I'm definitely at the risk of burning myself out. Long term goal is to start dialing the weddings back some once I get better at cutting my living expenses and getting a better system into place. You can see my work on my website www.swellfilms.com.

How about you?

[gdubb85]

Nice site/videos - I think traveling making surf videos would be my dream... I am from MD and the first video I clicked on was literally a drone shot of Ocean City, MD which I came back from today - an off-season surf trip! My wife and I talked about how we love the ocean but Ocean City just isn't our crowd (tons of smokers, a bit rough) and we started Zillowing Outerbanks places for our dogs as our retired home and I noticed that's where your located I think.  Very weird.

I am an engineer by day and dabble in online marketing on the side for extra income and cushion for my retired self when I get there.

Hows OBX for surfing?  Do you live on the beach? I am guessing that's why you have a successful airbnb there?  I think that's our next vacation spot...