DON’T BUY A HOME The notion of a 22-year-old buying a home sounds laughable to anyone living on the coasts. But Ms. Nipp and her brother, who is also a financial planning graduate of Texas Tech, lived in a $60,000 house in Lubbock that their parents had bought for them. And she could afford the down payment and mortgage on a condo in San Antonio right now.
But she ran the numbers, and it would put her in too tight a financial vise. “A lot of people don’t realize the expenses that come with a house,” she said, though she knows, having taken care of the one in Lubbock. “There is upkeep. Taxes. Insurance. It’s a lot more than just a mortgage payment, and just because your mortgage payment doesn’t go up doesn’t mean taxes and insurance won’t.”
DON’T MESS WITH TAXES Nobody knows where income tax rates will be in 30 or 40 years. “But the fact is, people my age are in a lower tax bracket now than we probably ever will be in again,” she said.
So her strategy is to take full advantage of the (incredible 8 percent) match that USAA offers on its 401(k) and then save as much after-tax money as she can in a Roth Individual Retirement Account. Under the current rules, the earnings in that account will come out tax-free when she retires.
It is a smart strategy, but what if the Roth rules change and diligent savers like Ms. Nipp are someday taxed on Roths over, say, $500,000. She says it doesn’t much matter, since the 401(k) rules could change, too. If either set of rules changes, at least she has two different types of retirement accounts and thus is hedged through tax diversification.
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By Ron Lieber