Intro & my financial situation, what's next?

[Outbound]

Hey all,

First post here, and I was referred to this forum by my friends from another self improvement forum.  A little background on my situation:

I have a job which I have been getting large raises over the past five years, and recently surpassed six figures excluding bonuses.  I also have a 401k and a Roth IRA.  For the 401k, I only contribute up to the full employer match, and have only recently maxed my Roth contributions.  I have the capacity to save about $2000 per month, maybe much more.

Now here's where it's gets interesting.  I recently came out of a divorce, and along with that, I got some money out of a home sale settlement during the divorce.  A month later, I got a bonus from my company.  So I have a good chunk of change sitting in my checking account.

My question is what to do with it?  I feel it is too much to leave it in the checking account where it earns peanuts in interest.  At the same time, I also feel it is not enough to put it into real estate, mostly because I want to keep at least half of it liquid in a savings account.

My goals over the next five years is to become Location-independent.  Not necessarily financially-independent, but I want to be able to work and earn money from anywhere in the world as long as I have an internet connection.  This could mean writing books and earning passive income, or becoming a freelance programmer, or even both.  I would love to accomplish location-independence inside of a year, but I'm thinking long term.

In the meantime, where should I park all this money sitting in my checking account?

EDIT: I have no outstanding debt, but my car is starting to get old with 120k+ miles on it.

[MDM]

recently surpassed six figures excluding bonuses.  I also have a 401k and a Roth IRA.  For the 401k, I only contribute up to the full employer match, and have only recently maxed my Roth contributions.  I have the capacity to save about $2000 per month, maybe much more.

Now here's where it's gets interesting.  I recently came out of a divorce, and along with that, I got some money out of a home sale settlement during the divorce.  A month later, I got a bonus from my company. 

So you may be in the 28% marginal bracket?

Any reason not to put the full $18K into a traditional 401k?

[Outbound]

Yes I'm in the 28% bracket, near the low end.

Not sure where you are getting the $18k figure, but my 401k balance is almost 10 times my Roth IRA balance, so I was wanting to get aggressive with the Roth while only contributing up to the employer match on the 401k. 

Plus my funds in the checking account, I'm also not sure what to do with, but I don't want to lock it all up in a retirement account that I wouldn't be able to access until I hit retirement age. 

[the_gastropod]

The $18K figure MDM mentioned is the max contribution one can make to a 401k for 2015. He's asking if there's a reason you aren't contributing to this max.

Regarding not being able to access your retirement accounts prior to retirement age, give this a read: https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/

[Outbound]

Thanks for the link.  I only read option 1, so from what I understand, I can max my 401k contributions, roll some of it over to my Roth every year, let it sit for 5 years, and take the money out?

Isn't the contribution limit of the Roth IRA only $5500?  So even if I put in 18k in my 401k yearly, I will only be able to convert $5500 from the 401k to the Roth?

[thd7t]

You're in a pretty high tax bracket to be using a Roth IRA.  Wouldn't a traditional IRA give you more money in the long run?

[MDM]

Isn't the contribution limit of the Roth IRA only $5500?

Yes.

So even if I put in 18k in my 401k yearly, I will only be able to convert $5500 from the 401k to the Roth?

No.  There is no conversion limit.

You're in a pretty high tax bracket to be using a Roth IRA.  Wouldn't a traditional IRA give you more money in the long run?

Yes, but the IRS won't let you do that when your income is this high.

[thd7t]

Isn't the contribution limit of the Roth IRA only $5500?

Yes.

So even if I put in 18k in my 401k yearly, I will only be able to convert $5500 from the 401k to the Roth?

No.  There is no conversion limit.

You're in a pretty high tax bracket to be using a Roth IRA.  Wouldn't a traditional IRA give you more money in the long run?

Yes, but the IRS won't let you do that when your income is this high.

Isn't use of TIRA based on MAGI?  I didn't see OP's income (and got this thread confused with another), but single filers at the bottom of the 28% bracket can get down to tIRA numbers just by maxing a 401k (and taking standard deduction/exemption).

[Outbound]

Isn't use of TIRA based on MAGI?  I didn't see OP's income (and got this thread confused with another), but single filers at the bottom of the 28% bracket can get down to tIRA numbers just by maxing a 401k (and taking standard deduction/exemption).

I'm at the very low end 6 figures, so if I max my 401k, I should be able to open a tIRA - correct?

Also, is there an easy way to keep track of what I convert from a 401k to a Roth IRA, so I don't run into any penalties or tax complications when I withdraw the money 5 years later?

[jmusic]

Isn't use of TIRA based on MAGI?  I didn't see OP's income (and got this thread confused with another), but single filers at the bottom of the 28% bracket can get down to tIRA numbers just by maxing a 401k (and taking standard deduction/exemption).

I'm at the very low end 6 figures, so if I max my 401k, I should be able to open a tIRA - correct?

Also, is there an easy way to keep track of what I convert from a 401k to a Roth IRA, so I don't run into any penalties or tax complications when I withdraw the money 5 years later?

You'd have to get your MAGI down to $71K as a single filer to PARTIALLY deduct tIRA contributions.  Def max the 401k anyway, but without any other gymnastics I don't think you can get down to $71K starting from six figures.  Note that nothing stops you from opening the account, but if it's not deductible there's no reason to contribute (well the growth is tax deferred, but then you're better off in a Roth).

http://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-Covered-by-a-Retirement-Plan-at-Work

[jmusic]

Isn't use of TIRA based on MAGI?  I didn't see OP's income (and got this thread confused with another), but single filers at the bottom of the 28% bracket can get down to tIRA numbers just by maxing a 401k (and taking standard deduction/exemption).

If you look at the tax forms, the IRA deduction happens prior to the standard deduction computation.

http://www.irs.gov/pub/irs-pdf/f1040.pdf

http://apps.irs.gov/app/vita/content/globalmedia/ira_deduction_worksheet_1040i.pdf

[thd7t]

Thanks for explaining!

[Catbert]

If you want to be location independent then don't buy real estate.  Pretty big costs to buy/sell.  You want to avoid being a long distance landlord since paying 10% of rent to a property manager can turn a nice cash flow into a wash.

Will you owe capital gains tax on your home sale?  (Generally if you've lived in the home for 2 of the last 5 years you can shield 250K of capital gains - 500K if your married.)  If so set $$ aside if you'll owe taxes.   

[Outbound]

^ I've only lived in the house for a year and 3 months before selling it, and I didn't get anything close to 250k out of it.  More like 25k, which was my half as part of the divorce settlement.

[Outbound]

Also, wanting to be location independent, I won't buy real estate.  That leaves paper assets (in either taxable accounts or tax sheltered retirement accounts), or starting a business. 

[Outbound]

Thinking about this some more, I feel like my original question was kind of unanswered.

Let's say I have a cash windfall of about 40k sitting in my checking account.  Should I put half of it in a taxable account and invest it, and keep the other half as my emergency fund?  I may also need some of it to buy a new car should the need arise. Any other ideas? 

[MDM]

Thinking about this some more, I feel like my original question was kind of unanswered.

Let's say I have a cash windfall of about 40k sitting in my checking account.  Should I put half of it in a taxable account and invest it, and keep the other half as my emergency fund?  I may also need some of it to buy a new car should the need arise. Any other ideas?

Given your marginal tax bracket (28% or maybe 25%), putting $18K into your traditional 401k and $5500 into a traditional IRA (if eligible - otherwise Roth) seems appropriate.

If you can do that out of normal cash flow, great.  If not, you could apply some part of that $40K.

Whatever is left over from the $40K should be split into investments for long term or savings for short term.

Is there something about that that you don't like?

[Outbound]

Is there something about that that you don't like?

No, just making sure I am grasping everything being said in this thread.

I can max the 401k and IRA out of normal cash flow, and split the 40k into long term investments (in a taxable account) and savings for short term.

One more question, should I be contributing to both traditional and Roth IRAs?  I think my income is too high to deduct my IRA contributions from taxable income.

[MDM]

Is there something about that that you don't like?

One more question, should I be contributing to both traditional and Roth IRAs?  I think my income is too high to deduct my IRA contributions from taxable income.

If your income is too high for deductible traditional, but below the maximum for Roth, then do Roth.

If your income is too high for Roth, then do backdoor Roth.

[Outbound]

I'll start doing the backdoor, because my annual bonus might push me over the Roth income limit.

Is there something I should do/not do in order to not get in trouble with the IRS?

[MDM]

I'll start doing the backdoor, because my annual bonus might push me over the Roth income limit.

Is there something I should do/not do in order to not get in trouble with the IRS?

Looks good.  See http://www.bogleheads.org/wiki/Backdoor_Roth_IRA and https://personal.vanguard.com/us/insights/article/ira-insights-roth-112014 for some specifics.  You will be one of many thousands (~20,000 in 2013 in Vanguard alone per the second link) doing this.

[Outbound]

Thanks very much.

I already set up a traditional IRA along side with my existing Roth in Fidelity (my 401k is on there as well). 

I automated my tIRA contributions and marked a date in December on my calendar to convert the balance to the Roth.

[MDM]

I already set up a traditional IRA along side with my existing Roth in Fidelity (my 401k is on there as well). 

I automated my tIRA contributions and marked a date in December on my calendar to convert the balance to the Roth.

Why wait - unless you are relying on the market falling?  If it continues to rise you will pay tax on the returns when you convert in December.  If you convert now, all subsequent gains in the Roth are tax free.

[Outbound]

Why wait - unless you are relying on the market falling?  If it continues to rise you will pay tax on the returns when you convert in December.  If you convert now, all subsequent gains in the Roth are tax free.

I see, so a couple days after the tIRA contribution clears, convert it to Roth?

It would be nice if there was a way to automate this.

[bb11]

Why are you talking about taking money out of your Roth? You don't want to remove it, even after 5 years.

[MDM]

I see, so a couple days after the tIRA contribution clears, convert it to Roth?

Yes.

[Outbound]

Tried converting my tIRA contribution to the Roth and I get this error:

This account cannot be converted at this time
(12B11780005) Your transaction cannot be processed at this time. Please try again later, or call a Fidelity Representative at 800-544-6666.

Is there a reason why I can't convert now?  Instead of calling customer service and being put on hold for 30+ min, I figured I would ask on here instead.

[MDM]

Tried converting my tIRA contribution to the Roth and I get this error:

This account cannot be converted at this time
(12B11780005) Your transaction cannot be processed at this time. Please try again later, or call a Fidelity Representative at 800-544-6666.

Is there a reason why I can't convert now?  Instead of calling customer service and being put on hold for 30+ min, I figured I would ask on here instead.

Fidelity computer problem?  I've had much better luck with Fidelity customer service response (i.e., no more than a few minutes wait) - might be worth a try.

[Outbound]

Still no luck with transferring from tIRA to Roth.  Customer service has not been helpful and told me to go visit a local branch. 

It would be a huge pain in the neck if I have to go to a branch once every month to have the funds transferred.  What am I doing wrong?

[MDM]

Based on https://www.bogleheads.org/forum/viewtopic.php?t=153097 you aren't doing anything wrong.  Just wait a few days....

Seems very poor communication on Fidelity's part.

[Outbound]

Was able to transfer to Roth online. Just had to wait a week or so until the tIRA contribution clears. I guess it's the the same old hold on funds time that banks are apparently legislated to do.