Author Topic: I've maxed out my 401(k); now what?  (Read 2900 times)

GerryS

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I've maxed out my 401(k); now what?
« on: August 22, 2015, 01:28:41 AM »
Hello Mustachians,

Your infinite wisdom is requested...

I hit the IRS Pre-tax limit of $18000 today in my MegaCorp 401(k) plan. I'm actually now $500 into after-tax contributions. I'm not sure what I should do for the rest of the year.

Some details about my situation:
  • I'm currently contributing 11% of my pay. The first 6% is matched at $0.75 on the $1.00.
  • My plan allows for after-tax contributions. Company will match first 6% of after-tax dollars just like it does pre-tax dollars, i.e. at the same $0.75 on the $1.00 rate.
  • We have a cash emergency cushion of $70k
  • my wife's 401(k) isn't maxed, but she went out today on maternity leave for the next 6 months and won't be earning her regular pay
  • I have a traditional IRA that I could contribute to
  • We also have a 529 plan for our son
  • aside from our mortgage (~$2000 PI) we only have one outstanding debt - a new Solar Loan at 1.89% (12 year term) and $144/mo (~18k balance)
  • we have been regularly saving $750/mo into our cash emergency fund, but last month we liberated $750/mo by paying off remaining car loan balance (from before we knew about MMM) and student loan balances. So we now have an extra $1500/month in our "budget" to play with
  • kid 2 is on the way within 2 weeks

Can anyone offer any tips on what to do next re the maxed out 4019k)? Should I continue contributing my current 11% in after-tax (note this is not termed a ROTH 401(k) in my plan details). Should I set contributions to 6%, just to continue capturing company match, or should I set contributions all the way down to 0% until next year and instead start putting that money into my Traditional IRA and potentially a Traditional IRA for my wife?

If it helps, my wife and I fall into the 28% tax bracket so we're well beyond the point of ROTH IRA and deductible IRA contributions.

I hope this isn't too vague. Let me know if additional details are warranted.


Trudie

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Re: I've maxed out my 401(k); now what?
« Reply #1 on: August 22, 2015, 06:35:07 AM »
But are you seeking maximum tax shelters, providing for your kids' educations, or flexibility?

Do you have an HSA?  If so, I would max that (if tax sheltering is an issue).

My next comment was going to be to do a Roth, but that doesn't seem to be an option for you.  If there are options for you to contribute after-tax to your 401K plan, then convert to Roth through a "backdoor Roth" strategy (well documented on this site), then I would consider that in the future.  But if not, I wouldn't invest after tax dollars in a typical 401K plan given the fees.  You're better off investing it on your own and purchasing EFTs or index funds.

If kids' educations are a priority, I would give early and often to that category and at least rack up the state tax credits.  Better yet, if you or your spouse may benefit from one in the future, start one for yourselves (you can always transfer the money to another beneficiary.)   I have them set up for both my husband and I and this is one way we will fund our retirement fun.  (We like school.  What can I say?)

If flexibility is a primary concern, then I would start developing an unqualified investment strategy, which will be an important cornerstone of ER.  I am questioning whether $70K in cash is excessive and could be better off working in the market (if even in a bond fund).  Do you have access to a HELOC ("springy debt" as MMM likes to call it)?  I guess the question is, what would you do to tide yourself over in the event of a shitastrophe?  If the answer to that question is that you'd be forced to make major changes anyway (selling a house, relocating, spouse returning to work) then what you're really looking for is a low-cost way to tide yourself over til you can get your feet under you.


nanu

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Re: I've maxed out my 401(k); now what?
« Reply #2 on: August 22, 2015, 06:56:14 AM »
If I understand you correctly, 11% of your pay = $18K, meaning you earn approximately $163K/year.
So if you contribute 6% ($9.8K) to your after-tax 401K the company will give you an additional match of $7.3K.
Even if your 401K has bad funds and fees, that seems like a great return on your money!
And if you can convert it to Roth within the plan (you can ask your 401K administrator about this), it would be great. Even if not, you should be able to convert the post-tax contributions into a Roth IRA and any earnings into a traditional IRA once you leave the company.

However, while this 401K saving seems good to me (due to the company match), it really depends on what goal you're saving for.
This money will be hard to touch before retirement, whereas if you want it for your child(ren) education then you might choose something else (like a 529).

MDM

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Re: I've maxed out my 401(k); now what?
« Reply #3 on: August 22, 2015, 03:47:07 PM »
Backdoor Roth seems to be a "go do".  Are you familiar with this?

Have you heard of a Mega Backdoor Roth (https://www.bogleheads.org/forum/viewtopic.php?t=137366)?  If your 401k allows, that might be great also.

ShoulderThingThatGoesUp

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Re: I've maxed out my 401(k); now what?
« Reply #4 on: August 22, 2015, 05:28:29 PM »
Your cash cushion is insanely huge. Put that money to work!

GerryS

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Re: I've maxed out my 401(k); now what?
« Reply #5 on: August 22, 2015, 07:37:50 PM »
Your cash cushion is insanely huge. Put that money to work!
Yeah, 70K is a hefty cash cushion. My folks never had much of a cushion when I grew-up so that plays into my cash conservatism. Funny enough though I'm more aggressive in the markets, but I guess that's because of time horizons, etc. Additionally, it currently represents a years worth of expense. My wife and I have a condo she purchased as a single gal in late 2006 as the housing bubble started to deflate. I spaced on this last night when i posted as it was late and I had several IPA's in me :-). It's rented currently (at a loss, grr), but factoring that into the monthly nut requires the cash. Thankfully that albatross is being listed at the end of our current tenants lease. Then we wont need such a cash cushion.

Backdoor Roth seems to be a "go do".  Are you familiar with this?

Have you heard of a Mega Backdoor Roth (https://www.bogleheads.org/forum/viewtopic.php?t=137366)?  If your 401k allows, that might be great also.
I'm somewhat familiar with this concept. I lurk on Bogleheads so have seen it discussed. I need to check with my Plan's Admin on this. If it turns out I can do this I'll likely continue with after-tax dollars into the 401(k) and then start rolling it out into a Vanguard Roth IRA.

If I understand you correctly, 11% of your pay = $18K, meaning you earn approximately $163K/year.
So if you contribute 6% ($9.8K) to your after-tax 401K the company will give you an additional match of $7.3K.
Even if your 401K has bad funds and fees, that seems like a great return on your money!
And if you can convert it to Roth within the plan (you can ask your 401K administrator about this), it would be great. Even if not, you should be able to convert the post-tax contributions into a Roth IRA and any earnings into a traditional IRA once you leave the company.

However, while this 401K saving seems good to me (due to the company match), it really depends on what goal you're saving for.
This money will be hard to touch before retirement, whereas if you want it for your child(ren) education then you might choose something else (like a 529).

I'm at the $165k mark for the year and based on salary and potential additional commissions I expect another 35K-40K in 2015. This is the portion that would go into 401(k) plan as after tax. It works out to about $2400 in contributions and $1800 in match. That's not bad "return" on my $2400. Oh and my plan has nice cheap index funds. S&P is .04% ER and mid-cap Index is .08%. It's not a true Total Stock Market, but it's close enough. The rest of my portfolio (bonds, international) is in my IRA

Thanks all for the ideas. I'm going to:
  • Look into plan rules for rollover of after-tax contributions to a Vanguard Roth IRA
  • if that isn't an option start pumping up my children's 529 plans

Moostache

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Re: I've maxed out my 401(k); now what?
« Reply #6 on: August 23, 2015, 05:24:45 AM »
The Mega Backdoor Roth is a great gift. My company just started to allow after tax contributions with in plan conversions as of the middle of this year so I won't quite be able to max out for the current year but next year should be great.  I upped my contribution level to 50% which is the maximum the company will allow.  That puts me right at the $50K contribution level so a little room for growth but nothing to do about that but hope for increasing salary.

The real challenge will be if I can stand what happens when I max out the pre-tax side of the fund - I go over that line on the next paycheck.  It will probably be a shock to see the after contribution paycheck dip down so low again. IF my calculations are correct I will be bringing home every two weeks about the same amount of money as I was when I started right out of college about 27 years ago.  How is that for going full circle? :)


Backdoor Roth seems to be a "go do".  Are you familiar with this?

Have you heard of a Mega Backdoor Roth (https://www.bogleheads.org/forum/viewtopic.php?t=137366)?  If your 401k allows, that might be great also.
« Last Edit: August 23, 2015, 05:42:47 AM by Moostache »