Author Topic: Just maxed out my 401K and HSA, now what?  (Read 3748 times)

Res Ipsa

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Just maxed out my 401K and HSA, now what?
« on: July 29, 2017, 10:10:47 AM »
Seeking advice on where to invest next:

DETAILS EDITED OUT FOR PRIVACY REASONS

Question
Where would you invest extra future income if you were in my shoes?  AGAIN, SEVERAL DETAILS DELETED FOR PRIVACY REASONS
Thanks in advance!
« Last Edit: May 04, 2020, 05:26:15 PM by Res Ipsa »

GizmoTX

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Re: Just maxed out my 401K and HSA, now what?
« Reply #1 on: July 29, 2017, 10:22:49 AM »
Kill the debt -- you're paying 4% of useless interest. It's a risk free return compared to any other taxable investment you can make at this point.
« Last Edit: July 29, 2017, 10:24:56 AM by GizmoTX »

mandy_2002

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Re: Just maxed out my 401K and HSA, now what?
« Reply #2 on: July 29, 2017, 10:25:20 AM »
Did you maximize the 401k completely, or just the tax advantaged portion?  If you are allowed to make after tax contributions, you can continue to put money in, then do a "mega-back-door Roth" conversion.  This is dependent on if you are allowed to do conversions of the after tax amount while you are still working; I think they are called in process conversions. (I was allowed to do 2 a year when I was working, and none on my tax advantaged portion, so if you are asking HR, make sure you use the right terms.  They don't always understand.)  Here's a page that can give you a bit more detail.  http://www.madfientist.com/after-tax-contributions/

There was some talk of closing this loophole in the tax code, but I don't believe it was actually passed at the end of 2016.
« Last Edit: July 29, 2017, 10:27:19 AM by mandy_2002 »

Res Ipsa

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Re: Just maxed out my 401K and HSA, now what?
« Reply #3 on: July 29, 2017, 03:23:45 PM »
Gizmo-thanks.  Good advice. Will likely end up doing this.  Love the guaranteed part, but 4% seems like a low rate of return and I will miss the tax deduction if I pay off the mortgage. 

Mandy, thanks.  Hadn't seen that.  I'll look into whether I'm able to contribute after-tax $$ above $18k under my 401k plan.  Once I hit $18k, my auto contribution was shut off.

RWD

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specialkayme

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Re: Just maxed out my 401K and HSA, now what?
« Reply #5 on: July 30, 2017, 06:18:03 AM »
If you believe the market is overvalued and is likely to hit a reversal, and you are looking to avoid (or minimize) its impact on you, paying off debt seems to be the best return for you. At a guaranteed 4%+ return, its tough to say no to that, again if you think the market is going to return a smaller percentage.

For me, I think its more likely to go up than down over the next 10 years, and I'm willing to take the risk. If on average the market increases 7% per year, I'd keep the debt and put it into the market. But I'm a fairly risky person, playing long term odds.

But if you're looking for an alternative, you may want to consider:
1) Blue chip dividend stocks, especially in the consumer products industry. Fairly stable, especially in market reversals, and the steady income stream is always a plus. Especially if you get an aristocrat dividend stock.
2) If you like the concept of real estate but don't have the time to put into it, you may want to consider REITs. You get the benefits of owning real estate (almost all of them) without the time commitment.
3) If you have the money to put up front on real estate, why not partner with someone? You put up the cash, they put up the work. Either an individual or a management company. Work the numbers to see if it works for you.
4) Significantly more risky, but you could look into some local venture capitalist moves. Local restaurants, breweries, ect are usually always opening. And they usually need start up cash. Investing and receiving convertible debt, or stock if you're so inclined, could provide a good return. Very unpredictable, highly risky, and tough to get out, but interesting to sit back and watch.

the_gastropod

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Re: Just maxed out my 401K and HSA, now what?
« Reply #6 on: July 30, 2017, 07:21:38 AM »
...I will miss the tax deduction if I pay off the mortgage. 

Only on the extra interest you'd be paying. It's a good deal to nix that interest, and take your guaranteed 4% return.

frugaliknowit

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Re: Just maxed out my 401K and HSA, now what?
« Reply #7 on: July 30, 2017, 01:05:46 PM »
Kill the debts with the highest interest rate first.  I believe that would be the higher rate SL, followed by the house, followed by the lower rate SL. 

JLee

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Re: Just maxed out my 401K and HSA, now what?
« Reply #8 on: July 30, 2017, 01:10:08 PM »
I am holding on the index fund path, but if that makes you nervous I'd knock out that 4%+ student loan first.

tralfamadorian

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Re: Just maxed out my 401K and HSA, now what?
« Reply #9 on: July 30, 2017, 02:01:32 PM »
I would consider real estate again.  In A-/B+ neighborhoods with a good property manager, your day-to-day involvement would be practically null.  There is some initial set up time but once you have chosen your farm neighborhoods and know your personal price ceilings for the types of properties in those areas, making offer and purchase decisions are not particularly time consuming.  Your market may be over-competitive right now but that won't last forever; there is something to be said for being ready for the slow down.   

Real estate can give some excellent tax benefits for high earners- you're probably earned out of using the passive loss benefits in the short term- more on that below.  But your children are the right age where you could hire them to do real estate work for you as a part-time job.  Lawn care, painting, online advertising.  Your income from the rentals goes down/passive losses increase.  Your kids can earn (off the top of my head- numbers may be inexact) $6.3k/year each tax free, which then can be contributed to their own roth and used with no tax consequences towards educational expenses. 

I don't know if you have a spouse or if they have a career that they are committed to, but if the answer is yes and no, then you can take this step further.  This would be particularly useful if you plan to stay in your high earning career long term as you mentioned above.  If your spouse becomes a real estate professional by IRS standards, then it removes the income limits and loss limits to the real estate passive loss.  This can be huge- real estate, particularly early on, often shows paper losses due to depreciation.  Between this and hiring your kids, you could minimize taxes on a good bit of your income in the highest bracket. 

use2betrix

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Re: Just maxed out my 401K and HSA, now what?
« Reply #10 on: July 30, 2017, 07:42:51 PM »
Does your employer not offer a match?

use2betrix

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Re: Just maxed out my 401K and HSA, now what?
« Reply #11 on: July 30, 2017, 09:05:27 PM »
Ah - makes sense.

Some people max out their 401k's very early and in turn don't get the companies match the remainder of the year, just wanted to make sure that didn't happen but it looks like you're all good!

Gonzo

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Re: Just maxed out my 401K and HSA, now what?
« Reply #12 on: July 30, 2017, 09:24:47 PM »
As a high income earner, you should do a backdoor Roth IRA every year.  And honestly, taxable investing isn't bad so long as you do it in a tax efficient way.  I no longer have any fixed income in taxable, and I keep that in pretax.  It's all equity index ETFs in taxable, and I pay bills from cash flow. 

loyalreader

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Re: Just maxed out my 401K and HSA, now what?
« Reply #13 on: July 31, 2017, 09:20:31 AM »
If your spouse becomes a real estate professional by IRS standards, then it removes the income limits and loss limits to the real estate passive loss. 

Kelly would you mind elaborating on this?

tralfamadorian

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Re: Just maxed out my 401K and HSA, now what?
« Reply #14 on: July 31, 2017, 03:15:59 PM »
If your spouse becomes a real estate professional by IRS standards, then it removes the income limits and loss limits to the real estate passive loss. 

Kelly would you mind elaborating on this?

Sure.  (please note I'm not a tax professional so check this stuff with your CPA and/or tax attorney)

From https://www.irs.gov/publications/p527/ch03.html on passive loss limits:

Exception for Rental Real Estate With Active Participation
If you or your spouse actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income. This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Similarly, you may be able to offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception.


From http://www.bankrate.com/finance/taxes/earnings-too-high-claim-passive-losses.aspx on the phase out:

Taxpayers whose modified adjusted gross income, or MAGI, is less than $100,000 can claim up to $25,000 in rental losses. The $25,000 cap is reduced $1 for every $2 a taxpayer’s MAGI exceeds $100,000.


From a nifty power point on irs.gov https://www.irs.gov/pub/irs-utl/33-Real%20Estate%20Professionals.pdf on real estate professionals:

Real Estate Professional Qualification
• Material participation in each specific
rental
• Material participation in separate Real
Property Trade or business
• 50% rule
• 750 hours rule
• 5% ownership rule


Real Estate Professional Exception
• The Special $25,000 Allowance Limitation
does not apply: can have more than
$25,000 of active real estate losses
• $100,000 Modified AGI test does not apply
• $100,000-$150,000 phase-out rules do not
apply

What this means is that to be a real estate professional you must spend at least 750 hours a year doing real estate things approved by the IRS (property hunting does NOT count).  You must spend at least 50% of your professional life on real estate things.  Which this means in actuality is that you can not have an unrelated full time job and be a real estate professional.  There have been a bunch of tax court cases around this and everyone who tries to fudge this loses.  See that same powerpoint on some details of what activities are included by the IRS as real estate things.  You can be a real estate agent but it is not a requirement.