Author Topic: Optimal strategy for monthly payouts from pool of cash  (Read 916 times)

nyekolas

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Optimal strategy for monthly payouts from pool of cash
« on: May 18, 2018, 11:21:25 AM »
My goal is to max out my 401k -> Roth IRA rollover. My compensation comes in the form of salary + bonus + stock and contributions to 401K must come out of salary/bonus. In order to make this happen I've sold a chunk of my stock to supplement my monthly income so that I can contribute enough to max out my 401k. Hopefully this makes sense, happy to clarify.

I sold all the stock I would need for the year at once (to minimize short term capitol gains, taxes were paid on them already when they were vested) so I have a chunk of cash (~$7000) that more than covers the difference in take home pay from contributing a large part of my paycheck to this rollover operation. In essence I'll be paying myself an extra $1000 a month out of this cash until the end of the year to make up the contributed salary income.

That means that the final $1000 for December is just sitting in my savings account for 7 months instead of working for me (or the $1000 for November is sitting around for 6 months, etc.). What is the best way to get the maximum returns on this money, while still making it easy to withdraw a fixed amount every month? I could just keep it simple and leave it in my savings account but this feels non-optimal. Any other ideas? Could I have performed any part of this operation in a more efficient way?

Thanks for any and all input!

Raenia

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Re: Optimal strategy for monthly payouts from pool of cash
« Reply #1 on: May 18, 2018, 11:28:01 AM »
One year is a pretty short length of time in financial terms, I would probably just leave it in the savings account.  You don't want to put it in anything riskier and run the risk of it not being there when you need it.  I don't think they run CD's shorter than 1yr.  You could put it in a money market, if you found one with an interest rate significantly better than your savings account.  On this timescale, though, I don't think the extra hassle is worth it.

ETA: I stand corrected.
« Last Edit: May 18, 2018, 12:27:28 PM by Raenia »

phred

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Re: Optimal strategy for monthly payouts from pool of cash
« Reply #2 on: May 18, 2018, 11:49:26 AM »
there are 6 month CDs (Ally Bank, Goldman Sachs for two examples).  There are also 6 month T-bills. 

FlorenG

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Re: Optimal strategy for monthly payouts from pool of cash
« Reply #3 on: May 18, 2018, 01:52:26 PM »
Even if you were to get a 1-2% return (from CDs or T-bills) We are still talking about $10-$20, and even less for the other chunks of money.

I would just put it in a money market since it's a lot simpler and you'll get just a little less than with CDs...

I'm confused with:

Quote
My goal is to max out my 401k -> Roth IRA rollover.

Are you rolling over money from your 401k to your Roth IRA while you are still receiving a salary? Why pay the extra taxes now for the conversion when you could do it for free after early retirement?

nyekolas

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Re: Optimal strategy for monthly payouts from pool of cash
« Reply #4 on: May 18, 2018, 02:26:37 PM »
These are all good points thanks everyone! I was thinking we're talking hundreds of dollars here MAX in a year so it's probably not worth the stress etc. Glad to hear others had the same idea.

To clarify, I've maxed out my pre-tax 401k and employer matching. Now I'm contributing to my after tax 401k up to the 55k or whatever the limit is and rolling that after tax money into a Roth IRA so I only pay taxes on that once. This is some sort of backdoor but I forget which.

FlorenG

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Re: Optimal strategy for monthly payouts from pool of cash
« Reply #5 on: May 19, 2018, 02:57:24 PM »
To clarify, I've maxed out my pre-tax 401k and employer matching. Now I'm contributing to my after tax 401k up to the 55k or whatever the limit is and rolling that after tax money into a Roth IRA so I only pay taxes on that once. This is some sort of backdoor but I forget which.

I believe is called Mega-backdoor Roth Contribution, and the point is being able to contribute to your IRA Roth over the $5,500 annual limit. Lucky you that your employer allows you to do post-tax contributions and also to do in-service withdrawals (rolling money from your job retirement account to your Roth IRA). My plan does not allow me to move the money until I retire or change jobs (or have some emergency).