Author Topic: 401K, Roth, then what  (Read 8941 times)

missionalan

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401K, Roth, then what
« on: February 04, 2016, 06:23:34 PM »
I'm sure this question has been answered numerous times but humor me.

My wife and I take the match portion of our 401k.  Then we max out our Roth accts.  I've been putting the remainder in a general mutual fund acct.

Is this an appropriate place to put the remainder of the retirement money?

2Birds1Stone

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Re: 401K, Roth, then what
« Reply #1 on: February 04, 2016, 06:25:55 PM »
No, you should be maxing out your tax advantaged 401k space.

missionalan

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Re: 401K, Roth, then what
« Reply #2 on: February 04, 2016, 06:28:39 PM »
What if I eventually want to buy some rental real estate with the general mutal fund money?  Hypothetically.

nereo

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Re: 401K, Roth, then what
« Reply #3 on: February 04, 2016, 06:49:35 PM »
HSA if you have one.  AFter that, I'd max out your 401(k) (the limit for tax-deferred individual contributions is $18,000)

No debt?  Sufficiently funded E-fund
(man, I wish I had a basic boilerplate response like MDM has.  Calling MDM...)

missionalan

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Re: 401K, Roth, then what
« Reply #4 on: February 04, 2016, 06:51:51 PM »
Ok.  Fair enough.  But what if I want to retire early (pre 59.5) or buy rental income with the leftover money?  Hypothetically.

nereo

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Re: 401K, Roth, then what
« Reply #5 on: February 04, 2016, 07:04:14 PM »
THere are a number of ways that you can access money in both your IRA nad 401(k) penalty free before age 59.5 
There's even a sticky on it.
72t/SEPPs are one method, as is setting up a ROTH conversion ladder.

IF you want to buy a rental income then you should weigh that against the tax advantages of fulling funding your 401(k)s.  How much a benefit that may be to you depends on your tax bracket.  In most cases the tax advantages of fully funding your 401(k) are worth it, but if you have no other way of saving up for a large down payment than some of that money shoudl be diverted to post-tax savings.

MDM

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Re: 401K, Roth, then what
« Reply #6 on: February 04, 2016, 10:04:30 PM »
THere are a number of ways that you can access money in both your IRA nad 401(k) penalty free before age 59.5 
There's even a sticky on it.
72t/SEPPs are one method, as is setting up a ROTH conversion ladder.

IF you want to buy a rental income then you should weigh that against the tax advantages of fulling funding your 401(k)s.  How much a benefit that may be to you depends on your tax bracket.  In most cases the tax advantages of fully funding your 401(k) are worth it, but if you have no other way of saving up for a large down payment than some of that money shoudl be diverted to post-tax savings.

+1. Sticky is http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/.

Generic investment order rules of thumb:
In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct -   
   unless your 457 fund options are significantly worse than those in the 401k/403b.
Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).   
   
WHAT   
0. Establish an emergency fund to your satisfaction   
1. Contribute to 401k up to any company match   
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.   
3. Max HSA    
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level   
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)   
6. Fund mega backdoor Roth if applicable   
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.   
8. Invest in a taxable account with any extra.   
   
WHY   
0. Give yourself at least enough buffer to avoid worries about bouncing checks   
1. Company match rates are likely the highest percent return you can get on your money   
2. When the guaranteed return is this high, take it.   
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.   
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic).  See also
   https://www.bogleheads.org/forum/viewtopic.php?f=2&t=182081,
   http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845
   and other posts in that thread about exceptions to the rule.
5. See #4 for choice of traditional or Roth for 401k   
6. Applicability depends on the rules for the specific 401k   
7. Again, take the risk-free return if high enough   
8. Because earnings, even if taxed, are beneficial   
   
The emergency fund is your "no risk" money.  You might consider one of these online banks: http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001   
      
If your 401k options are poor (i.e., high fund fees) you can check   
   http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/
for some thoughts on "how high is too high?"   

Bogleheads has a similar list.

nereo

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Re: 401K, Roth, then what
« Reply #7 on: February 05, 2016, 06:08:46 AM »
thanks MDM - just an observation... shouldn't "Why #8 read: Because earnings savings, even if taxed, are beneficial"?

@missionalan - +1 to MDM's list.  You may also want to check out the following blog posts:
http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

catccc

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Re: 401K, Roth, then what
« Reply #8 on: February 05, 2016, 08:04:15 AM »
Ditto 2birds, you should be maxing out your 401K. 

If you want to buy real estate, you can raid your Roth IRA contributions w/o penalty.  Just hang onto your 5498 forms.


TheBeardedIrishman

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Re: 401K, Roth, then what
« Reply #9 on: February 05, 2016, 08:43:15 AM »
Health savings accounts are great idea too

MDM

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Re: 401K, Roth, then what
« Reply #10 on: February 05, 2016, 12:14:41 PM »
thanks MDM - just an observation... shouldn't "Why #8 read: Because earnings savings, even if taxed, are beneficial"?
That could apply to a "save for a desired purchase" vs. "invest for the long term" discussion.

"Earnings" was used because the tax would be based on those and not the saved amount itself. 

Thoughts on where "alternatively, invest in real estate/own business/etc." might fall as a general rule in the list?

nereo

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Re: 401K, Roth, then what
« Reply #11 on: February 05, 2016, 12:36:32 PM »

Thoughts on where "alternatively, invest in real estate/own business/etc." might fall as a general rule in the list?
Personally I would put it between Max 401(k) (#5) and fund Mega Backdoor Roth (#6), but with the caveat that it's specific to the individual's investment style.

Here's why:
Up through #5 the steps all seek to stash away earnings with the notable exception of #2 which clearly frees up cashflow.  Regardless, all are designed to reduce how much you pay someone else (either in taxes or in interest charges - note #0 prevents this also by preventing a credit emergency down the road)

Investing in real estate/own business breaks from this by seeking to increase revenue (earnings) to the individual instead of decreasing the amount paid to something else.  Consequentially, as revenue increases, #0-5 become increasingly more important.
If they become large enough doing #6 (fund Megabackdoor ROTH) becomes especially useful, but there we have a chicken-and-egg problem.  Most people can't do a Mega backdoor ROTH until they have more income to put towards their 401(k) (above and beyond the ($18k + $5500 +$3350 )= $26,850 they are already contributing per person for steps 1, 3, 4 & 5.

So "fund Mega Backdoor ROTH" floats before/after "invest in real-estate/own business" depending on the individual's income and financials.

Perhaps a more long-winded answer than you were looking for, but there it is.

MDM

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Re: 401K, Roth, then what
« Reply #12 on: February 05, 2016, 12:40:54 PM »

Thoughts on where "alternatively, invest in real estate/own business/etc." might fall as a general rule in the list?
Personally I would put it between Max 401(k) (#5) and fund Mega Backdoor Roth (#6), but with the caveat that it's specific to the individual's investment style.

Here's why:
Up through #5 the steps all seek to stash away earnings with the notable exception of #2 which clearly frees up cashflow.  Regardless, all are designed to reduce how much you pay someone else (either in taxes or in interest charges - note #0 prevents this also by preventing a credit emergency down the road)

Investing in real estate/own business breaks from this by seeking to increase revenue (earnings) to the individual instead of decreasing the amount paid to something else.  Consequentially, as revenue increases, #0-5 become increasingly more important.
If they become large enough doing #6 (fund Megabackdoor ROTH) becomes especially useful, but there we have a chicken-and-egg problem.  Most people can't do a Mega backdoor ROTH until they have more income to put towards their 401(k) (above and beyond the ($18k + $5500 +$3350 )= $26,850 they are already contributing per person for steps 1, 3, 4 & 5.

So "fund Mega Backdoor ROTH" floats before/after "invest in real-estate/own business" depending on the individual's income and financials.

Perhaps a more long-winded answer than you were looking for, but there it is.
Fits my preconceived notions so you must be right! :)

Thanks, unless someone else chimes in with a good explanation of why we are both wrong I'll modify the 'Investment Order' tab in the case study spreadsheet to reflect this.

missionalan

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Re: 401K, Roth, then what
« Reply #13 on: February 05, 2016, 04:51:47 PM »
Enjoying this dialogue.

Devils Advocate...

What if I want to use real estate as "maxing out my 401k"?  Yes it will increase revenue but only when I pull it out of the LLC.

nereo

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Re: 401K, Roth, then what
« Reply #14 on: February 05, 2016, 06:49:43 PM »
Enjoying this dialogue.

Devils Advocate...

What if I want to use real estate as "maxing out my 401k"?  Yes it will increase revenue but only when I pull it out of the LLC.

These are just guidelines.  Everyone can decide to do something that better fits their priorities of course.
Speaking specifically to "maxing out 401(k)" vs "invest in real-estate", I'd say maxing out the 401(k) reduces your taxable burden.  How much it reduces your taxes depends on what your tax bracket is.  From an economic standpoint, you should consider whether the real-estate property you are investing in will give you better returns than what you instantly get from reducing taxes (perhaps 10-25% for that year) plus your annual return (probably somewhere around 5-8%).  Certain properties in some markets can return 10%+/year.  Others barely break even (or don't even do that much).

It's up to you to decide what is most likely.  That, and understand that real-estate requires some input of effort that you may or may not want to do, whereas a 401(k) takes about 5 minutes of work per year.

PsychoCid

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Re: 401K, Roth, then what
« Reply #15 on: February 09, 2016, 05:44:28 AM »
Aren't HSAs use it or lose it?  So if you max out that account but don't have any significant Healthcare expenditures that year, the money is just gone??

teen persuasion

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Re: 401K, Roth, then what
« Reply #16 on: February 09, 2016, 05:53:23 AM »
Aren't HSAs use it or lose it?  So if you max out that account but don't have any significant Healthcare expenditures that year, the money is just gone??

No, just the opposite.  HSA money rolls over from year to year, you can let it accumulate to use in future years.  An FSA is use it or lose it.

PsychoCid

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Re: 401K, Roth, then what
« Reply #17 on: February 09, 2016, 05:56:15 AM »
Crazy!  That was not the set up at the fortune 100 I recently left.  Management advised everyone not to invest more than they were certain they would use else it would disappear end of year

Thanks

ender

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Re: 401K, Roth, then what
« Reply #18 on: February 09, 2016, 05:59:53 AM »
Crazy!  That was not the set up at the fortune 100 I recently left.  Management advised everyone not to invest more than they were certain they would use else it would disappear end of year

Thanks

are you sure?

You have to have a high deductible plan for this to work. If you have a non-HDHP you can still have FSAs, but they receive the treatment you are describing.

hoping2retire35

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Re: 401K, Roth, then what
« Reply #19 on: February 09, 2016, 12:09:37 PM »
following.

for me personally, Ill be saving for a 20% downpayment on another apartment at #3 however if the banks won't give me a commercial loan and I have to save for the whole cash purchase price it might get bumped down to 7. the downpayment will take about 6 months of savings and full PP will take 2 1/2 years...so I guess I will see soon. but like nereo said of some people I need more income to really save a lot into the IRA and ROTH accounts to make any real dent into some retirement savings

FrugalKube

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Re: 401K, Roth, then what
« Reply #20 on: February 25, 2016, 11:09:10 PM »
I'll be keeping an eye on this topic. I really should start a HSA

BayIslandSaver

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Re: 401K, Roth, then what
« Reply #21 on: February 26, 2016, 12:25:28 AM »
if you're generally healthy, yes and HSA is a good idea.

similar to rental properties, if there is another business venture you're interested in, you could pursue that as well.

nereo

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Re: 401K, Roth, then what
« Reply #22 on: February 26, 2016, 05:23:07 AM »
I'll be keeping an eye on this topic. I really should start a HSA

Yes, you should :-) 
In fact, most of us here think that the HSA is the ultimate tax-advantaged account.  You get tax-free contributions, tax free growth, and tax free distributions.  In short, for the average Joe/Jane it's the only place you can put money and never, ever pay any taxes on it.

for a bit more information:
http://www.madfientist.com/ultimate-retirement-account/

dandypandys

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Re: 401K, Roth, then what
« Reply #23 on: February 26, 2016, 04:15:31 PM »
Thanks for the big ordered list, I've put it in my  mmmadvice word doc :)

Nickels Dimes Quarters

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Re: 401K, Roth, then what
« Reply #24 on: March 04, 2016, 05:08:45 AM »
I always love hearing HSAs promoted. I switched to the high-deductible plan last year and fully funded the HSA for 2015, and will easily fully fund it every year. Even switching plans has worked well and I see a few doctors regularly and take a couple of medications every day. My co-pays have not gone up all that much, and if something major happens, even the higher deductible has a cap, so it wouldn't mean financial ruin.

Regarding the list, what do you all think about deferred compensation? My contribution goes into a separate retirement account and it is deducted pre-tax and helps to lower my AGI. Where would you add this option?

NDQ

BayIslandSaver

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Re: 401K, Roth, then what
« Reply #25 on: March 10, 2016, 01:47:02 PM »
I'll be keeping an eye on this topic. I really should start a HSA

Yes, you should :-) 
In fact, most of us here think that the HSA is the ultimate tax-advantaged account.  You get tax-free contributions, tax free growth, and tax free distributions.  In short, for the average Joe/Jane it's the only place you can put money and never, ever pay any taxes on it.



unless you live in Alabama, California, or New Jersey...  :) (states that tax contributions)

Greenroller

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Re: 401K, Roth, then what
« Reply #26 on: March 15, 2016, 12:38:17 AM »
Subbing

MDM

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Re: 401K, Roth, then what
« Reply #27 on: March 15, 2016, 01:45:10 AM »
Regarding the list, what do you all think about deferred compensation? My contribution goes into a separate retirement account and it is deducted pre-tax and helps to lower my AGI. Where would you add this option?
Assuming you are talking about a contractual deferred compensation, in which you go to the back of the line in case your employer goes bankrupt:
 - Between 5 & 6 if you have complete faith in the company's ability to pay you, because your income is likely high enough that traditional is better for you than Roth.
 - Moving down the list as your faith in the company's ability to pay you decreases.  When you have no faith, it drops off completely.

MickeyMoustache

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Re: 401K, Roth, then what
« Reply #28 on: March 16, 2016, 07:25:11 AM »
HSAs are great but in my case, expecting a 3rd kid this year, it wouldn't pay in this particular instance.  However, next year I'll be funding it fully!

Question: where can I read more about the Mega backdoor Roth?  I have done pretty much all the steps outside of the possible RE stuff you are planning to add (although I have some REITs :)) and I am completely uneducated on the mega back door purpose/process/etc.


Scandium

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Re: 401K, Roth, then what
« Reply #30 on: March 16, 2016, 11:23:52 AM »
I'll be keeping an eye on this topic. I really should start a HSA

Yes, you should :-) 
In fact, most of us here think that the HSA is the ultimate tax-advantaged account.  You get tax-free contributions, tax free growth, and tax free distributions.  In short, for the average Joe/Jane it's the only place you can put money and never, ever pay any taxes on it.

for a bit more information:
http://www.madfientist.com/ultimate-retirement-account/

HSA does sound great. Unfortunately it's my wife that has one, and it's a shitty one. Just goes to a bank with 0.1% interest. So it would be a huge hassle (and fees) to set up another provider and have her transfer several times a year. Frustrating how limited the HSA is. So much easier to tell her to max the 401k and forget about it. Maybe in a few years when we have more money to save.

MDM

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Re: 401K, Roth, then what
« Reply #31 on: March 16, 2016, 11:48:44 AM »
So it would be a huge hassle (and fees) to set up another provider and have her transfer several times a year.

You might be interested in http://thefinancebuff.com/how-to-rollover-an-hsa-on-your-own-and-avoid-trustee-transfer-fee.html.

Proud Foot

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Re: 401K, Roth, then what
« Reply #32 on: March 16, 2016, 12:05:57 PM »
Enjoying this dialogue.

Devils Advocate...

What if I want to use real estate as "maxing out my 401k"?  Yes it will increase revenue but only when I pull it out of the LLC.

This will increase revenue every year depending on how you have it set up, not only when you pull it out of the LLC.  If you have it set up to be taxed as a Corporation then the LLC will pay the taxes and retain the revenue.  Your revenues would increase when you pull it out as a dividend.  If you elect S-Corp, Partnership, or Sole Proprietor status then the revenues (and taxes) will pass through to you whether you take any distributions or not.