Author Topic: Priority of investments?  (Read 9494 times)

jeromedawg

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Priority of investments?
« on: June 02, 2015, 10:37:46 AM »
Hey guys,

My company just opened up on offering post-tax Roth 401k contributions (up to $29k). They of course have the standard 401k pre-tax contribution offering, as well as ESPP and HSA.

Currently I'm maxing out the 401k pre-tax contribution and also doing 5% for ESPP, but I was hoping to up this to 15%. If I were to do that though, I think it would make things really tight as far as take-home is concerned. Haven't even considered HSA at this point in time. And I'm also maxing out our Roth IRAs as well.

With a kid on the way in August, and my wife leaning towards staying at home, we'll be transitioning currently from DINKs to single-income w/ a kid.

Anyway, assuming I continue maxing out the 401k pre-tax, should I prioritize the Roth 401k $29k contribution after that and try to max that out *before* ESPP? Or should I capitalize on the ESPP "15% return"? I'm assuming any IRA/401k should always take priority over ESPP and HSA.

What are your guys' thoughts on this?

Current salary (which is what we will be on once we transition to single-income) pre-tax comes out to around $100k give or take. My wife working added some nice cushion where it wouldn't be so uncomfortable thinking about all this, but since she won't be working at least for a while (perhaps many years), it gives me something to think about.

matchewed

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Re: Priority of investments?
« Reply #1 on: June 02, 2015, 10:57:07 AM »
I'd still do a maxing of the traditional 401k as long as you anticipate your tax rate to be lower in the future (FIRE).

The Roth and the pre-tax should share the same contribution limit.

thd7t

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Re: Priority of investments?
« Reply #2 on: June 02, 2015, 11:06:53 AM »
Are you contributing to the HSA?

GGNoob

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Re: Priority of investments?
« Reply #3 on: June 02, 2015, 11:34:20 AM »
I'm assuming any IRA/401k should always take priority over ESPP and HSA.

An HSA would usually be one of the top priorities because it of its triple tax-free advantages:
  • tax-free contributions
  • tax-free growth
  • tax-free withdrawals (for qualified reimbursements)
Read more here: http://www.madfientist.com/ultimate-retirement-account/

jeromedawg

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Re: Priority of investments?
« Reply #4 on: June 02, 2015, 11:54:37 AM »
I'm assuming any IRA/401k should always take priority over ESPP and HSA.

An HSA would usually be one of the top priorities because it of its triple tax-free advantages:
  • tax-free contributions
  • tax-free growth
  • tax-free withdrawals (for qualified reimbursements)
Read more here: http://www.madfientist.com/ultimate-retirement-account/
Are you contributing to the HSA?

I'll have to reconsider the HSA then - I'm not contributing to it, mostly because it's still a pretty foreign concept having just subscribed to an HMO medical plan ever since I started working. I'm not quite sure what to do once our baby comes too - we're due in August and I do have a window to make changes (including to opt for an HSA, etc)



I'd still do a maxing of the traditional 401k as long as you anticipate your tax rate to be lower in the future (FIRE).

The Roth and the pre-tax should share the same contribution limit.

pre-tax 401k contributions are capped at $18k~ where the recent change was to allow post-tax contributions [into a Roth 401k] up to $29k (http://www.madfientist.com/after-tax-contributions/)

« Last Edit: June 02, 2015, 12:02:40 PM by jplee3 »

jeromedawg

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Re: Priority of investments?
« Reply #5 on: June 02, 2015, 12:09:37 PM »
I think we may have missed our most optimal window to do the HSA. Now that we have a baby on the way, and once he's actually here, I anticipate quite a few more visits to the doctor, which would eat into the HSA way more than what it would have been if we had just done it earlier:

"I would NOT do a HDHP/HSA with a baby on the way. Those mostly work for people who don't have to go to the doctor a lot. Babies and kids go to the doctor a lot, healthy babies and kids go to the doctor a lot, just imagine if there is even something a little tiny bit wrong."

It just doesn't seem like a very good idea to do it with a newborn in the picture.

matchewed

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Re: Priority of investments?
« Reply #6 on: June 02, 2015, 12:10:25 PM »
I'd still do a maxing of the traditional 401k as long as you anticipate your tax rate to be lower in the future (FIRE).

The Roth and the pre-tax should share the same contribution limit.

pre-tax 401k contributions are capped at $18k~ where the recent change was to allow post-tax savings into a Roth 401k up to $29k (http://www.madfientist.com/after-tax-contributions/)

That is not what that article states. That article states that when you contribute your max ($18k) and add your employers match ($X) you can do after-tax contributions (not to be confused with regular Roth 401k contributions) of the remaining amount up to a total of $53k. The basic formula for this would be $18k+$X+$Y=$53k Where $X is your employer match and $Y is the remaining after-tax contributions you're allowed to make. It's not automatically $29k.

The strategy also relies on the allowance of after-tax contributions from the custodian. And relies on in-service withdrawals. If your plan doesn't allow this then you can't do it. I may be confusing your first statement since you said
My company just opened up on offering post-tax Roth 401k contributions (up to $29k).

And I want to point out a difference between Roth and after-tax contributions. They are in fact two different things. Make sure you read your paperwork carefully to determine what is being opened. Roth option or after-tax or both?

GGNoob

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Re: Priority of investments?
« Reply #7 on: June 02, 2015, 12:13:17 PM »
I'm assuming any IRA/401k should always take priority over ESPP and HSA.

An HSA would usually be one of the top priorities because it of its triple tax-free advantages:
  • tax-free contributions
  • tax-free growth
  • tax-free withdrawals (for qualified reimbursements)
Read more here: http://www.madfientist.com/ultimate-retirement-account/
Are you contributing to the HSA?

I'll have to reconsider the HSA then - I'm not contributing to it, mostly because it's still a pretty foreign concept having just subscribed to an HMO medical plan ever since I started working. I'm not quite sure what to do once our baby comes too - we're due in August and I do have a window to make changes (including to opt for an HSA, etc)

What a lot of us do, is we contribute to our HSA and we invest that money (ours is at healthsavings.com aka HSA Administrators invested in mutual funds) but don't actually pay for medical expenses out of it. For example, here's what my wife and I do:

-The HSA is for my wife only, so we contribute the max for a single person each year ($3350 in 2015).
-The money is invested in Vanguar'ds Lifestrategy Growth Fund (80% stock, 20% bond).
-The HSA can be used to reimburse expenses for either of us, but instead of reimbursing ourselves, we pay out of pocket and keep track of the expenses in a spreadsheet. We scan receipts and also save the physical copy.
-Years from now, we can reimburse ourselves for those expenses as long as we still have our proof (receipts). Otherwise, at age 65, we can withdraw that money penalty free and just pay the normal income taxes like you would with a Traditional IRA.

jeromedawg

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Re: Priority of investments?
« Reply #8 on: June 02, 2015, 12:22:30 PM »
I'd still do a maxing of the traditional 401k as long as you anticipate your tax rate to be lower in the future (FIRE).

The Roth and the pre-tax should share the same contribution limit.

pre-tax 401k contributions are capped at $18k~ where the recent change was to allow post-tax savings into a Roth 401k up to $29k (http://www.madfientist.com/after-tax-contributions/)

That is not what that article states. That article states that when you contribute your max ($18k) and add your employers match ($X) you can do after-tax contributions (not to be confused with regular Roth 401k contributions) of the remaining amount up to a total of $53k. The basic formula for this would be $18k+$X+$Y=$53k Where $X is your employer match and $Y is the remaining after-tax contributions you're allowed to make. It's not automatically $29k.

The strategy also relies on the allowance of after-tax contributions from the custodian. And relies on in-service withdrawals. If your plan doesn't allow this then you can't do it. I may be confusing your first statement since you said
My company just opened up on offering post-tax Roth 401k contributions (up to $29k).

And I want to point out a difference between Roth and after-tax contributions. They are in fact two different things. Make sure you read your paperwork carefully to determine what is being opened. Roth option or after-tax or both?

Thanks, so post-tax contributions are dependent on maxing out the 401k and employer's match first. And it seems the Roth 401k, which my company has already been offering, would have to be the only vehicle by which I could invest the money. So it sounds like it initially goes into a "post-tax account" and from there you convert it to a Roth 401k as the investment vehicle.

Here's the information I received:

Making Contributions with After-Tax Dollars
Currently, annual contributions by employees are limited to $18,000 (or $24,000 for those age 50 years or older) on either a pre-tax or Roth basis. Effective July 1, 2015, employees may contribute an additional $29,000 per year with after-tax dollars increasing the total contribution opportunity to $47,000 each year ($53,000 if you are age 50 or older).

Streamlined Deferrals
To help make it easier for you to take advantage of this after-tax enhancement, we are implementing a streamlined deferral election.  Streamlined deferrals eliminate the need for you to make separate contribution elections. Beginning July 1, once you reach the 401(k) IRS maximum of $18,000 ($24,000 if eligible), your contributions will continue as after-tax contributions, up to a maximum employee contribution of $47,000 ($53,000 if eligible).

Opportunity for Tax-Free Investment Gains with a Roth 401(k)
In addition, you will have the opportunity to convert your after-tax contributions to Roth 401(k) contributions. By converting after-tax contributions to a Roth 401(k), if certain conditions are met, any investment gains earned after conversion may be withdrawn in retirement tax-free!

jeromedawg

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Re: Priority of investments?
« Reply #9 on: June 02, 2015, 12:26:41 PM »
I'm assuming any IRA/401k should always take priority over ESPP and HSA.

An HSA would usually be one of the top priorities because it of its triple tax-free advantages:
  • tax-free contributions
  • tax-free growth
  • tax-free withdrawals (for qualified reimbursements)
Read more here: http://www.madfientist.com/ultimate-retirement-account/
Are you contributing to the HSA?

I'll have to reconsider the HSA then - I'm not contributing to it, mostly because it's still a pretty foreign concept having just subscribed to an HMO medical plan ever since I started working. I'm not quite sure what to do once our baby comes too - we're due in August and I do have a window to make changes (including to opt for an HSA, etc)

What a lot of us do, is we contribute to our HSA and we invest that money (ours is at healthsavings.com aka HSA Administrators invested in mutual funds) but don't actually pay for medical expenses out of it. For example, here's what my wife and I do:

-The HSA is for my wife only, so we contribute the max for a single person each year ($3350 in 2015).
-The money is invested in Vanguar'ds Lifestrategy Growth Fund (80% stock, 20% bond).
-The HSA can be used to reimburse expenses for either of us, but instead of reimbursing ourselves, we pay out of pocket and keep track of the expenses in a spreadsheet. We scan receipts and also save the physical copy.
-Years from now, we can reimburse ourselves for those expenses as long as we still have our proof (receipts). Otherwise, at age 65, we can withdraw that money penalty free and just pay the normal income taxes like you would with a Traditional IRA.

I see, so you basically have a separate "medical fund" that you're using to pay for any medical expenses out of pocket. I'm assuming there is some risk to doing it this way, like if you get in a major accident or are injured to the point of requiring a lengthy hospital stay or longer-term (or even expensive short-term) care and therapy?

matchewed

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Re: Priority of investments?
« Reply #10 on: June 02, 2015, 12:31:13 PM »
So it seems that both is the answer.

Ignoring your IRA and HSA for a moment what you'd need to do is do regular pre-tax contributions up to 18k, then after that you can contribute 29k from your savings account (or jar buried in the backyard). Then you'll have to rollover that after-tax contribution of 29k into a Roth IRA when you leave or if they allow in-service distributions.

Depending on your goal the rule of thumb advice would be max pre-tax savings (HSA, 401k, IRA) then do your after-tax contributions, then the rest goes to a taxable account.

GGNoob

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Re: Priority of investments?
« Reply #11 on: June 02, 2015, 01:35:10 PM »
I see, so you basically have a separate "medical fund" that you're using to pay for any medical expenses out of pocket. I'm assuming there is some risk to doing it this way, like if you get in a major accident or are injured to the point of requiring a lengthy hospital stay or longer-term (or even expensive short-term) care and therapy?

No. The most we would have to pay out-of-pocket for my wife in any given year is $5,000 because that is her max out-of-pocket cost. Our actual costs are closer to just a couple of hundred dollars a year. Our emergency fund could cover her max OOP costs. If we had to pay the $5k and wanted to, we could reimburse ourselves from the HSA.

My insurance is fantastic and cheap, so its a non-issue for me.

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Re: Priority of investments?
« Reply #12 on: June 02, 2015, 01:56:59 PM »
ESPP is a cash flow issue.  You buy it for the discount and x month look back and flip it right away. Therefore it really doesn't factor into this discussion. Max it out using your emergency fund if you want.  Heck even a credit card loan is probably EV+:). Seriously just get in the habit of flipping that stock every 6 months and enjoy the extra money. Unless you would buy the company stock if you didn't work there, you should not be holding it long term.

I would definitely do the deductible 401(k) up until the point that your income drops into the 15% bracket and I would seriously just think about maxing out. Run the math sometime on what the effective tax rate on 40k of ira withdrawals is versus paying 15% now.   HSAs are nice but you have to be careful to make sure that you don't end up paying more for medical care. Sometimes you end up with some very odd company offered plans.



Gin1984

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Re: Priority of investments?
« Reply #13 on: June 02, 2015, 01:59:25 PM »
I think we may have missed our most optimal window to do the HSA. Now that we have a baby on the way, and once he's actually here, I anticipate quite a few more visits to the doctor, which would eat into the HSA way more than what it would have been if we had just done it earlier:

"I would NOT do a HDHP/HSA with a baby on the way. Those mostly work for people who don't have to go to the doctor a lot. Babies and kids go to the doctor a lot, healthy babies and kids go to the doctor a lot, just imagine if there is even something a little tiny bit wrong."

It just doesn't seem like a very good idea to do it with a newborn in the picture.
It depends on your plans.  We had planned to switch to the lower deductible, non-HSA plan with our next kid but when I added the additional monthly cost of lower deductible plan, we were still out ahead maxing out our OOP.

seattlecyclone

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Re: Priority of investments?
« Reply #14 on: June 02, 2015, 05:23:38 PM »
jplee3, you have a few different things to consider here.

Should you switch to an HDHP so you can contribute to an HSA?
This will really depend on what medical plans you have available through your employer. You will have a new child, and children often need to see the doctor. This doesn't mean you should automatically overlook the HDHP though. For example, my employer charges a lower premium for the HDHP and also seeds the HSA with $2,000 per year for a family plan. That means that it starts out about $2,500/year ahead of the EPO plan in the baseline scenario where you don't need to see the doctor at all. In order for the EPO to come out ahead, your medical bills under that plan would have to be at least $2,500 lower than you would pay for the same services under the HDHP. Add in the tax savings from being able to shelter $4,650/year beyond the employer seed, and the gap widens even more (by $1,043.93 for someone who pays 7.45% FICA and is in the 15% marginal income tax bracket).

When the HDHP comes out ahead by about $3,500 in years where you need no health care and the out-of-pocket maximum is only just over $5,000, it's hard to envision a scenario where the EPO would be a significantly better choice. That said, it's entirely possible that your employer's plans are structured so that the HDHP is less obviously a good idea. You'll have to evaluate the options available to you to see which option comes out ahead if you need no medical attention, which option comes out ahead if you need infinite medical attention, and try to make a good guess for intermediate values as well.

Should you contribute to the ESPP?
If you get a discount on the shares, this is free money similar to a 401(k) match. Take advantage of it. Sell the shares immediately after you receive them and use the proceeds to pay your bills and/or invest in an IRA.

If you can't max out everything, what should the priority order be?
I would suggest the following:
  • Contribute to the pre-tax 401(k) up to the maximum match. Tax-deferred investing and free money should not be passed up.
  • Contribute the maximum amount to the ESPP. In the long run this money can be deployed to your normal spending, which should allow you to increase payroll deductions for other things.
  • If you choose the HDHP, max out the HSA next. This money can be tax-free in and out, plus you probably won't owe FICA on payroll-deducted HSA contributions. These advantages generally make HSA contributions better than non-matched 401(k) contributions.
  • Contribute to the pre-tax 401(k). Move this down a spot if your 401(k) only has high-fee investments.
  • Contribute to your traditional IRA, for you and your spouse. With your spouse no longer earning money, your income should be low enough to make deductible contributions, but not so low that Roth contributions become clearly better than traditional ones.
  • If your employer allows in-service distributions of after-tax 401(k) money, contribute to the after-tax 401(k) and roll it over to a Roth IRA periodically.
  • Do taxable investing last.

jeromedawg

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Re: Priority of investments?
« Reply #15 on: June 03, 2015, 11:15:17 AM »
I see, so you basically have a separate "medical fund" that you're using to pay for any medical expenses out of pocket. I'm assuming there is some risk to doing it this way, like if you get in a major accident or are injured to the point of requiring a lengthy hospital stay or longer-term (or even expensive short-term) care and therapy?

No. The most we would have to pay out-of-pocket for my wife in any given year is $5,000 because that is her max out-of-pocket cost. Our actual costs are closer to just a couple of hundred dollars a year. Our emergency fund could cover her max OOP costs. If we had to pay the $5k and wanted to, we could reimburse ourselves from the HSA.

My insurance is fantastic and cheap, so its a non-issue for me.

I was reviewing my HDHP/HSA and it actually seems somewhat decent. My company seeds $1000 for a family on an annual basis. Annual deductible is $2700 and max out of pocket is $5400. For in-network, most of the preventative care stuff is fully covered. Even for children within limit:
"Routine pediatric care (10 visits first year of life, 3 visits second year of life, and one exam per calendar year from age 2 through 18) "

Otherwise, most everything else has a "coinsurance payment of 10% after deductible" - I'm assuming that to mean that if you go to the chiropractor, for example, and it costs $1000, you pay $1000 out of pocket... But if it were to cost way more, say $2800, then you would pay the $2700 [deductable] and then pay 10% on the remainder (so $10?). This "10% after deductible" also applies to prescriptions, so we may end up having to pay a lot more for my wife's thyroid prescription. I hate having to mull through all this stuff as there's obviously very little information on pricing breakdowns for prescription drugs, etc. Usually you find out the hard way and after the fact when the bill comes.

jeromedawg

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Re: Priority of investments?
« Reply #16 on: June 03, 2015, 11:26:34 AM »
jplee3, you have a few different things to consider here.

Should you switch to an HDHP so you can contribute to an HSA?
This will really depend on what medical plans you have available through your employer. You will have a new child, and children often need to see the doctor. This doesn't mean you should automatically overlook the HDHP though. For example, my employer charges a lower premium for the HDHP and also seeds the HSA with $2,000 per year for a family plan. That means that it starts out about $2,500/year ahead of the EPO plan in the baseline scenario where you don't need to see the doctor at all. In order for the EPO to come out ahead, your medical bills under that plan would have to be at least $2,500 lower than you would pay for the same services under the HDHP. Add in the tax savings from being able to shelter $4,650/year beyond the employer seed, and the gap widens even more (by $1,043.93 for someone who pays 7.45% FICA and is in the 15% marginal income tax bracket).

When the HDHP comes out ahead by about $3,500 in years where you need no health care and the out-of-pocket maximum is only just over $5,000, it's hard to envision a scenario where the EPO would be a significantly better choice. That said, it's entirely possible that your employer's plans are structured so that the HDHP is less obviously a good idea. You'll have to evaluate the options available to you to see which option comes out ahead if you need no medical attention, which option comes out ahead if you need infinite medical attention, and try to make a good guess for intermediate values as well.

Should you contribute to the ESPP?
If you get a discount on the shares, this is free money similar to a 401(k) match. Take advantage of it. Sell the shares immediately after you receive them and use the proceeds to pay your bills and/or invest in an IRA.

If you can't max out everything, what should the priority order be?
I would suggest the following:
  • Contribute to the pre-tax 401(k) up to the maximum match. Tax-deferred investing and free money should not be passed up.
  • Contribute the maximum amount to the ESPP. In the long run this money can be deployed to your normal spending, which should allow you to increase payroll deductions for other things.
  • If you choose the HDHP, max out the HSA next. This money can be tax-free in and out, plus you probably won't owe FICA on payroll-deducted HSA contributions. These advantages generally make HSA contributions better than non-matched 401(k) contributions.
  • Contribute to the pre-tax 401(k). Move this down a spot if your 401(k) only has high-fee investments.
  • Contribute to your traditional IRA, for you and your spouse. With your spouse no longer earning money, your income should be low enough to make deductible contributions, but not so low that Roth contributions become clearly better than traditional ones.
  • If your employer allows in-service distributions of after-tax 401(k) money, contribute to the after-tax 401(k) and roll it over to a Roth IRA periodically.
  • Do taxable investing last.

I was reviewing what our current HMO would cost vs the HSA on a bi-weekly basis. Over the course of a year (in the context of bi-weekly payments, 26 pay periods), the HMO family plan would cost $3125.46 whereas the HDHP/HSA family plan would cost $629.46. My company would also seed the HSA with $1000 on an annual basis as well. As mentioned in my previous post, there seems to be full coverage for the basic preventative stuff (annual checkups for adults, eye exams, GYN checkups I think, as well as a number of visits for the baby's first and second years). Dental isn't covered of course, though I'm wondering if we should just keep paying for our dental coverage because we never have to pay a copay or for any pretty basic services (cleanings, fillings, xrays etc) when we go to our dentist... for a family it would cost $373.36 a year for dental coverage. That seems pretty reasonable to me... not sure how much things would cost without any insurance or coverage from the HDHP/HSA.

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Re: Priority of investments?
« Reply #17 on: June 03, 2015, 11:49:58 AM »
I'd still do a maxing of the traditional 401k as long as you anticipate your tax rate to be lower in the future (FIRE).

The Roth and the pre-tax should share the same contribution limit.

pre-tax 401k contributions are capped at $18k~ where the recent change was to allow post-tax savings into a Roth 401k up to $29k (http://www.madfientist.com/after-tax-contributions/)

That is not what that article states. That article states that when you contribute your max ($18k) and add your employers match ($X) you can do after-tax contributions (not to be confused with regular Roth 401k contributions) of the remaining amount up to a total of $53k. The basic formula for this would be $18k+$X+$Y=$53k Where $X is your employer match and $Y is the remaining after-tax contributions you're allowed to make. It's not automatically $29k.

The strategy also relies on the allowance of after-tax contributions from the custodian. And relies on in-service withdrawals. If your plan doesn't allow this then you can't do it. I may be confusing your first statement since you said
My company just opened up on offering post-tax Roth 401k contributions (up to $29k).

And I want to point out a difference between Roth and after-tax contributions. They are in fact two different things. Make sure you read your paperwork carefully to determine what is being opened. Roth option or after-tax or both?

Thanks, so post-tax contributions are dependent on maxing out the 401k and employer's match first. And it seems the Roth 401k, which my company has already been offering, would have to be the only vehicle by which I could invest the money. So it sounds like it initially goes into a "post-tax account" and from there you convert it to a Roth 401k as the investment vehicle.

Here's the information I received:

Making Contributions with After-Tax Dollars
Currently, annual contributions by employees are limited to $18,000 (or $24,000 for those age 50 years or older) on either a pre-tax or Roth basis. Effective July 1, 2015, employees may contribute an additional $29,000 per year with after-tax dollars increasing the total contribution opportunity to $47,000 each year ($53,000 if you are age 50 or older).

Streamlined Deferrals
To help make it easier for you to take advantage of this after-tax enhancement, we are implementing a streamlined deferral election.  Streamlined deferrals eliminate the need for you to make separate contribution elections. Beginning July 1, once you reach the 401(k) IRS maximum of $18,000 ($24,000 if eligible), your contributions will continue as after-tax contributions, up to a maximum employee contribution of $47,000 ($53,000 if eligible).

Opportunity for Tax-Free Investment Gains with a Roth 401(k)
In addition, you will have the opportunity to convert your after-tax contributions to Roth 401(k) contributions. By converting after-tax contributions to a Roth 401(k), if certain conditions are met, any investment gains earned after conversion may be withdrawn in retirement tax-free!

Am I the only one who noticed this?  It sounds like he wouldn't need to do inservice withdrawals, the employer will convert it to Roth 401k.  Wonder what the details are.

seattlecyclone

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Re: Priority of investments?
« Reply #18 on: June 03, 2015, 12:03:27 PM »
Otherwise, most everything else has a "coinsurance payment of 10% after deductible" - I'm assuming that to mean that if you go to the chiropractor, for example, and it costs $1000, you pay $1000 out of pocket... But if it were to cost way more, say $2800, then you would pay the $2700 [deductable] and then pay 10% on the remainder (so $10?).

Yes, this sounds right. With a $2,700 deductible and $5,400 out-of-pocket max, you'll pay 100% of the cost for the first $2,700 of expenses in a year, 10% of the cost of the next $27,000 of expenses, and nothing after that (provided everything is within the network, the insurance company agrees to pay for it, etc.). The coinsurance is generally calculated based on the price after the discount negotiated by your insurance company. $5,400 is less than the HSA contribution limit, so you can expect all of these expenses to come out of pre-tax income.

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Re: Priority of investments?
« Reply #19 on: June 03, 2015, 12:19:31 PM »
Here's the information I received:

Making Contributions with After-Tax Dollars
Currently, annual contributions by employees are limited to $18,000 (or $24,000 for those age 50 years or older) on either a pre-tax or Roth basis. Effective July 1, 2015, employees may contribute an additional $29,000 per year with after-tax dollars increasing the total contribution opportunity to $47,000 each year ($53,000 if you are age 50 or older).

Streamlined Deferrals
To help make it easier for you to take advantage of this after-tax enhancement, we are implementing a streamlined deferral election.  Streamlined deferrals eliminate the need for you to make separate contribution elections. Beginning July 1, once you reach the 401(k) IRS maximum of $18,000 ($24,000 if eligible), your contributions will continue as after-tax contributions, up to a maximum employee contribution of $47,000 ($53,000 if eligible).

Opportunity for Tax-Free Investment Gains with a Roth 401(k)
In addition, you will have the opportunity to convert your after-tax contributions to Roth 401(k) contributions. By converting after-tax contributions to a Roth 401(k), if certain conditions are met, any investment gains earned after conversion may be withdrawn in retirement tax-free!
[/quote]

Am I the only one who noticed this?  It sounds like he wouldn't need to do inservice withdrawals, the employer will convert it to Roth 401k.  Wonder what the details are.
[/quote]

I don't read it the same way.  I believe the employees has to take the action to convert it. That's the way it works with my plan with the Mega backdoor Roth conversion.  I had to take the action, and can convert once a quarter.  But...what did catch my eye was the 'if certain conditions are met' statement.  The OP better make sure to check with HR and maybe their plan administrator to see what those conditions are. 

jeromedawg

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Re: Priority of investments?
« Reply #20 on: June 03, 2015, 01:56:48 PM »
Quote
Quote
Here's the information I received:

Making Contributions with After-Tax Dollars
Currently, annual contributions by employees are limited to $18,000 (or $24,000 for those age 50 years or older) on either a pre-tax or Roth basis. Effective July 1, 2015, employees may contribute an additional $29,000 per year with after-tax dollars increasing the total contribution opportunity to $47,000 each year ($53,000 if you are age 50 or older).

Streamlined Deferrals
To help make it easier for you to take advantage of this after-tax enhancement, we are implementing a streamlined deferral election.  Streamlined deferrals eliminate the need for you to make separate contribution elections. Beginning July 1, once you reach the 401(k) IRS maximum of $18,000 ($24,000 if eligible), your contributions will continue as after-tax contributions, up to a maximum employee contribution of $47,000 ($53,000 if eligible).

Opportunity for Tax-Free Investment Gains with a Roth 401(k)
In addition, you will have the opportunity to convert your after-tax contributions to Roth 401(k) contributions. By converting after-tax contributions to a Roth 401(k), if certain conditions are met, any investment gains earned after conversion may be withdrawn in retirement tax-free!

Am I the only one who noticed this?  It sounds like he wouldn't need to do inservice withdrawals, the employer will convert it to Roth 401k.  Wonder what the details are.

I don't read it the same way.  I believe the employees has to take the action to convert it. That's the way it works with my plan with the Mega backdoor Roth conversion.  I had to take the action, and can convert once a quarter.  But...what did catch my eye was the 'if certain conditions are met' statement.  The OP better make sure to check with HR and maybe their plan administrator to see what those conditions are.

I looked a bit deeper and found this:


By converting these additional after-tax contributions to Roth 401(k) contributions, if certain conditions are met, both the
contributions and earnings after conversion can be withdrawn in retirement tax-free!1

1 A distribution from a Roth 401(k) plan is tax free and penalty free, provided the five-year aging requirement has been satisfied and one of the
following conditions is met: age 59 1/2, disability, or death.


There's also an addendum I stumbled across in one of the brochures:
"make sure to convert after-tax to Roth 401(k) contributions through Roth In-Plan Conversion."

So it sounds like I do have to take action and that this isn't automated.
« Last Edit: June 03, 2015, 02:02:53 PM by jplee3 »

jeromedawg

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Re: Priority of investments?
« Reply #21 on: June 03, 2015, 02:04:13 PM »
Otherwise, most everything else has a "coinsurance payment of 10% after deductible" - I'm assuming that to mean that if you go to the chiropractor, for example, and it costs $1000, you pay $1000 out of pocket... But if it were to cost way more, say $2800, then you would pay the $2700 [deductable] and then pay 10% on the remainder (so $10?).

Yes, this sounds right. With a $2,700 deductible and $5,400 out-of-pocket max, you'll pay 100% of the cost for the first $2,700 of expenses in a year, 10% of the cost of the next $27,000 of expenses, and nothing after that (provided everything is within the network, the insurance company agrees to pay for it, etc.). The coinsurance is generally calculated based on the price after the discount negotiated by your insurance company. $5,400 is less than the HSA contribution limit, so you can expect all of these expenses to come out of pre-tax income.

Did you mean just $2700?

jeromedawg

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Re: Priority of investments?
« Reply #22 on: June 03, 2015, 02:18:00 PM »
For HSA/HDHP vs HMO, I ran some numbers here:

http://www.aarp.org/health/medicare-insurance/hsa_calculator/


Based on the current figures for family plans between the HSA/HDHP and HMO, if I were contribute the max amount of $6550 into an HSA, factoring in 10% co-insurance, it looks like I'd have to accumulate roughly $17,000 worth of non-preventative/not fully covered expenses before it becomes no different than the cost of the HMO. Also, I think the $1000 seeded by the company doesn't count towards my contribution, right? If that's the case, I'd really have $7550 in the HSA which would allow for even more of a cushion for non-preventative/not fully covered expenses.

Not sure if this is right but wanted to throw it out there.

teen persuasion

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Re: Priority of investments?
« Reply #23 on: June 03, 2015, 04:07:28 PM »
No, the max is for employer + employee contributions.

seattlecyclone

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Re: Priority of investments?
« Reply #24 on: June 03, 2015, 05:07:50 PM »
Otherwise, most everything else has a "coinsurance payment of 10% after deductible" - I'm assuming that to mean that if you go to the chiropractor, for example, and it costs $1000, you pay $1000 out of pocket... But if it were to cost way more, say $2800, then you would pay the $2700 [deductable] and then pay 10% on the remainder (so $10?).

Yes, this sounds right. With a $2,700 deductible and $5,400 out-of-pocket max, you'll pay 100% of the cost for the first $2,700 of expenses in a year, 10% of the cost of the next $27,000 of expenses, and nothing after that (provided everything is within the network, the insurance company agrees to pay for it, etc.). The coinsurance is generally calculated based on the price after the discount negotiated by your insurance company. $5,400 is less than the HSA contribution limit, so you can expect all of these expenses to come out of pre-tax income.

Did you mean just $2700?

Nope. $2,700 is the rest of your out-of-pocket max after meeting the deductible, but since you're only paying 10% of the bills at that point you need to have $27,000 worth of care before you actually pay the $2,700.

As to the after-tax 401(k), my employer offers this option. You can withdraw the after-tax money to put it in a Roth IRA, or you can convert to Roth within the plan. Either way you have to take action to make the switch. Which option you should take depends on how good your 401(k) plan's funds are, as well as how much of an extra hassle it is to do the IRA conversion instead of the in-plan Roth conversion.

jeromedawg

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Re: Priority of investments?
« Reply #25 on: June 03, 2015, 05:45:23 PM »
No, the max is for employer + employee contributions.

Oh okay, so if I wanted to max it out, the most I could put is $5550

Otherwise, most everything else has a "coinsurance payment of 10% after deductible" - I'm assuming that to mean that if you go to the chiropractor, for example, and it costs $1000, you pay $1000 out of pocket... But if it were to cost way more, say $2800, then you would pay the $2700 [deductable] and then pay 10% on the remainder (so $10?).

Yes, this sounds right. With a $2,700 deductible and $5,400 out-of-pocket max, you'll pay 100% of the cost for the first $2,700 of expenses in a year, 10% of the cost of the next $27,000 of expenses, and nothing after that (provided everything is within the network, the insurance company agrees to pay for it, etc.). The coinsurance is generally calculated based on the price after the discount negotiated by your insurance company. $5,400 is less than the HSA contribution limit, so you can expect all of these expenses to come out of pre-tax income.

Did you mean just $2700?

Nope. $2,700 is the rest of your out-of-pocket max after meeting the deductible, but since you're only paying 10% of the bills at that point you need to have $27,000 worth of care before you actually pay the $2,700.

As to the after-tax 401(k), my employer offers this option. You can withdraw the after-tax money to put it in a Roth IRA, or you can convert to Roth within the plan. Either way you have to take action to make the switch. Which option you should take depends on how good your 401(k) plan's funds are, as well as how much of an extra hassle it is to do the IRA conversion instead of the in-plan Roth conversion.

Ah I see what you mean now. Although, it sounds like if I'm at the point that I've incurred $27k worth of expenses, it would have been a better option just to stick with HMO. That of course seems like a decision that needs to be made based on risk.
« Last Edit: June 03, 2015, 05:47:14 PM by jplee3 »

seattlecyclone

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Re: Priority of investments?
« Reply #26 on: June 03, 2015, 06:12:48 PM »
Ah I see what you mean now. Although, it sounds like if I'm at the point that I've incurred $27k worth of expenses, it would have been a better option just to stick with HMO. That of course seems like a decision that needs to be made based on risk.

Suppose you need $30,000 worth of care (or more!).

With the HDHP you pay $629.46 of premiums, $2,700 of deductible, and $2,700 of coinsurance to meet your out-of-pocket maximum. Subtract the $1,000 that your employer puts in your HSA and you pay a total of $5,029.46, all pre-tax.

With the HMO you pay $3,125.46 for premiums. If your HMO fully covers everything and doesn't bill you any co-pays for doctor visits or anything like that, the HMO would come out ahead by $1,904. If you do owe co-pays when you visit the doctor or go to the hospital, subtract those from the difference.

You're right that this does need to be based on risk. For most families, it's possible but not likely that they will have over $30k worth of medical care in a given year. You should have enough insurance so that this unlikely scenario doesn't bankrupt you, but if you can afford to pay an extra $1,904 in a bad year for a plan that will save you $3,000 in a good year and $1,000 in an average year, that's probably a trade-off that's worth making.