Roth Pipeline Question - Ordinary/Tax-Advantaged Earnings in the same tIRA?

[Rubyvroom]

I’m fairly new to investments and have $60K I need to invest. I also have some 401k funds from previous employers that I’d like to rollover into Vanguard funds. Here are a few facts before I get to the questions:

•   My husband and I are in our mid-30s, with forecasted FIRE in the 2020-2022 time frame
•   We will max both our 401k and HSA accounts this year
•   Our income is too high for a deduction on a tIRA
•   We have not contributed to a Roth at all in the past, nor have we contributed in 2016 yet
•   We have no investments other than our tax advantaged 401k and HSA accounts
•   We have $60K in cash (savings) due to thinking we’d buy land that we now have decided not to buy until FIRE

My plan is to contribute $11K into Vanguard Roth accounts for 2016. That leaves $49K cash and the 401k funds from previous employers to sort out.

I’ve read information about how complicated it can become if you comingle after tax dollars (like my remaining $49K in savings) and pre-tax dollars (like my 401k money from previous employers) into one tIRA account that is later converted to a Roth for the Roth pipeline. If I were to invest all of that money in the same tIRA account, will I be creating issues for myself down the road? Would it be better to open two accounts to keep the funds separate (ie, one tIRA for ordinary earnings and one for tax-advantaged earnings)? Or am I getting worked up about nothing?

The other option is rolling my 401k money from previous employers into my 401k with my current employer. They have VFIAX (Vanguard 500 Index), VSMAX (Vanguard Small Cap Index) and VIMAX (Vanguard Mid Cap Index), but the rest of the funds are not with Vanguard and are actively managed. So the only downside I see with this option is I’m limited to those three funds, and if I rolled it into a Vanguard tIRA I would have more investing options. But if comingling funds is detrimental to our financial health years later as we begin the Roth pipeline, maybe rolling 401k to 401k makes more sense. Three Vanguard fund options are better than none I suppose.

As I mentioned, I’m fairly new to this and I’m trying to better educate myself in this arena so any advice would be greatly appreciated! What would you suggest I do with this money (both the cash and the 401k funds)? Let me know if I left any pertinent information out, and thanks in advance!

[MDM]

•   Our income is too high for a deduction on a tIRA
...
My plan is to contribute $11K into Vanguard Roth accounts for 2016. That leaves $49K cash and the 401k funds from previous employers to sort out.

I’ve read information about how complicated it can become if you comingle after tax dollars (like my remaining $49K in savings) and pre-tax dollars (like my 401k money from previous employers) into one tIRA account....

Based on what you have written above, you can't put any new (as opposed to "rollover") money into a tIRA, so there is nothing to commingle...?

The other option is rolling my 401k money from previous employers into my 401k with my current employer. They have VFIAX (Vanguard 500 Index), VSMAX (Vanguard Small Cap Index) and VIMAX (Vanguard Mid Cap Index), but the rest of the funds are not with Vanguard and are actively managed. So the only downside I see with this option is I’m limited to those three funds

Not much downside when "limited" to Approximating the total stock market ;).

As I mentioned, I’m fairly new to this and I’m trying to better educate myself in this arena so any advice would be greatly appreciated! What would you suggest I do with this money (both the cash and the 401k funds)? Let me know if I left any pertinent information out, and thanks in advance!

If you think you might want to do a Backdoor Roth IRA at some time, keeping the money in a 401k and out of a tIRA would be good.  "Backdoor Roth" and "Roth pipeline" have some similarities but are different - are you familiar with each?

Do you have an emergency fund in addition to the $60K?  If not, some or all of the remaining $49K could become your e-fund.  Good luck!

[MustacheAndaHalf]

Let's say you sprint as fast as you can to FIRE, the 4 year target.  I think you'd have to live on some of the $60k you're investing now, since you have no other assets you can access within 4 years.

Converting to Roth involves a lock up period of 5 years, right?
https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/
Which means if you took your old 401(k) and used two steps - transfer to Traditional IRA, then convert to Roth IRA - you'd still have no access to it until 5 years have elapsed.  And that assumes you're okay converting it while in the 25%-28% tax bracket.

I bring this up because that $60k may be your only money outside retirement.  If you need that money in 4 years, that's a very different need than if the money is waiting for decades before it's needed.

1) What money/account will you use to pay expenses if you FIRE 2020-2022?
2) When will you start the Roth Conversion pipeline?  (5 year delay before you can use it penalty free)

[Rubyvroom]

•   Our income is too high for a deduction on a tIRA
...
My plan is to contribute $11K into Vanguard Roth accounts for 2016. That leaves $49K cash and the 401k funds from previous employers to sort out.

I’ve read information about how complicated it can become if you comingle after tax dollars (like my remaining $49K in savings) and pre-tax dollars (like my 401k money from previous employers) into one tIRA account....

Based on what you have written above, you can't put any new (as opposed to "rollover") money into a tIRA, so there is nothing to commingle...?

Yarg, I was for some reason thinking the $5.5K limit was for Roth only, not for tIRA, but one quick Google search and I see it's the limit for both. Roger that. So $11K in a Roth, end of story for 2016. Thanks for pointing this out :)

The other option is rolling my 401k money from previous employers into my 401k with my current employer. They have VFIAX (Vanguard 500 Index), VSMAX (Vanguard Small Cap Index) and VIMAX (Vanguard Mid Cap Index), but the rest of the funds are not with Vanguard and are actively managed. So the only downside I see with this option is I’m limited to those three funds

Not much downside when "limited" to Approximating the total stock market ;).

Thanks for the link, I hadn't seen this before. This will be helpful to use to play around with my current 401k elections, and it sounds like it would be my best bet to just go 401k to 401k.

As I mentioned, I’m fairly new to this and I’m trying to better educate myself in this arena so any advice would be greatly appreciated! What would you suggest I do with this money (both the cash and the 401k funds)? Let me know if I left any pertinent information out, and thanks in advance!

If you think you might want to do a Backdoor Roth IRA at some time, keeping the money in a 401k and out of a tIRA would be good.  "Backdoor Roth" and "Roth pipeline" have some similarities but are different - are you familiar with each?

I will read more about the two. I think I am getting them (or features of each) mixed up. More learning to do on my end.

Do you have an emergency fund in addition to the $60K?  If not, some or all of the remaining $49K could become your e-fund.  Good luck!

Yes, definitely an oversight, I would want about $12K cushion for $2K/month 6 months emergency fund. We are saving quite a bit each month however (September is a 3 paycheck month), so I'm forecasting that I'll be able to sock away another $5K-6K in September, so I will likely invest $42K of the remaining $49K, and the rest (plus September savings) will be e-fund. Good point.

1) What money/account will you use to pay expenses if you FIRE 2020-2022?
2) When will you start the Roth Conversion pipeline?  (5 year delay before you can use it penalty free)

We are fortunate that we have high earning power at the moment and are saving on average $4K per month in after tax earnings (in addition to maxing out 401k, HSA, etc.). So our plan is to have a significant after tax investment built up to give us the runway we need for 5 years (I'm estimating between $280K and $350K depending on market returns and our final timeline). So the plan would be to start the 4-5 year pipeline after retirement, while in a lower tax bracket, and use our after tax investments to get us there. That's why I've been extremely hesitant to put money into a Roth so far, as I didn't want to lock up the earnings, but having the money sitting in cash is not exactly smart either >_>

Thanks for both of those replies. The info was helpful while I try to work out all of the noobie-investor kinks :)

[Rubyvroom]

So I think I will do the following...

* Put $12K into some rolling 6 month CDs, $2K per month, to keep some emergency funds on hand
* Put $11K into a Roth IRA for 2016, and each year between now and FIRE (this may lock up $5K - $13K of earnings, which shouldn't really delay RE)
* Skip the tIRA and throw excess funds and future savings into Vanguard mutual funds
* Roll 401k from previous employer into current 401k, utilizing the Vanguard funds that are available
* Keep spreadsheeting to keep us on track and to keep my OCD brain tamed...
* Cross my fingers that there is no BIG UGLY EVENT in the next 4 years that extends our timeline
* Remind myself that I'll be investing at discounted rates in the event of a BIG UGLY EVENT
* Keep my cool
* Retire
* Drink wine and be merry

Thanks for letting me talk out loud at everyone while I work to figure this out (and thanks for the tips)! :)

[MDM]

* Keep spreadsheeting....

See Tools and calculators - Bogleheads, www.vertex42.com, and Spreadsheet Collection for various ideas.

[Rubyvroom]

* Keep spreadsheeting....

See Tools and calculators - Bogleheads, www.vertex42.com, and Spreadsheet Collection for various ideas.

I am a complete spreadsheet nerd, this will be great. Thank you!

[MustacheAndaHalf]

I'd suggest treating your taxable as two different buckets.  One, to pay for expenses during your 5 year Roth ladder.  That's the money that will only be invested 5 years, and then will be entirely used up 5 years after that.  It needs to be invested very conservatively - mostly bonds and cash.  The more risk in this money, the higher your risk of having to delay retirement a few years.

The other bucket is taxable investments for your retirement, and those can be more aggressive.  For example, Vanguard Target Retirement 2025 Fund holds holds 66% stocks (40% US + 26% international) and the rest bonds.  That might be a good mix for money that will last throughout retirement.