Author Topic: Where to invest after maxing Roth IRA contributions  (Read 8224 times)

Anti-ComplainyPants

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Where to invest after maxing Roth IRA contributions
« on: December 16, 2014, 02:08:58 PM »
I'm fairly certain that this is published somewhere, so feel free to simply post a link if you have one.

(Hopefully) I should be able to max out my Roth IRA contributions next year. When/If I find myself having contributed $5,500 with more cash to invest, what is the best order for investments? I'm thinking:

1) 403(b) up to employer match (5%)
2) Roth IRA up to $5,500/yr
3) ...Then should anything else go to increasing my contribution to my 403(b), or starting a Traditional IRA?

Thanks in advance, tried and true Mustacians

Cheddar Stacker

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Re: Where to invest after maxing Roth IRA contributions
« Reply #1 on: December 16, 2014, 03:05:38 PM »
Many variables for each individual will determine the proper order. We would need more specific info on your situation to give you proper advice.

A few notes:

1) You are limited to $5,500 in total IRA contributions annually. You can't do Roth of $5,500, then do Traditional of $5,500. Plus catch-up if applicable.
2) If you pay a high tax rate you might be better maxing a T.IRA to reduce your tax burden, but the income limits are lower than the Roth.
3) If you max out your 403b it would reduce your income, possibly opening up the T.IRA contribution limits for a deduction.
4) Get the employer match first in just about any scenario.
5) After that, it depends.
6) In an IRA you have virtually unlimited investment options, in a 403b you are limited to what the plan offers.

So if you want more replies, we need more info. Married, income, itemized deductions, timeline to early retirement, drawdown plan once FIREd, assets currently invested including what type of account they're in. etc.

If you don't want to put all that info out there, the generic answer above will have to do.

MDM

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Re: Where to invest after maxing Roth IRA contributions
« Reply #2 on: December 16, 2014, 03:10:37 PM »
I'm fairly certain that this is published somewhere, so feel free to simply post a link if you have one.

(Hopefully) I should be able to max out my Roth IRA contributions next year. When/If I find myself having contributed $5,500 with more cash to invest, what is the best order for investments? I'm thinking:

1) 403(b) up to employer match (5%)
2) Roth IRA up to $5,500/yr
3) ...Then should anything else go to increasing my contribution to my 403(b), or starting a Traditional IRA?

Thanks in advance, tried and true Mustacians

Yes to #1
Not sure what you mean by #2 because it was a given ("having contributed $5,500 with more cash to invest") in the OP.  Next year you'll actually be able to contribute $6000.
For #3, you can't contribute more than $6000 total next year to Roth and traditional IRAs.  You could put $4K in one and $2K in another, $6K and $0K, etc.
Putting more into the 403b looks good.

In short, maximize tax-advantaged investments (whether to do Roth vs. traditional is another question?) before making taxable investments.

Investing vs. paying high interest debt is another topic.

Cheddar Stacker

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Re: Where to invest after maxing Roth IRA contributions
« Reply #3 on: December 16, 2014, 03:17:11 PM »
MDM, I would prefer it you were right, but I'm not sure about that $6K limit. This would be the first I've heard of it. 401k limit went up $500, IRA was held constant at $5,500.

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits

BarkyardBQ

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Re: Where to invest after maxing Roth IRA contributions
« Reply #4 on: December 16, 2014, 03:22:11 PM »
MDM, I would prefer it you were right, but I'm not sure about that $6K limit. This would be the first I've heard of it. 401k limit went up $500, IRA was held constant at $5,500.

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits

and... http://www.irs.gov/Retirement-Plans/COLA-Increases-for-Dollar-Limitations-on-Benefits-and-Contributions

MDM

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Re: Where to invest after maxing Roth IRA contributions
« Reply #5 on: December 16, 2014, 04:07:07 PM »
MDM, I would prefer it you were right, but I'm not sure about that $6K limit. This would be the first I've heard of it. 401k limit went up $500, IRA was held constant at $5,500.

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits

and... http://www.irs.gov/Retirement-Plans/COLA-Increases-for-Dollar-Limitations-on-Benefits-and-Contributions

Mea culpa, mea maxima culpa.  Wishful thinking I guess....

Pooperman

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Re: Where to invest after maxing Roth IRA contributions
« Reply #6 on: December 17, 2014, 01:12:46 PM »
Personally, I go with:

401k(or whatever your applicable version(s) is(are)) up to match.
Max HSA (if applicable)
Max IRA
Max 401k(or whatever your applicable version(s) is(are))
Taxable

Here's an interesting question for you, stacker. Now that it seems like 529A accounts will be a thing, where do they fit on the list if your SO and/or yourself are eligible? Money can only be put in by other people, not the person for which the account is set up for and it's taxable going in but not coming out if used for education, housing, and other needs. Additionally, it can be disbursed without penalty as laid out in section 72 (not sure on whether this is taxable or not). Anything beyond section 72 has a 10% penalty. Money taken out for needs expenses doesn't count towards section 72 limits.

Anti-ComplainyPants

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Re: Where to invest after maxing Roth IRA contributions
« Reply #7 on: December 17, 2014, 02:17:42 PM »
Thanks for all the great feedback so far!

I did not know that the max IRA contributions included both Roth AND Traditional (can't do $5.5k into both) so this is good to know. I'm doing Roth because I'm in a low tax bracket. Speaking of which, as additional information:
  • $33,500 salary (HOPEFULLY jumping to ~$37kish next year, thus my potential ability to max my IRA contributions after 403(b) up to employer match)
  • Single (Well, engaged, but not getting married until 2016)
  • Hoping to FIRE as early as possible, but for me that will probably be over 20 years from now
  • Right now all of my non-liquid assets are in my 403(b), Roth IRA, and taxable Betterment account (the Betterment account is to save money for a house downpayment in 4ish years. It's at an 80/20 AA, and if the market is down when the time comes, I can always rent and wait for it to recover).
  • No debt
So it seems that if I can max my Roth IRA contributions, additional savings for that year should go into my 403(b). But Pooperman (nice name, by the way) emphasized HSA contributions...I *think* I have that option, but I'm pretty healthy. Can I roll contributions from an HSA into another account after a period of time, or how does that work?

ALSO (and this may be a whole other question altogether) - if all of my savings are going into these tax-sheltered accounts that I can't access without penalty until I'm over 59 1/2, how could I ever use them to retire early?

MDM

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Re: Where to invest after maxing Roth IRA contributions
« Reply #8 on: December 17, 2014, 02:58:52 PM »
I'm doing Roth....
...if all of my savings are going into these tax-sheltered accounts that I can't access without penalty until I'm over 59 1/2, how could I ever use them to retire early?
Roth contributions can be withdrawn at any time without penalty.

Cheddar Stacker

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Re: Where to invest after maxing Roth IRA contributions
« Reply #9 on: December 17, 2014, 03:21:30 PM »
You need to read madfientist.com, particularly retire even earlier. That will answer a lot of these questions.

Also please search the MMM forum for earned income credit and retirement savers credit. With your low income getting those could produce a better result than the tax free Roth plan. There's a thread from a year ago called optimizing taxable income or something similar where this was discussed at great length.

Pooper, I know nothing about 529A, yet.

Anti-ComplainyPants

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Re: Where to invest after maxing Roth IRA contributions
« Reply #10 on: December 18, 2014, 07:54:43 AM »
You need to read madfientist.com, particularly retire even earlier. That will answer a lot of these questions.
I did, and it has. Great suggestion, thanks!
Also please search the MMM forum for earned income credit and retirement savers credit. With your low income getting those could produce a better result than the tax free Roth plan. There's a thread from a year ago called optimizing taxable income or something similar where this was discussed at great length.
Next on my to-do list, thanks again.
So (pending my research in those articles) my plan seems to be:
  • Continue matching my 403(b) up to employer match
  • Max my Roth IRA contributions when able
  • Increase my contributions to my 403(b)
Then when I leave this job for another one (3-4 years from now), I should be able to roll my 403(b) into a Traditional IRA. As soon as I do that, I can start rolling over "$X" every year into my Roth IRA, with X equaling the amount I can deduct from my income with deductions and exemptions (of course by then I'll be married, so I don't know the details of that yet).

My gross income will still be below $40k, I'll be married by the time I make that switch (and our gross income will likely be below $80k, assuming we will file joint taxes even though we keep most of our money separate. It's what works for us).

I'll keep doing research, but the best information I get always comes from these threads!

Anti-ComplainyPants

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Re: Where to invest after maxing Roth IRA contributions
« Reply #11 on: December 18, 2014, 07:58:17 AM »
@Cheddar - Forum searches for "optimizing taxable income," "earned income credit," and "retirement savers credits" yielded no results. Anyone have a link to that thread?

Cheddar Stacker

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Re: Where to invest after maxing Roth IRA contributions
« Reply #12 on: December 18, 2014, 09:03:08 AM »
http://forum.mrmoneymustache.com/welcome-to-the-forum/optimize-your-taxable-income/

Pay very close attention once seattlecyclone chimes in. He seems to really understand the tax code, and he explains the part I was referring to well.

Sorry for not providing links earlier, I was typing on my cell at the time.

Fallenour

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Re: Where to invest after maxing Roth IRA contributions
« Reply #13 on: December 18, 2014, 09:12:25 AM »
Start your own business, get a small business 401k plan, pump as much money and assets of value into the company as you can, amortize those capital investments, buy services from your own company, give yourself a salary, do a company employment matching of 25% of your salary, pump remaining income of the business into your SB401k up until you hit the legal max (51k-403b).

This will give you the legal maximum of maximums for company contribution wihtout getting a partner involved.

This also allows you to take a large amount of tax breaks and credits in several areas, decrease your overal AGI, and thus lower your tax bracket, and take tax breaks over time, which all in all, give you massive advantages income, tax sheltered investments, and purchasing power wise.

Additionally, build your business credit. Allows you to borrow, and thus leverage potentially as well, your standalone business credit.

It also builds your business a history of income due to continual business (with yourself of course, and potentially others).

All legal, all legit, little paperwork, clean books, clean hands, happy pockets. I've done it for years.

Cheddar Stacker

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Re: Where to invest after maxing Roth IRA contributions
« Reply #14 on: December 18, 2014, 09:13:29 AM »
As soon as I do that, I can start rolling over "$X" every year into my Roth IRA, with X equaling the amount I can deduct from my income with deductions and exemptions (of course by then I'll be married, so I don't know the details of that yet).

My gross income will still be below $40k, I'll be married by the time I make that switch (and our gross income will likely be below $80k, assuming we will file joint taxes even though we keep most of our money separate. It's what works for us).

2 things on the quoted part above:

1) It would likely serve you much better to wait until you stop earning income before converting the T.IRA into R.IRA. That way you can pay no/little tax. If you do it while you're working you will just end up paying a higher tax than you currently do, which defeats the purpose of the whole plan.

2) Keeping separate finances in itself is not a bad idea IMO. Filing under the status "married filing separate" has some unfortunate consequences on your tax return. You might want to do some research on that as well. It may hurt your overall plans quite a bit.

And one other note, after reading the optimizing taxable income thread and considering your plan, my general thought is that you would change from R.IRA contributions to T.IRA contributions, and max out as much 403b as possible. The combination of those two things could result in your tax bill becoming less than $0. It would be tough to save that much, but certainly possible. And if you're inclined to do so, you can re-characterize your 2014 IRA contributions from Roth to Traditional.

And learn to play around with this: https://turbotax.intuit.com/tax-tools/calculators/taxcaster/

BarkyardBQ

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Re: Where to invest after maxing Roth IRA contributions
« Reply #15 on: December 18, 2014, 10:03:56 AM »
OP, if you have a 403b, does your employer also offer a 457b? You can contribute to both if they allow both.

Anti-ComplainyPants

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Re: Where to invest after maxing Roth IRA contributions
« Reply #16 on: December 18, 2014, 11:41:26 AM »
OP, if you have a 403b, does your employer also offer a 457b? You can contribute to both if they allow both.
I have no idea, but I'm also light-years away from being able to max 403(b) contributions.
2) Keeping separate finances in itself is not a bad idea IMO. Filing under the status "married filing separate" has some unfortunate consequences on your tax return. You might want to do some research on that as well. It may hurt your overall plans quite a bit.
I'll cross this bridge when I get there, but I had implied filing together even though we tend to have our own separate checking/savings/retirement accounts.
And one other note, after reading the optimizing taxable income thread and considering your plan, my general thought is that you would change from R.IRA contributions to T.IRA contributions, and max out as much 403b as possible. The combination of those two things could result in your tax bill becoming less than $0. It would be tough to save that much, but certainly possible.
I can see the advantage of this. Up to this point, I had justified making Roth contributions because I'm already in a low tax bracket and it's easy for me to make contributions to my Roth as my budget allows - it's not a given for me to be able to max my yearly contributions, although I'm hoping for a promotion that would. I'm sure I could adjust to set T.IRA and 403(b) contributions, but it limits my ability to spontaneously contribute windfalls. It seems those would have to go in a taxable account, which for now is a "house downpayment" Betterment account.
And if you're inclined to do so, you can re-characterize your 2014 IRA contributions from Roth to Traditional.
I don't know what this means - why would I transfer funds that I've already paid taxes on from a tax-free-to-withdraw account to a tax-when-withdrawn account? It would lower my taxable income this year, but I'll be in the 15% bracket either way and I feel like the difference will be less than paying taxes again when withdrawn from a T.IRA.
And learn to play around with this: https://turbotax.intuit.com/tax-tools/calculators/taxcaster/
On my way, right now.

Cheddar Stacker

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Re: Where to invest after maxing Roth IRA contributions
« Reply #17 on: December 18, 2014, 11:56:17 AM »
If you re-characterize it changes the contributions from R to T. Then when you file your 2014 taxes the IRA contributions are deducted from your income, and you pay less tax.

In the 15% bracket I wouldn't do it unless you were shooting for the saver's credit or some other advantage. Just something to think about.

When you withdraw/convert funds from the T.IRA, you can do it slowly and ensure you stay within the 15% bracket. But you are saving 15% now, and hopefully paying a graduated 10% and 15% later, so your effective rate is less than 15% in the future.

Fallenour

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Re: Where to invest after maxing Roth IRA contributions
« Reply #18 on: December 18, 2014, 12:28:30 PM »

I don't know what this means - why would I transfer funds that I've already paid taxes on from a tax-free-to-withdraw account to a tax-when-withdrawn account? It would lower my taxable income this year, but I'll be in the 15% bracket either way and I feel like the difference will be less than paying taxes again when withdrawn from a T.IRA.


The income at that point of transfer, being 5500 due to maximums law, (being less than 9,056 I think is the 10% bracket), would be a 10% tax.

This is, of course, assuming that he does his limit 1 annual rollover, and makes no other incomes (or at least claims no other AGI).

Anti-ComplainyPants

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Re: Where to invest after maxing Roth IRA contributions
« Reply #19 on: December 18, 2014, 12:38:27 PM »
If you re-characterize it changes the contributions from R to T. Then when you file your 2014 taxes the IRA contributions are deducted from your income, and you pay less tax.

In the 15% bracket I wouldn't do it unless you were shooting for the saver's credit or some other advantage. Just something to think about.

When you withdraw/convert funds from the T.IRA, you can do it slowly and ensure you stay within the 15% bracket. But you are saving 15% now, and hopefully paying a graduated 10% and 15% later, so your effective rate is less than 15% in the future.

The savers credit is the exact reason I'd be doing it. And out makes sense that I'd (ideally) be paying slightly less than 15% tax on the withdrawals, and in the meantime there is more money in the account to compound.
But I still don't necessarily get how to transfer from R. to T., and how I wouldn't be getting screwed by putting taxed money in an account that taxes again upon withdrawal.

Cheddar Stacker

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Re: Where to invest after maxing Roth IRA contributions
« Reply #20 on: December 18, 2014, 01:08:41 PM »
If you re-characterize it changes the contributions from R to T. Then when you file your 2014 taxes the IRA contributions are deducted from your income, and you pay less tax.

In the 15% bracket I wouldn't do it unless you were shooting for the saver's credit or some other advantage. Just something to think about.

When you withdraw/convert funds from the T.IRA, you can do it slowly and ensure you stay within the 15% bracket. But you are saving 15% now, and hopefully paying a graduated 10% and 15% later, so your effective rate is less than 15% in the future.

The savers credit is the exact reason I'd be doing it. And out makes sense that I'd (ideally) be paying slightly less than 15% tax on the withdrawals, and in the meantime there is more money in the account to compound.
But I still don't necessarily get how to transfer from R. to T., and how I wouldn't be getting screwed by putting taxed money in an account that taxes again upon withdrawal.

It's not a transfer, it's a phone call to the IRA custodian. They will simply change your contributions from R to T, and when you get your year end statement it will reflect the change.

When you contribute to a T IRA you put the contribution on your tax return and deduct it, which means you do not pay taxes on it, therefore it's not taxed money.

Anti-ComplainyPants

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Re: Where to invest after maxing Roth IRA contributions
« Reply #21 on: December 18, 2014, 03:04:21 PM »
Okay, I think I'm getting it. Thanks so much for your patience and clear explanations.

I prefer things to be simple, and it sounds like maintaining R.IRA contributions are the simplest choice. BUT! If I transfer my R.IRA to a T.IRA, my savings credit jumps from a 10% to 20% or maybe even 50% credit from my contributions. Since I'm expecting a small federal refund, it seems that I'd be refunded all that money (up to $2k since I'm single). P.S. - I *love* having just learned about this Savings Credit, I hope I can figure out how to apply for it on TaxAct.

I think what I like least about it is:
  • Come retirement, I'll have to transfer a little bit to a Roth account every year in order to eventually see all that money tax-free, and
  • By maxing T.IRA contributions, I'll have no tax-sheltered vehicles to spontaneously invest or to invest windfall money.

I'm tempted to keep maxing Roth contributions until I threaten the upper limit of the 15% tax bracket, then consider switching to T.IRA in order to remain in that bracket. I can live on $1200/month, but I can't figure out how I could possibly lower my taxable income enough to fall into the 10% bracket without finding a way to live on even less.
The alternative seems to be to max T.IRA and 403(b) contributions to lower my taxable income by as much as possible, maximizing my current savings' ability to compound, and then worry about accessing it/transferring it to a Roth later.

Personal preferences and suggestions are welcomed (and requested)