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I'm getting too much cash
Old 02-04-2011, 06:46 PM   #1
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I'm getting too much cash

Last year we maxed out two 401k's (don't qualify for Roths) and put the excess cash toward paying off the mortgage. Now that's done, and all the extra cash that came in January is just sitting in savings earning 1.3%. We have no other debt except student loans at 2%, but seems silly to pay them off given how low the fixed rate is. Not sure where to put the extra cash now?

I have a taxable equity fund, but hestitate to buy in as the market reaches new highs (for the second time). Interested in munis now that the prices have come down, but don't want to get too bond-heavy given our age (~30) and also think the muni financial situation could get worse before it gets better.

Maybe I should just go spend it on a new car?
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Old 02-04-2011, 07:17 PM   #2
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Back-door Roths?

Your 401(k)s could be invested 100% in bonds before you started into muni bonds in taxable. You could invest tax-efficiently in taxable. Some things to consider buying VGTSX/VXUS or VTSMX/VTI for starters to replace the equivalent funds in your 401(k)s that you exchange into bond funds.
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Old 02-04-2011, 08:08 PM   #3
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Last year we maxed out two 401k's (don't qualify for Roths) and put the excess cash toward paying off the mortgage.
You could still put the money in conventional IRAs and convert them to Roths later.

We did the first for about 10 years and we're about eight years into the second...
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Old 02-04-2011, 08:55 PM   #4
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As stated in earlier posts, you can invest in Traditional and convert them to Roths.

You'd have until April to invest 10k for 2010 Roths (assuming you're married) and have until next April to invest the other 10k for 2011 Roths. Thats 20k right there (more if you're over 50).

This is what we did last year. I guess this strategy would also depend on your tax situation and whether or not you currently have any funds in a Traditional from previous years.
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Old 02-04-2011, 11:52 PM   #5
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I have a taxable equity fund, but hestitate to buy in as the market reaches new highs (for the second time). Interested in munis now that the prices have come down, but don't want to get too bond-heavy given our age (~30) and also think the muni financial situation could get worse before it gets better.

Maybe I should just go spend it on a new car?
Mr Geithner, Bernake etc. would very much like it if you went out and bought the new car. Encouraging consumption is precisely why the Fed is keeping interest rates so low. Although demand for money is also pretty low.

I personally don't think there are any compelling investment opportunities, so if you need a new car... go for it.
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Old 02-05-2011, 06:23 AM   #6
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...I personally don't think there are any compelling investment opportunities, so if you need a new car... go for it.
Or slightly used so you don't suffer the instant drop from dealer sticker price to KBB value when you leave the parking lot.
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Old 02-05-2011, 06:33 AM   #7
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It's OK. Cash from people who have more than they need should trickle back into the economy, even if it is via his neighborhood dealership. Just think of it as an altruistic action.
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Old 02-05-2011, 06:58 AM   #8
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When people talk about maxing out their 401K, they are usually talking abut maxing the pre-tax (or Roth) federal limitation of $16,500 (less if you are considered highly compensated and there is low participation at you’re company).

But did you know that the limit for the total of pre-tax, Roth, and after-tax traditional contributions was $49K?

Normally I wouldn’t suggest investing within a 401K for tax-deferred growth without getting the current tax year benefit (you could essentially get this if you invested in a non retirement account with low turn-over funds).

Normally you are not allowed to take out you’re pre-tax or Roth contributions while you are still working for a company (unless you have a hardship). But many companies (mine included) allow you to take out you’re after-tax traditional contributions. If you’re company allows you to do this, then you can periodically take out you’re after-tax contributions and roll them into a Roth IRA – you will only need to pay tax on the growth at the time of conversion. There is no longer an income limitation on conversions to Roth, so you should be able to do this regardless of you’re income.

By the way, I’ve contributed more than $16.5K in my 401K by using this technique for the last two years. 2010 was the first year I rolled these funds to Roth. I haven’t done my taxes yet, but it appears to be working out as planned.

Personally, if this is all money slated for retirement, I would have it 100% invested in equities at you’re age. Over long periods of time, stocks tend to out perform bonds. The stock market ride is very rough (especially in the last few years). So if you can’t stomach the ride, then do what you have to do to bring the volatility to a comfortable level.
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Old 02-05-2011, 09:07 AM   #9
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I guess I'm the odd man out because I'd pay off the student loan debt. Yeah, it's a low rate but you're earning 1.3% and paying 2.0%, a guaranteed loss of .7%. I don't like debt. Get rid of it now while you can because you never know when something else will pop up and bite you in the rear.
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Old 02-05-2011, 10:54 AM   #10
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On keeping the student debt (or even a mortgage), it's like paying 0.7% for the option to have the flexibility of cash and other assets. This is a rather small price to pay.

This option is usually not included in the pay-off or invest dialog.
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Old 02-05-2011, 12:26 PM   #11
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Or slightly used so you don't suffer the instant drop from dealer sticker price to KBB value when you leave the parking lot.
[hijack]I can't find it now, but I recently read an article about how the drop in value was far less than it used to be, due to fewer used cars (Cash for Clunkers) and many of them retaining more resale value. After looking at slightly used car values I'd have to say it's true. Many of them are within 20% of the new car price. When you add in the value of the warranty etc., it makes more sense to at least consider a new car these days.[/hijack]
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Old 02-05-2011, 12:52 PM   #12
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When people talk about maxing out their 401K, they are usually talking abut maxing the pre-tax (or Roth) federal limitation of $16,500 (less if you are considered highly compensated and there is low participation at youíre company).

But did you know that the limit for the total of pre-tax, Roth, and after-tax traditional contributions was $49K?

Normally I wouldnít suggest investing within a 401K for tax-deferred growth without getting the current tax year benefit (you could essentially get this if you invested in a non retirement account with low turn-over funds).

Normally you are not allowed to take out youíre pre-tax or Roth contributions while you are still working for a company (unless you have a hardship). But many companies (mine included) allow you to take out youíre after-tax traditional contributions. If youíre company allows you to do this, then you can periodically take out youíre after-tax contributions and roll them into a Roth IRA Ė you will only need to pay tax on the growth at the time of conversion. There is no longer an income limitation on conversions to Roth, so you should be able to do this regardless of youíre income.

By the way, Iíve contributed more than $16.5K in my 401K by using this technique for the last two years. 2010 was the first year I rolled these funds to Roth. I havenít done my taxes yet, but it appears to be working out as planned.

Personally, if this is all money slated for retirement, I would have it 100% invested in equities at youíre age. Over long periods of time, stocks tend to out perform bonds. The stock market ride is very rough (especially in the last few years). So if you canít stomach the ride, then do what you have to do to bring the volatility to a comfortable level.
That's an interesting approach, but I don't know if every company's 401(k) is set up to handle it. For example, I know the federal Thrift Savings Plan stops payroll deductions right at the $16,500 mark for participants younger than age 50.

I guess investors would also have to consider the benefit of the tax-deferred compounding against the issue of many 401(k)'s high expense ratios. (Not an issue with the TSP.) Hence the conventional wisdom to only invest in a 401(k) to the match, then max out the conventional/Roth IRAs.

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[hijack]When you add in the value of the warranty etc., it makes more sense to at least consider a new car these days.[/hijack]
Or just go farther out on the "used" curve and start looking at five-year-olds.

It took me a long time to appreciate that cars last 15-20 years now instead of just 10.
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Old 02-05-2011, 01:00 PM   #13
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On keeping the student debt (or even a mortgage), it's like paying 0.7% for the option to have the flexibility of cash and other assets. This is a rather small price to pay.

This option is usually not included in the pay-off or invest dialog.
I understand that and would not run my cash down to zero to pay off the debt but would if I still had a fair amount of cash left over.
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Old 02-06-2011, 07:05 AM   #14
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That's an interesting approach, but I don't know if every company's 401(k) is set up to handle it. For example, I know the federal Thrift Savings Plan stops payroll deductions right at the $16,500 mark for participants younger than age 50.

I guess investors would also have to consider the benefit of the tax-deferred compounding against the issue of many 401(k)'s high expense ratios. (Not an issue with the TSP.) Hence the conventional wisdom to only invest in a 401(k) to the match, then max out the conventional/Roth IRAs.
Iím sure not every company will allow this Ė but there are no federal rules preventing it. If you have extra money available to make in long term investments, itís at least worth a phone call Ė or a read through the 401K plan materials to see if this strategy will work. You need the plan to allow the following

1. You can make after-tax (traditional) contributions.
2. You can take out after-tax contributions for any reason (that is, you donít need a hardship). There may be a small administrative fee for preparing the paperwork and cutting the check every time you do this (for me it is on the order of $10-$20).

Item 2 above takes care of the issue of having bad options in your 401K plan since you can roll the money out of the 401K and put it into your own personal IRA thatís invested into what ever you want. FYI Ė I rolled money out of my 401K directly into my IRA three times in 2010.

If you really donít like youíre 401K options to even leave money in there for a few months Ė there is usually some type of cash option where you can just let it accumulate for a while before you roll it out.

Also Ė if you really donít like youíre 401K options, some plans (like mine) allow you to take out the company match any time you want after youíre vested. For several years (actually since the day I became vested in the company match), Iíve been at least annually taking out the company match and rolling it to a Traditional IRA (last year I rolled it to directly to a Roth IRA and will pay the taxes on the conversion).

As an example, my companies plan allows me to contribute up to 30% of my pay into the 401K. In 2010, I put in 5% of my pay as pre-tax contributions and 25% of my pay as after-tax traditional contributions. Note that Iím under 50 and 30% of my pay is over the $16,500 limit for pre-tax contributions. In 2010, my company matched 50% of what we put in up to 8% of our salary. It doesnít matter what type of contributions you make Ė I received the full match. I rolled out every thing I could (pre-tax contributions + their growth and company match) directly to a Roth IRA. When I rolled the money out of the 401K, the plan told me how much of it was pre-tax. Since I rolled the money into a qualified plan, I wonít owe any penalty. Since I already paid taxes on the ďpre-taxĒ amount, I wonít owe any tax on these funds. I will owe normal income tax on everything else that was converted (the growth of the pre-tax at the time I converted and the company match).

I also contributed $5K directly to a Roth IRA.

To give some real numbers to this technique to show how useful it can be, letís say you make $100K/year and youíre company allows you to contribute 30% of youíre pay to a 401K. Letís say you max out the 30% all with after-tax $. At the end of the year you convert it all to a Roth IRA. The amount rolled will be $30K +/- any growth or loss the investment had during the year. The only tax owed would be on the growth.

Letís say you are also married and youíre annual income allows you contribute to Roth IRAs. You can also put in $10K ($5K for each spouse) directly into Roth IRAs.

In this example, the couple was able to essentially contribute $40K into Roth IRAs.

If youíve got the money to do it Ė defiantly worth checking out to see if you can.
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Old 02-06-2011, 07:55 AM   #15
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The nondeductible IRA contributions with a subsequent Roth conversion sounds attractive to me.

Do you have a HSA and if so are you maxing out contributions to the HSA? If not, that could be an option.

Another option would be to value average into equities. Let's say you want to put $12,000 into the market over the next 12 months. First, invest $1,000. A month later, invest an amount to bring the account up to $2,000. A month later, invest an amount to bring the account up to $3,000. and so on. What will happen is in periods when prices are relatively high you will invest less and you will invest more when prices are relatively low. Sort of like dollar cost averaging but with a twist. I did this with my kid's college funding and it worked very well.
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Old 02-06-2011, 08:26 AM   #16
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Aeowyn's strategy is important to know about. Unfortunately, very few people will be able to use it. I have never had a 401(k) nor 403(b) nor 401(a) that has been setup like Aeowyn's. Neither has my spouse. Nevertheless, it's worth checking into.
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Old 02-06-2011, 10:15 AM   #17
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A friend of mine has a 401k that allows additional after-tax savings, and makes use of it.

The reason is that he cannot risk having more money showing up in his checking account; his spendthrift wife would see it and spend it before he gets a chance to transfer to a brokerage account.

This being his 2nd wife, he said half-jokingly that he could not afford another divorce, being so old and all that. Sad, eh?
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Old 02-06-2011, 10:33 AM   #18
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Unfortunately, very few people will be able to use it. I have never had a 401(k) nor 403(b) nor 401(a) that has been setup like Aeowyn's. Neither has my spouse. Nevertheless, it's worth checking into.
You might be surprised. This is certainly not an option that is advertised or promoted by 401K plans. Certainly the biggest obstacle to working this strategy is having the money available to put into it. But the OP seems to have investment money to spare.

It was kind of an ďaccidentĒ that I found out about this. I noticed that there was an option available within my 401K for if we exceeded the federal limit on pre-tax 401K contributions. We could either:

1. Stop contributions (would not get company match then)
2. Continue contributions with after-tax $ for just enough to max out the company match
3. Continue contributions at current level with after-tax $

That caused me to investigate the limit on after-tax contributions. Usually the only people who will be able to save more than $16,500 are people with a MAGI above $100K. Up until 2010, people with MAGI above $100K were not allowed to convert from traditional retirement accounts to Roth. Now they are able to. If youíre not able to convert to a Roth, this technique doesnít make any sense Ė because if youíre just deferring taxes you may as well invest outside of a retirement account. So it is only since 2010 that this has really been a good option.
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Old 02-06-2011, 02:11 PM   #19
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Aeowyn, what does your proposal (rolling over pre-tax 401k contributions) acheive that couldn't be duplicated by just funding a non-deductible IRA and then converting that to a Roth? Is the only benefit the ability to put in more than $5k/year/person?

My 401k appears to allow in-service withdrawals of pre-tax contributions, subject to some restrictions. DW's 401k does not. My 401k also has rock bottom expenses (1 bp), DW's are significantly higher.

I hadn't thought about it in a while but I guess DW and I could each put $10k into non-deductible IRAs for 2010 and 2011 ($20k total) and then convert that to a Roth now that the income limits are gone.

We don't have enough health expenses to justify a HSA.
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Old 02-06-2011, 05:56 PM   #20
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Aeowyn, what does your proposal (rolling over pre-tax 401k contributions) acheive that couldn't be duplicated by just funding a non-deductible IRA and then converting that to a Roth? Is the only benefit the ability to put in more than $5k/year/person?

My 401k appears to allow in-service withdrawals of pre-tax contributions, subject to some restrictions. DW's 401k does not. My 401k also has rock bottom expenses (1 bp), DW's are significantly higher.

I hadn't thought about it in a while but I guess DW and I could each put $10k into non-deductible IRAs for 2010 and 2011 ($20k total) and then convert that to a Roth now that the income limits are gone.

We don't have enough health expenses to justify a HSA.
If the non-deductible IRA gets you to the amount you want to invest, then that should work for you. In fact is preferable to go this route first as long as you donít already have an IRA with deductible contributions in it. But if you want to get large sums of money into a Roth (more than $10K/year), the non-deductible 401K contribution might help you out since each person would be able to contribute up to $49K into their 401K.

One issue with the IRA conversion is if you have any traditional IRAs with deductible contributions in it. You donít get to pick just the non-deductible contributions to convert. Say the total of all youíre IRAs is composed of 25% non-deductible contributions and 75% deductible contributions and growth. If you want to convert 25% of whatís in youíre traditional IRAs to a Roth IRA, you canít just choose the 25% non-deductible contributions you made Ė even if they are in a separate IRA. The amount converted will be in proportion to what they are in youíre total traditional IRAs Ė therefore 75% of what you convert will be taxable.

Iím not positive (Iíve converted all of my traditional IRAs to Roth at this point), but if you roll directly from a 401K to a Roth IRA (donít go to a Traditional IRA first), I think you can avoid the issue of having to consider taxable portions of youíre Traditional IRA Ė if thatís an issue for you.
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