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Maxed out 401K,too much for Roth, what to invest in.
Old 09-05-2007, 08:59 PM   #1
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Maxed out 401K,too much for Roth, what to invest in.

If you max out the 401K plans, can't have a Roth ( $230K w/ Wife's income per year ) and have at least $50K per year to invest, what would you invest in too be tax efficient?

No Debt whatsoever.

Thnx
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Old 09-05-2007, 09:09 PM   #2
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Stock is pretty tax efficient. Especially if you don't sell.

Buy something like VTSAX and the only distributions you'll probably see are from the 1.7% dividend yield.
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Old 09-05-2007, 09:12 PM   #3
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You invest in the same-old same-old: your asset allocation. Just put fixed income in your 401k. Put other tax inefficient investments like REITs in your tax-deferred accounts. Then add your equities to your tax-deferrred, then when that's all filled up, you have only equities in your taxable. But be sure to use tax-efficient equities like large cap blend, total market, total international (take the foreign tax credit!). Examples: VTI, VTSMX, VEU, VFWIX. Some folks would say don't put small cap in taxable, but sometimes you gotta do that because all the tax-deferrred stuff is filled up.

You can avoid tax-exempt bonds (munis) in your taxable because you should be putting taxable bonds in your 401k's. For example, my 401k is 90% one fund: an intermediate bond fund. Do not fall into the trap that every account has to be exquisitely asset allocated. Look at your total picture of ALL (his and hers) accounts.
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Old 09-05-2007, 09:16 PM   #4
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And make sure your emergency fund is in a tax-exempt money market fund. Your taxable equivalent yield will be almost 6%.
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Old 09-06-2007, 12:25 AM   #5
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Originally Posted by LOL! View Post
And make sure your emergency fund is in a tax-exempt money market fund. Your taxable equivalent yield will be almost 6%.
lol!, can you give us the rough arithmetic that
produces your "almost 6%" number

i looked at the vanguard
tax-exempt funds and am not sure how you got from the yields reported
there to the 6% figure. i am not trying to refute your stmt. just want
to know how your calculation is being done...
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Old 09-06-2007, 08:27 AM   #6
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See Vanguard's Tax Equivalent Calculator
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Old 09-06-2007, 08:32 AM   #7
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I would be putting $50,000 each year into dividend paying stocks (and adjust 401k/IRA accordingly to maintain asset allocation).

1/3 into Dow components (Dogs of the Dow type strategy) will yield around 2-3%, 10 stocks
1/3 into financials and utilities (this is to get higher yield) should yield 3-5% 10-20 stocks
1/3 into small and mid cap dividend stocks. This should give more growth. 1-2% yield. 20-60 stocks.

year 1, go with dow
year 2 add the utilities
year 3 add the small caps
year 4, put 17k into each of the 3.

The small caps/mid caps is something which takes some homework. If this amount of work does not appeal to you, then find a mutual fund. I would put all dividends in a money market and add to stock allocation the next year.

If you buy the stocks, you control the selling points. If you buy a mutual fund, you will lose control of when fund buys and sells.

If you have $1 M to invest, consider this fund: MFQTX

It is the most tax efficient fund I can find.
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Old 09-06-2007, 10:35 AM   #8
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I'm in a similar situation. I'm assuming you have your stock:bond ratio established and an asset allocation plan. You will want to pay attention to your asset location as mentioned above. Put tax inefficient investments in your 401k, efficient investments in your taxable. This will depend on what you have access to in your 401k. I invest my taxable dollars per my AA in the appropriate ETF's, mostly Vanguard. Based on your post you will have ~$4100 to invest each month. If you use a low/no cost broker your fees will be low and you will come out ahead of MF's. Use Vanguards calculator that compares costs etc of their MF's with their ETF's to determine that. Good Luck.

DD
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Old 09-06-2007, 02:00 PM   #9
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lol!, can you give us the rough arithmetic that
produces your "almost 6%" number
Let's work backwards: If you earn 6% and pay 40% of that in taxes, that means you keep 60% of your 6%. 0.60 * 6% is 3.6%. So if you find a tax-exempt money market fund paying close to 3.6%, then that's like a taxable yield of close to 6%.
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Old 09-07-2007, 12:55 PM   #10
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Originally Posted by Foodeefish View Post
If you max out the 401K plans, can't have a Roth ( $230K w/ Wife's income per year ) and have at least $50K per year to invest, what would you invest in too be tax efficient?

No Debt whatsoever.

Thnx
I'm not recommending this, but If you want to save for retirement you could use a tax deferred annuity from someone like TIAA-CREF. You use after tax dollars and the gains are tax deferred. I'd be careful of the fees though.

My opinion is that if you are maxing out all the regular stuff like 401k etc, its good to just invest after tax so that you have enough liquidity to ER. Look at tax efficient funds (index) or maybe get into some real estate
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Old 09-07-2007, 05:05 PM   #11
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I believe tax efficient funds would be a better choice than a VA for most people.
You lose some tax flexibility with the VA in that withdrawals are taxed at ordinary income rates instead of capital gains rates and are taxed first not last. Also you cannot use losses to offset gains in other investments.
Fees and expenses are considerable higher in the VA than index funds.

A VA might be OK for someone who wants growth and wants this money to be protected from lawsuits. Some states including Texas protect monies in VA from lawsuits.

2soon
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Old 09-10-2007, 08:26 AM   #12
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I believe tax efficient funds would be a better choice than a VA for most people.
You lose some tax flexibility with the VA in that withdrawals are taxed at ordinary income rates instead of capital gains rates and are taxed first not last. Also you cannot use losses to offset gains in other investments.
Fees and expenses are considerable higher in the VA than index funds.

A VA might be OK for someone who wants growth and wants this money to be protected from lawsuits. Some states including Texas protect monies in VA from lawsuits.

2soon
I agree, a tax deferred annuity wouldn't really be my choice, there plenty of better tax deferred ways to save for retirement and once you've maxed those out I'd save after tax to give you some flexibility.
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