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Where to invest w/ 401k maxed and not Roth eligible
Old 12-03-2014, 03:40 PM   #1
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Where to invest w/ 401k maxed and not Roth eligible

42 years old. Married with 3 kids and planning to retire at 55.

I have been maximizing my 401k and contributing to a Roth 401k. Our household income will be $200k this year so we will no longer be Roth eligible. In January I will receive a vested stock bonus of $30k and some large stock options that I can exercise anytime in the next 7 years. What should we do with this extra cash to help us retire early. Some options I have considered:

  • Keep as cash in a money market account and buy a mutual fund on the next dip
  • Dollar cost invest it into a mutual fund
  • Keep for a extra emergency fund (already have 6 months saved)
  • Use it for some living expenses and have my spouse set up a SEP
  • Pay down debt - have a car loan at 2% and mortgage is 2.5%
  • Other
Thanks for the advise.
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Old 12-03-2014, 03:59 PM   #2
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In my case, after I hit the $17,000 or so limit to the pre-tax 401k, I was able to continue to make contributions "after-tax" into our 401k up to ~$50,000/year.

What is very nice about this option is that I could then do an in-service rollover to a Roth IRA with only minimal taxes due.

Not all 401k plans allow "after-tax" contributions and/or in-service withdrawals, but for those that do, this is a great way to funnel over $50,000 a year into a Roth.

-gauss
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Old 12-03-2014, 04:01 PM   #3
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Since the mortgage interest is tax deductible and the car loan is not, I would consider paying off the car loan before anything else. And to reduce income taxes this year, if your spouse is eligible, have him/her open a SEP-IRA and max that out.
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Old 12-03-2014, 04:01 PM   #4
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Everyone is eligible for a Roth...you just have to do it through the backdoor. Contribute to a traditional IRA (nondeductible) and then convert it to a Roth right away. I've done that the past few years. There's no income limits on conversions.


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Old 12-03-2014, 04:19 PM   #5
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Tax favored vehicles
Coverdell Esa Versus 529 Plan
Spousal IRA Contribution Limits for 2013


Or Lower expense Funds.
Or VIGAX or VIMAX
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Old 12-03-2014, 05:07 PM   #6
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Post-tax 401k if your plan allows that. Then rollover into Roth when you leave their employ.

Backdoor Roth if you don't have an tIRAs.

If you can't do either of the above then value average into a taxable equity mutual fund since the income is tax advantaged.
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Old 12-03-2014, 06:12 PM   #7
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Quote:
Originally Posted by gauss View Post
In my case, after I hit the $17,000 or so limit to the pre-tax 401k, I was able to continue to make contributions "after-tax" into our 401k up to ~$50,000/year.

What is very nice about this option is that I could then do an in-service rollover to a Roth IRA with only minimal taxes due.

Not all 401k plans allow "after-tax" contributions and/or in-service withdrawals, but for those that do, this is a great way to funnel over $50,000 a year into a Roth.

-gauss
My plan did not offer in-service conversions so they have to wait until I transfer the 401k to IRAs. The after tax amount can go to the Roth at that time.

Unfortunately the IRS only just recently declared that this is OK. I would have been maxing the contributions to 53k/18k (2015) if I was still working and they didn't drag their feet for years on the ruling. Now it is too late.
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Old 12-03-2014, 09:25 PM   #8
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Old 12-04-2014, 04:27 AM   #9
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Originally Posted by jim584672 View Post
My plan did not offer in-service conversions so they have to wait until I transfer the 401k to IRAs. The after tax amount can go to the Roth at that time.

Unfortunately the IRS only just recently declared that this is OK. I would have been maxing the contributions to 53k/18k (2015) if I was still working and they didn't drag their feet for years on the ruling. Now it is too late.
My understanding of this is that recently, in the past couple of months, the IRS implemented rules that would allow direct rollovers (ie trustee to trustee transfers) that would not require withholding of 20% of the taxable amount.

Prior to this indirect (ie 60 day) rollovers where allowed. You just had to be careful of how you sequenced the rollovers (ie taxable vs non-taxable) and you had to front the 20% of the taxable amount.

Since both DW and my 401ks allowed this, we were moving ~ $100k per year to the Roth IRAs while still getting the tax-deferral for the taxable amount (which went to a traditional IRA.)

Lots of good discussion of these strategies at fairmark.com

-gauss
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Old 12-04-2014, 06:11 AM   #10
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You should be investing post-tax money as well. You will lose ground with too much cash too early. Equities on average earn 8% annually. Cash earns a big fat zero. You will need that money before you tap your IRA and 401K money. Besides, when you spend it later, it's like getting a paycheck without any taxes taken out.

Do you have 529 plans for the kids?

Pay off the car.

Just my $0.02.


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Old 12-04-2014, 09:39 AM   #11
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Equities on average earn 8% annually. Cash earns a big fat zero.


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Not true! :-)

The future value of cash is the present value times (1-inflation). You lose money.

You need to invest that cash just to EARN a big fat zero.




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Old 12-04-2014, 10:06 AM   #12
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Plenty of good ideas above. I Bonds will expand your tax-deferred space also.
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Old 12-04-2014, 12:11 PM   #13
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Not true! :-)

The future value of cash is the present value times (1-inflation). You lose money.

You need to invest that cash just to EARN a big fat zero. ....
Actually have the right idea but you have stated it wrong.

If cash earned zero percent interest, its value would not change since value is generally defined as the amount of cash that something can be converted to (before transaction costs and taxes) and for cash there is no conversion necessary so it's nominal amount and value are always the same.

However, it is true that the purchasing power of cash generally declines as a result of inflation, so the amount of goods that cash can buy declines over time because its value stays constant but the value of goods generally increase.

Similarly, if you had deflation, the value of cash doesn't change but what it can buy increases.
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Where to invest w/ 401k maxed and not Roth eligible
Old 12-04-2014, 10:26 PM   #14
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Where to invest w/ 401k maxed and not Roth eligible

Quote:
Originally Posted by pb4uski View Post
Actually have the right idea but you have stated it wrong.



I stated the formula for FV wrong?please correct it. I left off N to keep it simple.



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Old 12-04-2014, 11:18 PM   #15
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I stated the formula for FV wrong?please correct it. I left off N to keep it simple....
Actually now that you mention it, technically you had it totally wrong. You had FV = PV * (1-inflation)^n

But really, FV = PV * (1+i)^n where i=interest rate and n=number of periods.

So you used the wrong sign (- rather than +) and the wrong variable (inflation rather than interest). Back to Finance 101 for you!
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