Max 401k & IRA... What's next?

[SkinsFan0521]

Hi,

My wife & I are both 33 and planning to retire around 50-55. 2017 will be the first year that we both max out both of our Roth 401k & Roth IRA accounts. We just switched to Roth 401k this year and were previously both contributing to traditional 401k. We have basically no real amount of money in any brokerage accounts or other non-retirement accounts.

My question is about what to do after maxing both of those?? Maybe later this year or definitely in 2018,we'll have additional money to contribute to our retirement and I'm not quite sure where to put it.

We have cash emergency savings. No kids, so we don't need a 529. We don't have access to a HSA.

My wife's 401k allows additional after-tax contributions, so I was considering that. But I'm unclear on the rules to access that money. Something about needing to withdraw some of the 401k at the same time as the after tax money? If that's true then we'll be hit with the 10% penalty if we wanted access to that money before 59 1/2. That doesn't sound appealing!

Then, the other option that I was considering is to contribute to a brokerage account.

Are there other options that I'm missing?

Thoughts or suggestions on what to do next??

Thanks!

 

[Koolau]

I'm no longer up on the "rules" (how much allowed in which type account, etc.) but I do think you need to consider some balance between Roth type accounts and deferred accounts. I think there must be a sweet spot in terms of saving tax dollars now and yet not paying too much in the future. Personally, we committed too much to the deferred accounts and are paying the price now with RMDs. Still, deferring money from taxes for a while can be powerful if you play it right. Having said that, I lover Roths. I never had the opportunity for a Roth 401(k) but I'm so glad that I have several Roths and glad I got a chance to convert a fair amount to Roths. These vehicles can be gold. YMMV

 

[SkinsFan0521]

I'm no longer up on the "rules" (how much allowed in which type account, etc.) but I do think you need to consider some balance between Roth type accounts and deferred accounts. I think there must be a sweet spot in terms of saving tax dollars now and yet not paying too much in the future. Personally, we committed too much to the deferred accounts and are paying the price now with RMDs. Still, deferring money from taxes for a while can be powerful if you play it right. Having said that, I lover Roths. I never had the opportunity for a Roth 401(k) but I'm so glad that I have several Roths and glad I got a chance to convert a fair amount to Roths. These vehicles can be gold. YMMV

Hi,

I completely agree on the balance but a bunch of the research says that if you max out a Roth 401k, it's a better deal than going the traditional route and investing the tax savings.

Also, my (admittedly very rough) plan is to switch back to traditional 401k at some point closer to retirement. Also, like I mentioned... This is our first year in Roth 401k and the previous 10 years have been into traditional. We weren't maxing those years, but still putting in 10-15% of our income even at the beginning. Plus, the employer match still goes into traditional even when we're contributing to Roth.

But, regardless, I agree that there needs to be some balance.

Thanks for your reply!

 

[bw5972]

I retired last year at 57. The reason I could was that I had long planned to have non-taxed deferred monies saved. I used one of the well known discount brokerage firms and consistantly deposited there from age 30-57. Invested mostly in individual growth stocks but that was just my preference.

Ended up with assets about 25% taxable and 75% 401k which I rolled to an IRA at the same brokerage.

Should be ok to span my spending needs until SS without touching the IRA.

 

[travelover]

...........
My wife's 401k allows additional after-tax contributions, so I was considering that. But I'm unclear on the rules to access that money. Something about needing to withdraw some of the 401k at the same time as the after tax money? If that's true then we'll be hit with the 10% penalty if we wanted access to that money before 59 1/2. That doesn't sound appealing!

The sharpest person I know is Alan S. over at Fairmark forum re after-tax 401(k) contributions to Roth IRA rules. He helped me do a roll over before the IRS clarified the finer points.

Then, the other option that I was considering is to contribute to a brokerage account.............

I have way too much in IRAs and will subsequently be slammed by RMDs in a couple of years. In retrospect, I wish I had more after-tax investments. You can invest in something like Berkshire that pay no dividends, so you don't have to pay taxes yearly on dividends.

 

[Johanson]

Hi,

I completely agree on the balance but a bunch of the research says that if you max out a Roth 401k, it's a better deal than going the traditional route and investing the tax savings.

Do you have links to that research? Everything I've seen lately (besides Dave Ramsey and he is giving an opinion) is that traditional 401K is a better deal.

 

[SkinsFan0521]

Do you have links to that research? Everything I've seen lately (besides Dave Ramsey and he is giving an opinion) is that traditional 401K is a better deal.

There is a section m the bogleheads forum that discusses it and has a link to a spreadsheet where you can input different variables and it'll do the calculations for you:

https://www.bogleheads.org/wiki/Traditional_versus_Roth

Also, here are a couple I've read recently :

http://millennialmoney.com/roth-401k-vs-traditional-401k/

https://thefinancebuff.com/roth-401k-for-people-who-contribute-max.html

Plus another thing that I think I've read is that even though you may run into RMD with Roth 401k, they can be rolled into a Roth IRA easily and avoid any issues. I may be wrong about that but I believe that to be true.

But, like pretty much everything else when it comes to retirement investing... There are multiple schools of thought.

 

[Scuba]

I recommend you invest in a brokerage account. When we ER'd at 56/57, about 2/3 of our portfolio was in a taxable brokerage account. Not only does this mean we don't have to worry about bridging income between our ER date and age 59.5, but also the RMD hit should not be as bad for us since only about 1/3 of our assets are in tax deferred vehicles.

 

[pb4uski]

+1 Having taxable account money is critical for those who plan to retire before 59 1/2 (or 55 with 401k money). Plus, if your taxable account money is in equities then qualified dividends and long-term capital gains get taxed at lower rates (0% for taxpayers in the 15% tax bracket or lower and 15% for most other taxpayers).

But my question is why Roth? Wouldn't tax-deferred savings save you a bunch in taxes? When I was working I avoided paying 28% or more and now in early retirement am paying ~7% on withdrawals/Roth conversions... saving me ~21%... very substantial benefit.

While I know future earnings on the Roth are tax-free, I'm not sure if the benefit of that would be worth paying 28% (or 21%) for the privilege.

 

[Luck_Club]

Consider rental real estate. Uses after tax money, can provide positive cash flow while reducing taxable income.

 

[NgineER]

Check out madfientist as well for insights into why tax deferred is great for ER. If you max out the Roth it is true that you essentially have contributed more as you have $18k after tax invested. But the tax savings now are important, allowing you to invest elsewhere.
After tax 401k is something I'm a fan of, I roll the aftertax portion into a Roth every month and can use those contributions at any time before 59.5.

 

[Z3Dreamer]

Many moons ago (23 years), I was in a similar situation: mid 30's, maxed out, etc. At the time, I decided to put some money (5%) in a Single Premium Deferred Annuity through Fidelity. In hindsight, I would not recommend this, because there are so many more options today. With such favorable capital gains tax rules, I would put it in Vanguard, Fidelity, etc. mutual funds that have very few capital gains distributions. Problem with what I did is that when I pull out the gains, I will be taxed at ordinary income tax rates (maybe 15% fed and 5% state). With a low turnover mutual fund, those gains would be taxed at 0% fed and 5% state.

Of course, this is a first world problem as the funds have returned, on average, 8.5% and are worth six times the original investment.

 

[SkinsFan0521]

Check out madfientist as well for insights into why tax deferred is great for ER. If you max out the Roth it is true that you essentially have contributed more as you have $18k after tax invested. But the tax savings now are important, allowing you to invest elsewhere.
After tax 401k is something I'm a fan of, I roll the aftertax portion into a Roth every month and can use those contributions at any time before 59.5.

Can you please explain how you roll the after tax into a Roth every month? Does your plan have to allow in service distributions for this? Or is it a rule that you can do this in any plan that allows after tax? Also, you can just roll out the after tax portion without touching the other contributions?

Thanks!

 

[Closet_Gamer]

I'd use a brokerage.

Easy to diversify....including diversifying across evolving tax policies..
It's liquid...buy a house, send a kid to college, etc. Goals evolve.
It's flexible...use dividends to build passive income or focus on cap gain.
It's cheap...focus on index funds .

My $0.02. Good job on saving.

 

[SkinsFan0521]

I was already leaning towards going the brokerage account route and am the feedback here seems to validate that thought.

But, one question that I have is why not do the after tax 401k and then roll into a Roth right away? Then I would be able to withdraw all contributions at any time (i.e between whenever we retire and 59.5). What am I missing with that strategy?

Thanks to everyone for the help so far!

 

[pb4uski]

I think you could do that and it would be a sensible alternative but I'm not sure if you can roll it right away unless your 401k plan allows in-service rollovers... I think most plans only allow rollovers once you have separated from the company but unless your 401k options stink it might not be much of a substantive difference.

 

[Senator]

If you can put money in an HSA, and leave it there, that is better than a Roth. pay medical expenses out of your after tax accounts.

Do a back door Roth. Contribute to a IRA, and then convert it to a Roth. The more money in a Roth, the better.

 

[Scuba]

I'd use a brokerage.

Easy to diversify....including diversifying across evolving tax policies..
It's liquid...buy a house, send a kid to college, etc. Goals evolve.
It's flexible...use dividends to build passive income or focus on cap gain.
It's cheap...focus on index funds .

My $0.02. Good job on saving.

+1
And if you want tax efficiency, use index ETF's rather than mutual funds. No taxes on capital gains of ETF's until you actually sell them.

 

[Scuba]

I am not a tax expert but my CPA recommended against doing after-tax IRA contributions. When you have both tax-deferred and after-tax funds in an IRA, it gets complicated as earnings have to be allocated. Maybe if one immediately converts after tax $ to a Roth, this is mitigated, but I'm not sure about that.

Regardless, I'd still advocate for a brokerage account. Sounds like most of your savings now are tax-deferred. It would be better to put saving beyond your employer max into brokerage account so you can build substantial assets you can tap at any age with low tax rates.

 

[travelover]

............When you have both tax-deferred and after-tax funds in an IRA, it gets complicated as earnings have to be allocated. ............

I think that this varies. My employer kept careful accounting of earnings on pre and after tax contributions and when I rolled it out there was no issue.

 

[Ready]

You still have a long way to go until you turn 50-55, so there's plenty of time to plan your ER strategy. While you have done great maxing out your retirement accounts, you state you don't have much saved elsewhere. Many of us who successfully retired early found that we had to live on much less than our salaries even after maxing out the retirement accounts, as those accounts don't really allow you to put that much away if you really want to retire well before social security kicks in.

Take a look at your expenses and see if you have some room to cut back and allow for you to build up a sizeable amount in your taxable accounts in addition to the 401K contributions. You will need a sizeable buffer to get you to 59.5, especially if you retire closer to 50 than 55.

 

[NgineER]

If you can't do in service distributions, I believe you can roll your after tax contributions into your Roth 401k, but I'm not entirely sure.

 

[SkinsFan0521]

Thanks for all of the great advice and comments in this thread, I appreciate it!

Maybe this isn't the place and I should start a new thread and I know there are already tons of things written about it, but what are all of your opinions on a maxing a Roth 401k vs maxing a Traditional 401k when it relates to ER specifically?

I know that if we retire at 50, we're going to need a good chunk of money in an after-tax brokerage account to bridge the gap to 59.5 when we can access our 401k and IRA. That was the original intent of this thread.

However, now there has been the discussion about Roth 401k vs Traditional 401k that has me thinking about changing. Even though the math says that I'd be better off by maxing the Roth 401k (since we're in 25% bracket now and expect to be in 25% bracket in retirement -- *Edited*: There is a slight chance that we could be in the 15% bracket some years, but that would be based on the idea that we would be withdrawing Roth monies that wouldn't count towards income tax. However, with less Roth money, that is less likely of an option. Basically a catch-22, but just figured I'd add that in case it matters.), I now have less money to contribute to the brokerage account.

I'm wondering what your thoughts are about maybe switching back to traditional so we have the extra money (tax savings) to put into the brokerage account. My thought process is that money in the brokerage account may actually be more "valuable" to us since it would allow an ER vs having more money in a retirement account that I can't access for another 10 years after ER.

Thanks for your help and opinions!

 

[NgineER]

I believe that the money being locked into a traditional IRA or 401(k) are exaggerated. There are strategies to get the money out without having to incur penalties.
I would not worry about that too much.
That said, I think that it would be good to balance it out between Roth, traditional and after-tax

 

[pb4uski]

See http://www.caniretireyet.com/generating-retirement-income-before-age-59/