How should my daughter save for retirement?

[Gallaher]

My daughter is 32, single, makes $210k a year….nice problem!
Recently bought a house.
Her employer offers an unmatched 401k. However, they recently informed her they are returning her 2025 YTD contributions because too few lower income employees are participating in the 401K plan. They have essentially shut down the 401K to high earners.

Suggestions for tax deferred investing? She makes too much for a Roth.

She may be able to invest in a traditional IRA. However, she is covered by a 401K…but her employer won’t let her participate.

Suggestions?

 

[pb4uski]

Does she currently have any tax-deferred savings? If not, then a non-deductible IRA contibution followed by a Roth conversion to back-door it into a Roth IRA.

Does her employer offer a non-qualified deferred comp plan? HSA?

Other than that's she's screwed.

 

[Jerry1]

Read up on the issue. If she cannot participate then how can she be covered by a 401K? Maybe there’s an exception for such instances. My belief is that the rule is to prevent doubling up on contributions.

If she’s truly blocked, I wouldn’t worry too much since there’s no match. Just look at all the comments on this board about whether or not income taxes in retirement are actually much different than from when employed. More importantly, it’s good to have a good amount of already taxed savings when you hit retirement, especially in the form of unrealized capital gains.

 

[Gallaher]

Sorry Jerry1 the rule is not to prevent doubling up on contributions. It’s to keep companies from rewarding C suite with 401k and not front line employees. I have personal experience. That’s why many companies went to offering 401K contributions even when employees did not participate.

My concern is not tax before or after retirement….its 30 years of tax deferred GROWTH.

 

[badatmath]

Well I think her only option is nondeductible IRA or a taxable account. IRS rules don't allow what they call top heavy plans IIRC so there isn't much she can do about it.

 

[CalBird]

Try backdoor Roth IRA contribution since she is still very young.

 

[Jerry1]

My concern is not tax before or after retirement….its 30 years of tax deferred GROWTH.

Long term capital gains on stocks grow tax free. Plus, they give you a lot of flexibility with cash flow in retirement. Maybe not as good as an IRA but take it form someone who has most of his nest egg in a IRA, it’s good to have both pre tax and after tax accounts going into retirement.

Is she going to stay with this company her entire career? As stated, the back door Roth is an option, but maybe her next employer will have better options.

 

[imjustawarrior]

Most of the ideas have already been thrown out. Maybe she needs to look for a job with better benefits and go for a pay raise too.

 

[COcheesehead]

When I maxed out all my deferred options I stuck a chunk into what Fidelity called a retirement annuity, which is really just a deferred annuity. The cost is low, .25% a year, all the regular investment fund classes available to you, but no RMDs and it doesn’t annuitize until your 96. So almost like an IRA without the RMDs. The money I have put into it has almost tripled. I look at it as our LTC fund.

 

[cathy63]

She may not be able to make a tax-deductible contribution to a traditional IRA. When she gets her W-2, she needs to look at it and see if "Retirement Plan" is checked in box 13. If that box is checked and she makes over $89K (if filing Single), then she can't get a tax deduction for the IRA contribution. If the box is not checked, then she has until April 15 to make the contribution for 2025. She may want to contact her payroll people now an discuss the situation with them to see if they can agree in advance that she's not covered by any sort of retirement plan and the box should not be checked.

Does she do anything as a side gig? She may be able to open a solo 401k and contribute funds earned outside her regular job.

 

[FlaGator]

BTDT. Tough when it happens, the consolation prize is that you're killing it income-wise. Advise her to put the money in index funds with low dividends. That's the closest thing I found to tax-deferred growth in a regular account.

 

[Montecfo]

I think she is an active participant even if unable to contribute.

I think investing in a taxable account, backdoor Roth and/or annuity are the options.

 

[Gallaher]

Thanks all.
I’ve considered the back door Roth. Maybe even have her convert all of her outstanding IRAs to Roth. The retirement annuity is a new consideration. I have thought about having her look for an employer with better benefits.
Another big challenge is she makes well over $200K in a job she does entirely remotely. Works from her spare bedroom 100% and they make her clock out at 40 hours per week. So great pay and tremendous convenience.
My employers worked me like a mule.

 

[Diogenes]

This is a common problem in stingy small companies which refuse to offer 401K matching. The matching - I think that it can be as low as 3% - completely obviates the problem with the IRS ("safe harbor"). But if there is zero matching AND insufficient participation by lower-paid employees, then the so-called "highly compensated employees" are out of luck. My former start-up company had 0% matching, and as a result, I ended up with a "refund" (rejection) of a prior-year's 401K contribution. It was fully taxable, fortunately with no penalty, in the following tax-year.

I hate to say this, because I've personally been excoriated for this, both on this site and on Bogleheads, but here's what's going to happen, OP:

1. Before long, your daughter is going to have $10M or $20M or more, in her fully taxable account.
2. That means that even with zero trading, rebalancing or redemptions, dividends alone are likely going to exceed her W2.
3. So, if she loses her job say 25 years from now, she will still on-paper have a deep 6-figure "income", rendering her ineligible for things like ACA subsidies.
4. She will quite literally be in a position where she is too wealthy to retire early. I am not kidding, or being sarcastic. I mean this very forthrightly and literally.

Unfortunately, I don't have any suggestions... only empathy.

 

[Sunset]

BTDT. Tough when it happens, the consolation prize is that you're killing it income-wise. Advise her to put the money in index funds with low dividends. That's the closest thing I found to tax-deferred growth in a regular account.

That and BRK.B which has no dividends and is diverse.

 

[Sunset]

This is a common problem in stingy small companies which refuse to offer 401K matching. The matching - I think that it can be as low as 3% - completely obviates the problem with the IRS ("safe harbor"). But if there is zero matching AND insufficient participation by lower-paid employees, then the so-called "highly compensated employees" are out of luck. My former start-up company had 0% matching, and as a result, I ended up with a "refund" (rejection) of a prior-year's 401K contribution. It was fully taxable, fortunately with no penalty, in the following tax-year.

I hate to say this, because I've personally been excoriated for this, both on this site and on Bogleheads, but here's what's going to happen, OP:

1. Before long, your daughter is going to have $10M or $20M or more, in her fully taxable account.
2. That means that even with zero trading, rebalancing or redemptions, dividends alone are likely going to exceed her W2.
3. So, if she loses her job say 25 years from now, she will still on-paper have a deep 6-figure "income", rendering her ineligible for things like ACA subsidies.
4. She will quite literally be in a position where she is too wealthy to retire early. I am not kidding, or being sarcastic. I mean this very forthrightly and literally.

Unfortunately, I don't have any suggestions... only empathy.

She could invest in BRK.B which has zero dividends so she can have 20M and still get ACA (if it exists in 25 years.).

 

[Midpack]

BTDT. We maxed out our 401ks and did get matches, but were limited in how much we could contribute by lower income workers - sounds like we were fortunate to get anything. Also did some small non deductible tIRA contributions, tiny % deductible. So our assets today are 74% in taxable. Good to confirm I wasn’t missing an opportunity. Good problem as mentioned above.

 

[Gumby]

Well I think her only option is nondeductible IRA or a taxable account. IRS rules don't allow what they call top heavy plans IIRC so there isn't much she can do about it.

This exact situation happened to me back in the 90s (also with a non-matching 401k plan). I made a non-deductible IRA contribution and I have since regretted it, because it gives you a basis in your IRA and complicates your tax preparation. I would just save in taxable. BRK.B would be a good choice.

 

[COcheesehead]

This is a common problem in stingy small companies which refuse to offer 401K matching. The matching - I think that it can be as low as 3% - completely obviates the problem with the IRS ("safe harbor"). But if there is zero matching AND insufficient participation by lower-paid employees, then the so-called "highly compensated employees" are out of luck. My former start-up company had 0% matching, and as a result, I ended up with a "refund" (rejection) of a prior-year's 401K contribution. It was fully taxable, fortunately with no penalty, in the following tax-year.

I hate to say this, because I've personally been excoriated for this, both on this site and on Bogleheads, but here's what's going to happen, OP:

1. Before long, your daughter is going to have $10M or $20M or more, in her fully taxable account.
2. That means that even with zero trading, rebalancing or redemptions, dividends alone are likely going to exceed her W2.
3. So, if she loses her job say 25 years from now, she will still on-paper have a deep 6-figure "income", rendering her ineligible for things like ACA subsidies.
4. She will quite literally be in a position where she is too wealthy to retire early. I am not kidding, or being sarcastic. I mean this very forthrightly and literally.

Unfortunately, I don't have any suggestions... only empathy.

LOL, except she would have the money to pay for HC directly.

 

[Flieger]

This is a common problem in stingy small companies which refuse to offer 401K matching. The matching - I think that it can be as low as 3% - completely obviates the problem with the IRS ("safe harbor"). But if there is zero matching AND insufficient participation by lower-paid employees, then the so-called "highly compensated employees" are out of luck. My former start-up company had 0% matching, and as a result, I ended up with a "refund" (rejection) of a prior-year's 401K contribution. It was fully taxable, fortunately with no penalty, in the following tax-year.

I hate to say this, because I've personally been excoriated for this, both on this site and on Bogleheads, but here's what's going to happen, OP:

1. Before long, your daughter is going to have $10M or $20M or more, in her fully taxable account.
2. That means that even with zero trading, rebalancing or redemptions, dividends alone are likely going to exceed her W2.
3. So, if she loses her job say 25 years from now, she will still on-paper have a deep 6-figure "income", rendering her ineligible for things like ACA subsidies.
4. She will quite literally be in a position where she is too wealthy to retire early. I am not kidding, or being sarcastic. I mean this very forthrightly and literally.

Unfortunately, I don't have any suggestions... only empathy.

Before long? At $210k/year? If only....

Flieger

 

[pb4uski]

...I hate to say this, because I've personally been excoriated for this, both on this site and on Bogleheads, but here's what's going to happen, OP:

1. Before long, your daughter is going to have $10M or $20M or more, in her fully taxable account.
2. That means that even with zero trading, rebalancing or redemptions, dividends alone are likely going to exceed her W2.
3. So, if she loses her job say 25 years from now, she will still on-paper have a deep 6-figure "income", rendering her ineligible for things like ACA subsidies.
4. She will quite literally be in a position where she is too wealthy to retire early. I am not kidding, or being sarcastic. I mean this very forthrightly and literally.

Unfortunately, I don't have any suggestions... only empathy.

If I had $10M or $20M in a taxable account I would be totally willing to forgo ACA subsidies... not only that, IMO someone with $10-20M of assets, which equates to a minimum of $200-400k of dividend income at 2%, should not be getting ACA subsidies and I highly doubt that many are.

 

[Diogenes]

Before long? At $210k/year? If only....

Flieger

If she remains scrupulously frugal, avoids having children or other open-ended expenses.

Sample calculation, starting with zero today: 40% annual tax rate, save 75% of after-tax income, assume 3% inflation, salary increase keeps pace with inflation (and never exceeds it); and 10% before-inflation annual rate of return. $10M is reached in 23-24 years, and $20M in ~29 years. That is of course not adjusted for inflation. If she's 32 today, she reaches $10M at 55 or so. Given the span of modern human life, that's... not long.

I did however make one sly and duplicitous assumption: her taxes are just on her W2. I didn't include additional taxes on her annual dividend income. In the first 15 years or so, that doesn't matter greatly. But as her portfolio comes to attain a large multiple of her gross annual W2 (it reaches 15X in year 17, and 40X in year 29, for example), she'll see more and more of her W2 gobbled by additional income tax, just to cover her taxable portfolio gains. If she chooses not to retire early, by year 42 - when she's just about to reach Medicare eligibility age - her portfolio will have exceeded 100X her annual W2. If she retires then, imagine her IRMAA expenses!

For another fun thought-experiment, imagine if our heroine had managed to score such a remunerative job right out of college, meaning that she would have been a decade ahead. Then consider her tax expenses and also the costs of retiring early.

 

[Gallaher]

our heroine, my daughter, only earned the graduate degree that justifies her compensation 4 years ago at age 28. Although, she was earning close to $200K before 30.
Further complicating her savings strategy, she did not learn the meaning of FRUGALITY until well into adulthood. Her brothers still dont seem to grasp the concept. It skips a generation.
Fortunately, daughter has not found the tree money grows on and is cutting expenses and saving.

 

[Flieger]

If she remains scrupulously frugal, avoids having children or other open-ended expenses.

Sample calculation, starting with zero today: 40% annual tax rate, save 75% of after-tax income, assume 3% inflation, salary increase keeps pace with inflation (and never exceeds it); and 10% before-inflation annual rate of return. $10M is reached in 23-24 years, and $20M in ~29 years. That is of course not adjusted for inflation. If she's 32 today, she reaches $10M at 55 or so. Given the span of modern human life, that's... not long.

I did however make one sly and duplicitous assumption: her taxes are just on her W2. I didn't include additional taxes on her annual dividend income. In the first 15 years or so, that doesn't matter greatly. But as her portfolio comes to attain a large multiple of her gross annual W2 (it reaches 15X in year 17, and 40X in year 29, for example), she'll see more and more of her W2 gobbled by additional income tax, just to cover her taxable portfolio gains. If she chooses not to retire early, by year 42 - when she's just about to reach Medicare eligibility age - her portfolio will have exceeded 100X her annual W2. If she retires then, imagine her IRMAA expenses!

For another fun thought-experiment, imagine if our heroine had managed to score such a remunerative job right out of college, meaning that she would have been a decade ahead. Then consider her tax expenses and also the costs of retiring early.

Ok. You're definition of before long and mine are vastly different.

Also, a lot of supposition on spending, investments, etc for someone we know nothing about.

I hope she does well.

Flieger

 

[Steelpony]

My daughter is 32, single, makes $210k a year….nice problem!
Recently bought a house.
Her employer offers an unmatched 401k. However, they recently informed her they are returning her 2025 YTD contributions because too few lower income employees are participating in the 401K plan. They have essentially shut down the 401K to high earners.

Suggestions for tax deferred investing? She makes too much for a Roth.

She may be able to invest in a traditional IRA. However, she is covered by a 401K…but her employer won’t let her participate.

Suggestions?

I shook out grandmas bag of animal bones onto the sacred blanket to delve way into the future:

How about VTI or VOO and/or a boatload of munis in a taxable account?

Tax favored minuscule dividends taxed at low rates with no cap gain taxes until cashed in at her desired amounts in the future.

Munis (on reinvestment?) is basically free money which at this point would just affect SS taxes which would be the max probably anyway.

Could have rented though using the muni distributions for taxes and/or to live for free.