Maxing out 401k and IRA, now what?

[newellcr]

Hello Folks,

Any other suggestions on funding the ER after maxing out the 401k and IRA contributions? There are standard mutual funds or a brokerage account but does anyone have any ideas about ER friendly investment products? Somewhere along the way, I saw an article suggesting the use of the 529 plan for additional ER funds. The money grows tax deferred and then just pay the taxes and 10% penalty. The biggest problem with this, once you get beyond paying the 10% penalty, is that the money is taxed as income rather than as capital gains.

Anyone have any comments about the 529 plan or another type of investment for additional ER funding?

Thanks,

Chris

 

[JWR1945]

Consider buying ibonds to augment your emergency fund and your funds to make major purchases in the near-term. I realize that this does not fall into an investment category per se. Still, if you are using credit to purchase a car or just about anything else, paying cash in full is an attractive alternative.

You cannot tap into ibonds for an entire year. Hence, they are not appropriate for most emergency fund needs. They can be useful for adding to a longer term need.

ibonds are tax free until redeemed. They match inflation. They never decrease in value. (In contrast, TIPS are taxable each year and TIPS can temporarily decrease below par. They are guaranteed to return their initial price at maturity even if there has been deflation overall, but not before then.)

Have fun.

John R.

 

[unclemick]

The REtire Early Index has an article on stocks versus mutualfunds worth reading.

This doesn't exactly fit but since ER in 1993 my hobby money is in DRIP's via Moneypaper - 44 stocks as of today - I don't golf. It's creaped up to 12% of our ER portfolio and 20% of my taxable (diviends) income so it's starting to get expensive - paying taxes on dividends I'm compounding. I periodically spend some to keep it down.

 

[newellcr]

John R and Unclemick,

Thanks for the replies. Bonds are something I know little about. They haven't been attractive to me in the past. With the long timeline for growth, stocks, stocks, and more stocks were what I wanted. Actually mutual funds are what I wanted. I have tried the DRIP investments before. I liked them pretty well and did well with what I had. But like I posted somewhere else on this site - I got mad when my stocks didn't go up because I knew they should have and I got anxious when they went up because I wasn't sure they should have. I sold everything and bought some mutuals and slept much better and avoided needing to go see a pshrink.

I think I'll just deliberate more.

Kind Regards,

Chris

 

[rwwoods]

After I maxed out my 401K and IRAs, I started investing in the Schwab 1000 index mutual fund. This is one of several funds that are designed and operated to be "tax efficient" - i.e., no capital gain distributions. The fund does pay dividends which are now going to be tax favored; but I won't pay any capital gains until I sell shares. That's about as close to a tax differed plan as one can get.

 

[unclemick]

Sorry - I thought about tax managed after my previous post. We have all our funds with Vanguard balanced index funds but I still get flyers touting their 'tax efficient' funds. These are the new kids on the block and probably deserve some onvestigation especiaaly for DCA over 15 yrs. or more.

 

[cajun]

hey yall
well I would pay off the house and all bills
and reduce all debt and life would be less stressful

cajun

 

[John Galt]

Sorry for the repeat here. It was a big surprise to me that after
ER, I have almost complete control over my income,
and thus almost complete control over my taxes.
Serendipity of the highest order.

John Galt

 

[Whakamole]

Consider buying ibonds to augment your emergency fund and your funds to make major purchases in the near-term. I realize that this does not fall into an investment category per se. Still, if you are using credit to purchase a car or just about anything else, paying cash in full is an attractive alternative.

You cannot tap into ibonds for an entire year. Hence, they are not appropriate for most emergency fund needs. They can be useful for adding to a longer term need.

ibonds are tax free until redeemed. They match inflation. They never decrease in value. (In contrast, TIPS are taxable each year and TIPS can temporarily decrease below par. They are guaranteed to return their initial price at maturity even if there has been deflation overall, but not before then.)

Have fun.

John R.

I-Bonds are perfect for an emergency fund after that first year, because they grow without tax and are easy to cash.

One thing you can do is ladder your purchases by purchasing some each month.

 

[Eyerishgold]

Why would you use a 529 to fund retirement? I'm so confused.......

 

[GatorBuzz]

Why would you use a 529 to fund retirement? I'm so confused.......

Yeah, I really don't understand that either. I don't know why you'd want to willingly pay the 10% penalty AND taxes. It wouldn't be the first time, but am I missing something?

After I maxed out our 401k and Roths, I invested in Vanguard Total International Index Fund. Low taxes, low expense ratio. Our Roth Target Retirement funds don't have enough international exposure and my 401k international options are pretty terrible. There are plenty of MFs that are geared toward lower taxes. I would think direct investing in one or more of these would suit you much, much better than investing through a 529 vehicle.

 

[JustCurious]

After maxing out my tax deferred retirement plans, I would make sure I had an adequate emergency fund, then, I would pay down my debt. Only after I was debt free would I then begin taxable investing.

 

[EngineeringMyFinances]

Roth Conversion

I'm also maxing out the 401(k) and Roth IRA annual contributions. And I'm doing even more by converting 401(k) funds to a rollover IRA and then to a Roth IRA. I consider the taxes I pay on the conversion as retirement savings.

If you have 401(k) funds from prior employers or traditional IRA funds you may be able to do the same.

 

[travelover]

You might want to check with your HR to see if you can contribute after tax dollars to the 401(k) once you max out pretax.. I did this at my Megacorp and I believe the total upper limit was something like $42 K

 

[EngineeringMyFinances]

... if you can contribute after tax dollars to the 401(k) once you max out pretax

According to the SPD, my plan does allow after-tax contributions.

I considered that option and rejected it. In fact, I stay below the maximum tax-deferred contribution limits by a few dollars so I don't have any after-tax money cluttering up my accounts because of some of the plan's withdrawal rules.

If I had no tax-deferred savings and were trying to catchup, I probably would do this. But I have enough that I'm looking at the 1040 line 20 taxation of SS benefits and the possibility of paying a higher tax rate when I withdraw it than I am now deferring. If I weren't converting tax-deferred funds to Roth, I'd be in the stock market after tax to setup long-term capital gains income.

 

[firewhen]

What does 401k/IRA give you?
Additional tax deduction (assuming traditional ones)
Tax deferral
Ordinary income rates at withdrawal

Consider what low-cost index funds give:
No tax deduction
Tax deferral (except for dividends which are taxed at qualified rate)
Income tax at capital gains rate at withdrawal

In the long run, you could be better off in the second example if future differences between ordinary and qualified rates are large. Not that I am knocking IRAs, but you might consider after-tax mutual funds to be little different. The best part is that there is no limit to what you can save and invest.

 

[jumpstart]

Yeah, I really don't understand that either. I don't know why you'd want to willingly pay the 10% penalty AND taxes. It wouldn't be the first time, but am I missing something?

The theory is, after a given number of years, the tax-free compounding that any IRA like shelter enjoys (such as a 529 plan) invested in something with a great rate of return (say, an aggressive stock mutual fund) would allow for making more than enough money to cover the 10% penalty with some left over. However, you'd have to hold one at least about 5 years or so before you'd reach the break even point. But past 10 years or so, its a near certainty that you'd have the 10% penalty covered with earnings left over thus making it a better choice than a taxable account in that scenario.

The taxes part of the equation is there whether you go with 529 plan or any other tax-exposed investment (in this scenario). Most of the predominately tax-sheltered investments don't have that much return power (like muni's).

There'd be ethical concerns of course. I'd probably bother me knowing I have a 529 plan I have no intention of using towards someone else's education.

 

[taramj22]

You could invest in the forex markets. They are quite a bit riskier but the return potential is quite a bit more too. I made over 50% in my portfolio over the past 6 months.

 

[Martha]

What a resurrection--a thread from 2003. I was scared for a moment when I saw some of the posters' names.