Maxed out on IRA/401K - What now?

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Maxed out on IRA/401K - What now?

Postby washjeff » Fri Dec 28, 2012 6:53 pm

My D and SIL are frugal and have relatively high income for their age (early-mid 30s) and are looking for ideas on what to do with savings for retirement beyond what they can put in qualified plans, which they are maxing out. They could figure this out themselves, or course, but since they are both pretty busy, and they realize this gives me something to do, they are happy to have me do the legwork for them :)

I recall seeing other posts regarding the same subject, and if I remember correctly, one tactic suggested was to put tax efficient investments in an after tax account and buy a low cost variable annuity for non-tax efficient investments (r.g. REITs and high yield bond funds). I've looked at Fidelity (where we all have our money since my wife worked there for a number of years), and they have a variable annuity with a cost of about .26% with REIT and HY bond funds available, and no asset allocation rewuirements. Including fund fees, looks like the all in cost is about 1% which seems reasonable for tax deferral for a couple with high income for their ages.

Does this make sense? Any other suggestions? I assume index funds would be the most tax efficient investments for the equities portion. Is that correct?

Thanks,

Jeff in Tennessee
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Re: Maxed out on IRA/401K - What now?

Postby NYBoglehead » Fri Dec 28, 2012 7:14 pm

Jeff,

Variable annuities are one of the absolute worst purchases someone can make. The whole point of an annuity is to have a guaranteed level of income, and the only thing that should change is if you choose to have an inflation-indexed annuity. If they want to contribute to an annuity I would recommend a deferred fixed annuity. But I do not think that is the best option.

If they've already maxing out tax-advantaged space one route to go would be muni bonds. The interest is tax-free so they wouldn't be incurring any additional tax liability right now.

I'm not sure how much extra cash you're talking here so I'm not sure if purchasing some investment real estate for renting would be an option either, or if they haven't paid off their house that might be another good option.

Or just starting a 3-fund portfolio in a taxable account.

Bottom line is I would highly recommend NOT pursuing a variable annuity.
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Re: Maxed out on IRA/401K - What now?

Postby NorCalDad » Fri Dec 28, 2012 7:18 pm

Do they have kids? 529s.

Do they have a home? Refi, consider prepaying debt. Don't have a home? Save for a down payment.

Beyond that, taxable investing will be a path, but it's going to be hard for people to advise without knowing the full scope of their portfolio. I do not think an annuity is a good idea for most people, however.
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Re: Maxed out on IRA/401K - What now?

Postby tainted-meat » Fri Dec 28, 2012 7:23 pm

Do they have an HSA? That thing is like the holy grail of tax deferral (no taxes paid going in and no taxes to pay coming out as long as it is for medical expenses). Also, there is no payroll (SS) tax for it.
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Re: Maxed out on IRA/401K - What now?

Postby Majormajor78 » Fri Dec 28, 2012 7:31 pm

The biggest problem with variable annuities is that they are really good at transferring wealth from the investor to the insurance company. On the other hand, you can get REIT and HY bond variable annuities through Vanguard for about .58% and .59% respectively. ( https://personal.vanguard.com/us/funds/ ... s/variable )

I've never looked into variable annuities too much beyond satisfying my curiosity so you will have to ask someone else about their pros vs. cons beyond costs. Personally I like a little liquidity so the little bit of surplus beyond tax deffered space I stick in tax efficient international funds.
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Re: Maxed out on IRA/401K - What now?

Postby fareastwarriors » Fri Dec 28, 2012 7:35 pm

Just invest the rest in a simple taxable brokerage through vanguard or a comp.
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Re: Maxed out on IRA/401K - What now?

Postby Watty » Fri Dec 28, 2012 7:58 pm

The next thing I would look at doing is to start holding the least tax efficient assets in the retirement accounts and the most tax efficient ones in their taxable account.

http://www.bogleheads.org/wiki/Principl ... _Placement

This is greatly oversimplified that would typically be holding bonds in the retirement accounts and stocks(or stock mutual funds) in a normal taxable brokerage account. A mutual fund like a total stock market index fund, or a special mutual fund that is designed to be tax effecient, would generate very little in taxes each year. There are also some tax advantages of holding an international stock fund in a taxable account because that can allow some foreign tax credit deductions.

Buying something like a variable annuity or life insurance for tax reasons is almost always a bad choice because of all the fees involved and how difficult(or impossible) it is to change the investment if your situation changes. In the rare situations where one of these might be a good choice it is usually for estate planning reasons and not because of a persons current tax situation. Not only is it rare for one of these to be a good choice but the vast majority of them are pretty toxic . One of these should not be bought without expert advice from a fee only financial advisor who not be getting any compensation for selling you something.
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Re: Maxed out on IRA/401K - What now?

Postby cherijoh » Fri Dec 28, 2012 8:55 pm

If they are currently maxing out their tax-advantaged accounts, at their age that should provide plenty of room for bond funds and other inefficient asset classes they may want to hold - provided that their 401K (or other tax advantaged plan) offers those asset classes. They could then invest after-tax funds in low-cost stock index funds or stock index ETFs which are highly tax-efficient.

Considering their ages, it is highly likely that one or both of them will leave their current employer at some point in the future which would then free up their employer plan (with limited choices) for a roll-over to an IRA (which would open up their tax-advantaged space to any asset class they choose). In my opinion, it would be smarter to limit their current asset classes rather than get tied into an expensive annuity with high surrender charges. If you can keep expenses and taxes to a minimum, you can do great with a simple portfolio of domestic stock (or stock index) fund, international stock (or stock index) fund, and bond (or bond index) fund.

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Re: Maxed out on IRA/401K - What now?

Postby retiredjg » Fri Dec 28, 2012 8:58 pm

-Health Savings Account (if they have a high deductible health insurance policy)

-529 accounts for kids' college

-After tax contributions to 401k or 403b (not the same as Roth 401k) - a lot of people have this opportunity and don't know it

-Taxable investing

I would probably not use a variable annuity, but a low cost one might be reasonable if a person just has to have something like REIT and has no place to put it. However, I don't think a cost of 1% is reasonable. If a person really must have a variable annuity, check out Vanguard for lower costs.
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Re: Maxed out on IRA/401K - What now?

Postby letsgobobby » Fri Dec 28, 2012 9:12 pm

If by maxing out all accounts it is meant "maxing out 401k, 403b, 401a, 457b, 457f, 529, ESA, HSA, IRA/Roth IRA, spousal IRA/Roth IRA, I-bonds, EE-bonds, and tax efficient TSM, TISM, tax-managed funds, and muni bonds in taxable, all including after-tax contributions where permissible" then sure, consider a VA. There are so many other options that are lower cost that voluntarily converting long term capital gains to regular income is something I try to avoid paying for the right to do.
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Re: Maxed out on IRA/401K - What now?

Postby lloydbraun » Fri Dec 28, 2012 11:08 pm

If they don't have kids but plan to, I'm pretty sure they can start 529 accounts in their own names and then transfer them to their children's names once they're born or once they're adopted. I could also recommend some good restaurants, it sounds like they can afford to treat themselves to a one time fancy meal for their great work (I know I would!).
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Re: Maxed out on IRA/401K - What now?

Postby lloydbraun » Fri Dec 28, 2012 11:11 pm

This is a little off topic, but you could also ask them if they're properly insured (disability, term life if they have kids, long term care, etc.) since if they aren't they can make sure that they cover all of their insurance bases before investing money in a taxable account.
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Re: Maxed out on IRA/401K - What now?

Postby Amishman » Fri Dec 28, 2012 11:28 pm

fareastwarriors wrote:Just invest the rest in a simple taxable brokerage through vanguard or a comp.


+1

It is good to have some savings outside qualified plans. You don't want all of your income sources in retirement to be taxable.
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Re: Maxed out on IRA/401K - What now?

Postby NorCalDad » Sat Dec 29, 2012 12:47 am

lloydbraun wrote:This is a little off topic, but you could also ask them if they're properly insured (disability, term life if they have kids, long term care, etc.) since if they aren't they can make sure that they cover all of their insurance bases before investing money in a taxable account.

This is good advice and not off topic. Also make sure their liability and umbrella liability policies are sufficient to protect their assets.
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Re: Maxed out on IRA/401K - What now?

Postby BuckyBadger » Sat Dec 29, 2012 9:35 am

My husband and I are in a similar situation -- 32-33 years old, maxing out 2 401ks, 2 (backdoor) Roth IRAs, and an HSA.

We chose to open a taxable investing account. In it we have all international stock (VTIAX).

We could have chosen to more aggressively pre-pay our mortgage, but we decided that in our tax bracket, with a 3.5% rate, we're happier with the investments and the (relative) liquidity for real emergencies. We put a little extra to the mortgage, but it's just a few hundred dollars a month of "rounding up."

One comment about their IRAs: I'm not sure if they are doing Roth or traditional IRAs, but make sure they know about the backdoor Roth conversion. If the money is already in a Roth, great! If not, and it's not too high a balance, maybe they would want to convert it this year so that going forward they can keep doing a backdoor Roth until the law gets changed. If they are young and maxing out all those accounts, I'm assuming that their income level puts them out of reach of a straightforward Roth contribution -- of if not yet, will soon.
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Re: Maxed out on IRA/401K - What now?

Postby washjeff » Sat Dec 29, 2012 7:06 pm

Thanks for all the great feed back!

As additional info - no kids, but they plan to start a family in the next 1-2 years.

No house. My SIL had one in Michigan which he was able to rent after he left for Chicago, then Seattle. Finally sold it a year or so ago and had to take a $75,000 check to closing. Once the family gets bigger, I expect they will be back in the market.

They both have roll over IRAs from former employers, and have Roths. Not sure if they can make contributions given there income, but if they can, I'm sure they are.

SIL works for a very large tech company headquartered right outside Seattle, so I assume they have pretty good health care.

I suggested they consider investing in VG Total US and VG Total International, or a target date fund from VG or T. Rowe Price.

I know they aren't completely in "delayed gratification" mode. They spent two weeks in France in October celebrating their second anniversary and came here for Christmas!

I am going to pass on the thoughts about backdoor Roths and setting up a 529 in advance, but I think they will want to wait on that one.
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Re: Maxed out on IRA/401K - What now?

Postby WHL » Mon Dec 31, 2012 12:23 am

My plan is:

1. max Roth IRA (5k)
2. max 401k (17.5k)
3. max i-bonds (10k)
4. invest into a taxable account (~20k)

As this is currently just over 50% of my income, I don't know if I will be able to continue it forever, but it is working well for now. If I made substantially more money, I would increase my taxable investments accordingly.
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