Funding Backdoor Roth IRAs w/ portion of EF

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sj2000
Posts: 14
Joined: Sun Nov 19, 2017 8:17 pm

Funding Backdoor Roth IRAs w/ portion of EF

Post by sj2000 » Tue Jul 10, 2018 9:51 pm

Want opinions/thoughts on taking a portion of my emergency fund in order to fund Backdoor Roth’s this year so I don’t lose out on the $11k. Current financial picture.

32yr old and Spouse 36 yrs old
Gross Income for Self and Spouse: $240K
Current Debt: $55k Student Loans @ average of 5% interest (Original Balance $200K+), $18k Car at 3% interest, $230K Mortgage at 3% interest

Current Savings Balances:

$200K 401K, $6K Vanguard Taxable, $21K Savings (3 Month Emergency Fund), $22K 529's, $100 457b (Just opened based upon advice from previous post)

Monthly Savings Activity:
- $1540 pre-tax monthly to max $401k for me.
- $750 pre-tax monthly to defined benefit plan for spouse.
- $100 pre-tax monthly to 457b for spouse.
- $500 monthly total in Vanguard 529s for kids.
- $1000 monthly in savings for new house (if we move) or EF (if don’t move). New house likely.
- $1500 extra toward student loan debt. (Base payment approximately $1000.)

Other Important Notes: Wife has defined benefit plan through her job. As noted above, contributikg 9%. Two kids 5 and 7 years old.

Current Priorities:

Priorities are currently to max 401k, save for kids college via 529s, and save for 20% downpayment on new home all while paying down student loan debt in next 24 - 36 months. Have made significant progress on paying down loans over the last several years and we are trying to accomplish multiple goals instead of throwing it all at debt as some would recommend.

Once student loans paid off, plan to buy our forever home with 20% down payment. The ultimate goal is to get the house we want on 15 yr note while still being able to max out 401k ($18.5k), 457b ($18.5k), Backdoor Roth IRAs ($11k), fund college 529s and possible taxable investing.

Below is my question:

As noted above, we don’t have a huge EF since the main priority over the last few years has been to pay down $200k+ in student loans (we can see the light at the end of tunnel!). We currently do not have IRAs and do not qualify for Roth’s without doing a backdoor. With my current priorities, should I pull $11k out of EF to fund Backdoor Roth’s so we don’t lose his year of eligibility. From everything I read now, I feel like I should be contributing to Roth’s annually.

I technically would build the EF back up in less than a year but the money is technically ear-marked for the 20% down payment on new home. Since I am technically putting 50% of EF in the Roth’s, should I invest conservatively until I have an EF cushion again? Should it be like money market conservative or 50/50 stocks/bonds conservative?

Any other thoughts on this approach or any of the above? Thanks in advance!

mcraepat9
Posts: 968
Joined: Thu Jul 16, 2015 11:46 am

Re: Funding Backdoor Roth IRAs w/ portion of EF

Post by mcraepat9 » Tue Jul 10, 2018 10:12 pm

sj2000 wrote:
Tue Jul 10, 2018 9:51 pm
Want opinions/thoughts on taking a portion of my emergency fund in order to fund Backdoor Roth’s this year so I don’t lose out on the $11k. Current financial picture.

32yr old and Spouse 36 yrs old
Gross Income for Self and Spouse: $240K
Current Debt: $55k Student Loans @ average of 5% interest (Original Balance $200K+), $18k Car at 3% interest, $230K Mortgage at 3% interest

Current Savings Balances:

$200K 401K, $6K Vanguard Taxable, $21K Savings (3 Month Emergency Fund), $22K 529's, $100 457b (Just opened based upon advice from previous post)

Monthly Savings Activity:
- $1540 pre-tax monthly to max $401k for me.
- $750 pre-tax monthly to defined benefit plan for spouse.
- $100 pre-tax monthly to 457b for spouse.
- $500 monthly total in Vanguard 529s for kids.
- $1000 monthly in savings for new house (if we move) or EF (if don’t move). New house likely.
- $1500 extra toward student loan debt. (Base payment approximately $1000.)

Other Important Notes: Wife has defined benefit plan through her job. As noted above, contributikg 9%. Two kids 5 and 7 years old.

Current Priorities:

Priorities are currently to max 401k, save for kids college via 529s, and save for 20% downpayment on new home all while paying down student loan debt in next 24 - 36 months. Have made significant progress on paying down loans over the last several years and we are trying to accomplish multiple goals instead of throwing it all at debt as some would recommend.

Once student loans paid off, plan to buy our forever home with 20% down payment. The ultimate goal is to get the house we want on 15 yr note while still being able to max out 401k ($18.5k), 457b ($18.5k), Backdoor Roth IRAs ($11k), fund college 529s and possible taxable investing.

Below is my question:

As noted above, we don’t have a huge EF since the main priority over the last few years has been to pay down $200k+ in student loans (we can see the light at the end of tunnel!). We currently do not have IRAs and do not qualify for Roth’s without doing a backdoor. With my current priorities, should I pull $11k out of EF to fund Backdoor Roth’s so we don’t lose his year of eligibility. From everything I read now, I feel like I should be contributing to Roth’s annually.

I technically would build the EF back up in less than a year but the money is technically ear-marked for the 20% down payment on new home. Since I am technically putting 50% of EF in the Roth’s, should I invest conservatively until I have an EF cushion again? Should it be like money market conservative or 50/50 stocks/bonds conservative?

Any other thoughts on this approach or any of the above? Thanks in advance!
I think you have to keep it in money market funds until you’ve built up your EF back to full strength. You are essentially using your Roth as an EF in the meantime, so can’t have market risk on those funds.

As for the rest of your finances, I think IRAs should be fully funded prior to dollar 1 in a 529. I also am surprised you haven’t been attacking the 5+% student loans. Taxable investing should be off the table until those loans are 3% interest and below.
Amateur investors are not cool-headed logicians.

jacoavlu
Posts: 569
Joined: Sun Jan 06, 2013 12:06 pm

Re: Funding Backdoor Roth IRAs w/ portion of EF

Post by jacoavlu » Tue Jul 10, 2018 10:31 pm

You have 9 months before the deadline where you “lose” the 2018 IRA space. Wait.

Are your “emergency mode” monthly expenses really $7k? Like, if you just had to pay bills but not fund retirement, extra loan payments, etc. You may already have more than 3 months there.

You can consider your EF and taxable brokerage like a single bucket. Because the brokerage is liquid and probably where you’d go if your EF ran dry. So try to fill that bucket some more by tax deadline next year, then you could move $11k from brokerage to IRA. And work on filling it up again and getting ahead of schedule.

User avatar
BL
Posts: 8381
Joined: Sun Mar 01, 2009 2:28 pm

Re: Funding Backdoor Roth IRAs w/ portion of EF

Post by BL » Tue Jul 10, 2018 10:52 pm

You have until next April 15 to complete the backdoor IRA if you decide to do that. Agree that using your taxable brokerage fund to fund Roth might make sense. Or just cash it in and apply to student loans.

I would also prioritize 401k/457 contributions where you save 24% fed + state income taxes which can be used to pay down loans or get closer to maxing these.

Would hold off on 529 until student loans are paid off. Are you paying off the higher rate loans first? Also wait on saving for house and plow it into S.L. Are you getting 5% on your savings for the house? You will need a bigger e-fund when you get a new house. There are lots of ways to spend more money on that.

It will really improve your cash flow to have that loan paid off!

sj2000
Posts: 14
Joined: Sun Nov 19, 2017 8:17 pm

Re: Funding Backdoor Roth IRAs w/ portion of EF

Post by sj2000 » Wed Jul 11, 2018 8:43 am

mcraepat9 wrote:
Tue Jul 10, 2018 10:12 pm
sj2000 wrote:
Tue Jul 10, 2018 9:51 pm
Want opinions/thoughts on taking a portion of my emergency fund in order to fund Backdoor Roth’s this year so I don’t lose out on the $11k. Current financial picture.

32yr old and Spouse 36 yrs old
Gross Income for Self and Spouse: $240K
Current Debt: $55k Student Loans @ average of 5% interest (Original Balance $200K+), $18k Car at 3% interest, $230K Mortgage at 3% interest

Current Savings Balances:

$200K 401K, $6K Vanguard Taxable, $21K Savings (3 Month Emergency Fund), $22K 529's, $100 457b (Just opened based upon advice from previous post)

Monthly Savings Activity:
- $1540 pre-tax monthly to max $401k for me.
- $750 pre-tax monthly to defined benefit plan for spouse.
- $100 pre-tax monthly to 457b for spouse.
- $500 monthly total in Vanguard 529s for kids.
- $1000 monthly in savings for new house (if we move) or EF (if don’t move). New house likely.
- $1500 extra toward student loan debt. (Base payment approximately $1000.)

Other Important Notes: Wife has defined benefit plan through her job. As noted above, contributikg 9%. Two kids 5 and 7 years old.

Current Priorities:

Priorities are currently to max 401k, save for kids college via 529s, and save for 20% downpayment on new home all while paying down student loan debt in next 24 - 36 months. Have made significant progress on paying down loans over the last several years and we are trying to accomplish multiple goals instead of throwing it all at debt as some would recommend.

Once student loans paid off, plan to buy our forever home with 20% down payment. The ultimate goal is to get the house we want on 15 yr note while still being able to max out 401k ($18.5k), 457b ($18.5k), Backdoor Roth IRAs ($11k), fund college 529s and possible taxable investing.

Below is my question:

As noted above, we don’t have a huge EF since the main priority over the last few years has been to pay down $200k+ in student loans (we can see the light at the end of tunnel!). We currently do not have IRAs and do not qualify for Roth’s without doing a backdoor. With my current priorities, should I pull $11k out of EF to fund Backdoor Roth’s so we don’t lose his year of eligibility. From everything I read now, I feel like I should be contributing to Roth’s annually.

I technically would build the EF back up in less than a year but the money is technically ear-marked for the 20% down payment on new home. Since I am technically putting 50% of EF in the Roth’s, should I invest conservatively until I have an EF cushion again? Should it be like money market conservative or 50/50 stocks/bonds conservative?

Any other thoughts on this approach or any of the above? Thanks in advance!
I think you have to keep it in money market funds until you’ve built up your EF back to full strength. You are essentially using your Roth as an EF in the meantime, so can’t have market risk on those funds.

As for the rest of your finances, I think IRAs should be fully funded prior to dollar 1 in a 529. I also am surprised you haven’t been attacking the 5+% student loans. Taxable investing should be off the table until those loans are 3% interest and below.
Thank you for your input. I was thinking the same thing with the MM in the Roth to reduce market risk. I can consider moving funding away from 529's to IRAs or SL's. This seems to be a consistent recommendation from all but I have struggled with it since our oldest is 7 going on 8 (i.e. only 10 years left to save for college).

I have been attacking the student loans over the last few years (currently paying $1500 extra monthly). The taxable is not being funded at this time. I put some money in there a couple years ago in VTSMAX and I am just letting it sit to avoid taxes from cashing it out.

sj2000
Posts: 14
Joined: Sun Nov 19, 2017 8:17 pm

Re: Funding Backdoor Roth IRAs w/ portion of EF

Post by sj2000 » Wed Jul 11, 2018 8:49 am

jacoavlu wrote:
Tue Jul 10, 2018 10:31 pm
You have 9 months before the deadline where you “lose” the 2018 IRA space. Wait.

Are your “emergency mode” monthly expenses really $7k? Like, if you just had to pay bills but not fund retirement, extra loan payments, etc. You may already have more than 3 months there.

You can consider your EF and taxable brokerage like a single bucket. Because the brokerage is liquid and probably where you’d go if your EF ran dry. So try to fill that bucket some more by tax deadline next year, then you could move $11k from brokerage to IRA. And work on filling it up again and getting ahead of schedule.
Thank you for replying! Unfortunately, the $7K is pretty accurate as of now even though it is definitely conservative as far as groceries, kids activities, etc. It does not include saving, extra loan payments, etc.

I like to idea of funding the taxable to move to IRA if needed. I could go this route in conjunction with redirecting 529 funds and house/EF saving funds to the SLs and IRA funding until SL's paid off and then pick back up with 529s.

sj2000
Posts: 14
Joined: Sun Nov 19, 2017 8:17 pm

Re: Funding Backdoor Roth IRAs w/ portion of EF

Post by sj2000 » Wed Jul 11, 2018 8:55 am

BL wrote:
Tue Jul 10, 2018 10:52 pm
You have until next April 15 to complete the backdoor IRA if you decide to do that. Agree that using your taxable brokerage fund to fund Roth might make sense. Or just cash it in and apply to student loans.

I would also prioritize 401k/457 contributions where you save 24% fed + state income taxes which can be used to pay down loans or get closer to maxing these.

Would hold off on 529 until student loans are paid off. Are you paying off the higher rate loans first? Also wait on saving for house and plow it into S.L. Are you getting 5% on your savings for the house? You will need a bigger e-fund when you get a new house. There are lots of ways to spend more money on that.

It will really improve your cash flow to have that loan paid off!
Thank you for replying! 2nd recommendation on using the taxable to save/fund the IRA. I like this option.

I am fully funding the 401k now. I was planning to hold on funding the 457 until after the loans were paid off in 24 months or so. I guess I could reconsider for tax implications. Need to consider/run the numbers on this.

Holding on 529 contributions seems to be a consensus so I am thinking I should start redirecting these funds to IRA's or SLs. I have struggled with doing so since college is quickly approaching and time to save is getting smaller. We are definitely paying higher interest rate loans first. We were trying to accomplish multiple goals in paying down SLs as well as saving for house because psychologically I like knowing we are accomplishing two goals... However, hard to argue with the 5% interest argument...

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