Need advice on how to save more

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Topic Author
ered
Posts: 14
Joined: Wed Oct 05, 2016 8:41 pm

Need advice on how to save more

Post by ered » Thu Aug 30, 2018 1:23 am

Hi,

I'm looking for advice on how to save more money for retirement and college fund. My salary is too high to contribute to a regular Roth IRA, so I'm thinking of doing a backdoor Roth conversion instead. Some background info:

Me: 47 years old
  • Income: $200k (full-time)
Her: 36 years old
  • Income: $15k (part-time self employed)
Kid(s): 2 years old, planning second kid

Investment:
  • About $500k in low-cost funds
  • About $500k company stock options and RSU
  • Three investment properties (all paid off) with about $4k monthly income

Retirement accounts:
  • Me:
    • 401(k): $300k - max out annually
    • 401(k) Roth portion: $60k - max out annually via the mega backdoor. Intended for college fund since I'll be able to withdraw when my son goes go college. If not it's for retirement.
    • Traditional IRA: $150k
    • SEP IRA: $15k (from previous self-employment)
  • Her:
    • Traditional IRA $120k
My plan is to do the following:
  1. Me:
    1. Transfer SEP-IRA to Traditional IRA
    2. Transfer Traditional IRA to company 401(k) plan
    3. Open new traditional IRA account
    4. Contribute $5,500 post-tax money
    5. Call and convert the $5,500 to a Roth IRA
    6. Repeat step 4 and step 5 annually
  2. Her:
    1. Open a solo 401(k)
    2. Transfer Traditional IRA to solo 401(k)
    3. Open new traditional IRA account
    4. Contribute $5,500 post-tax money
    5. Call and convert the $5,500 to a Roth IRA
    6. Repeat step 4 and step 5 annually.
  3. Open a 529 account for each kid and max them out
Does this sound like a good plan? Is there anything else I can do?

Thanks!
Last edited by ered on Thu Aug 30, 2018 2:11 am, edited 1 time in total.

User avatar
FiveK
Posts: 8019
Joined: Sun Mar 16, 2014 2:43 pm

Re: Need advice on how to save more

Post by FiveK » Thu Aug 30, 2018 2:04 am

ered wrote:
Thu Aug 30, 2018 1:23 am
Does this sound like a good plan?
Yes.
Is there anything else I can do?
Keep up the good work!

Are you planning to contribute to the solo 401k (beyond the rollover)? What amount are you aiming for in traditional accounts at retirement?

Topic Author
ered
Posts: 14
Joined: Wed Oct 05, 2016 8:41 pm

Re: Need advice on how to save more

Post by ered » Thu Aug 30, 2018 2:10 am

FiveK wrote:
Thu Aug 30, 2018 2:04 am
ered wrote:
Thu Aug 30, 2018 1:23 am
What amount are you aiming for in traditional accounts at retirement?
Since the income from my wife's business is just additional income, we're planning to save whatever the maximum is, so it continues to grow and save us on self-employment tax. Is this a good move?

gostars
Posts: 439
Joined: Mon Oct 09, 2017 7:53 pm

Re: Need advice on how to save more

Post by gostars » Thu Aug 30, 2018 2:15 am

HSA, if available. And I would investigate what it would take to sell out of some of those options. Huge chunk of the portfolio+primary source of income all in one place is less than ideal, but if you're stuck waiting on vesting or something then you might just have to live with it and pray the company does well.

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FiveK
Posts: 8019
Joined: Sun Mar 16, 2014 2:43 pm

Re: Need advice on how to save more

Post by FiveK » Thu Aug 30, 2018 2:15 am

ered wrote:
Thu Aug 30, 2018 2:10 am
Since the income from my wife's business is just additional income, we're planning to save whatever the maximum is, so it continues to grow and save us on self-employment tax. Is this a good move?
Probably.

The question about the traditional balance at retirement goes to whether you will have "too much" in traditional - does that make sense?

Topic Author
ered
Posts: 14
Joined: Wed Oct 05, 2016 8:41 pm

Re: Need advice on how to save more

Post by ered » Thu Aug 30, 2018 2:33 am

The question about the traditional balance at retirement goes to whether you will have "too much" in traditional - does that make sense?
I’m not sure I fully understand. Do you mean too much in traditional 401(k) so I have to pay more tax when I withdraw?

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FiveK
Posts: 8019
Joined: Sun Mar 16, 2014 2:43 pm

Re: Need advice on how to save more

Post by FiveK » Thu Aug 30, 2018 2:57 am

ered wrote:
Thu Aug 30, 2018 2:33 am
The question about the traditional balance at retirement goes to whether you will have "too much" in traditional - does that make sense?
I’m not sure I fully understand. Do you mean too much in traditional 401(k) so I have to pay more tax when I withdraw?
Yes. Certainly not the worst problem to have, and there is reason to err on the side of too much in traditional (e.g., in case market returns or career lengths are less than forecast). But, for high savers with significant "unavoidable" retirement income (e.g., pensions, rentals) - which seems to describe you - it's worth considering how much is too much.

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CyclingDuo
Posts: 2823
Joined: Fri Jan 06, 2017 9:07 am

Re: Need advice on how to save more

Post by CyclingDuo » Thu Aug 30, 2018 6:53 am

ered wrote:
Thu Aug 30, 2018 1:23 am
Hi,

I'm looking for advice on how to save more money for retirement and college fund. My salary is too high to contribute to a regular Roth IRA, so I'm thinking of doing a backdoor Roth conversion instead. Some background info:

Me: 47 years old
  • Income: $200k (full-time)
Her: 36 years old
  • Income: $15k (part-time self employed)
Kid(s): 2 years old, planning second kid

Investment:
  • About $500k in low-cost funds
  • About $500k company stock options and RSU
  • Three investment properties (all paid off) with about $4k monthly income

Retirement accounts:
  • Me:
    • 401(k): $300k - max out annually
    • 401(k) Roth portion: $60k - max out annually via the mega backdoor. Intended for college fund since I'll be able to withdraw when my son goes go college. If not it's for retirement.
    • Traditional IRA: $150k
    • SEP IRA: $15k (from previous self-employment)
  • Her:
    • Traditional IRA $120k
My plan is to do the following:
  1. Me:
    1. Transfer SEP-IRA to Traditional IRA
    2. Transfer Traditional IRA to company 401(k) plan
    3. Open new traditional IRA account
    4. Contribute $5,500 post-tax money
    5. Call and convert the $5,500 to a Roth IRA
    6. Repeat step 4 and step 5 annually
  2. Her:
    1. Open a solo 401(k)
    2. Transfer Traditional IRA to solo 401(k)
    3. Open new traditional IRA account
    4. Contribute $5,500 post-tax money
    5. Call and convert the $5,500 to a Roth IRA
    6. Repeat step 4 and step 5 annually.
  3. Open a 529 account for each kid and max them out
Does this sound like a good plan? Is there anything else I can do?

Thanks!
HSA has already been mentioned.

In terms of looking for more tax deferred investment growth, there are the options via both the Vanguard Variable Annuity:

https://investor.vanguard.com/annuity/variable

and the Fidelity Personal Retirement Annuity:

https://www.fidelity.com/annuities/FPRA ... y/overview

No IRS limits on how much you can contribute, grows tax deferred, can be taken out penalty free starting at age 59 1/2, and there are never any RMD's to worry about at age 70 1/2 and beyond. Both have the low cost funds within them to build the three fund portfolio. Expense wise, both also include an annual administrative contract fee (.10% - .25% at Fidelity and similar at Vanguard). This is very similar to a lot of 403b/457b plans in terms of expense ratios and administrative wrap fees.

Examples of the Three Fund Portfolio in these tax deferred accounts:

Total Bond Fund at Vanguard costs .42% with the contract fee
Total Stock Market Index Fund costs .42% with the contract fee
Total International Index Fund costs .38% with the contract fee

Total Bond Market at Fidelity costs .14% plus the .10% or .25% (depending on your account balance)
Total Stock Market Index at Fidelity costs .12% plus the .10% or .25% (depending on your account balance)
Total International Index at Fidelity costs 17% plus the .10% or .25% (depending on your account balance)

You could also save in taxable account investments.
"Everywhere is within walking distance if you have the time." ~ Steven Wright

Topic Author
ered
Posts: 14
Joined: Wed Oct 05, 2016 8:41 pm

Re: Need advice on how to save more

Post by ered » Thu Aug 30, 2018 11:52 am

Thank you FiveK, gostars, and CyclingDuo for all the advice.

I'm already using the three-fund portfolio across all accounts - VTSAX+VTIAX+VBTLX (Fidelity equiv FSTVX+FSGDX+FSITX), and continually adding every month. The annuity option looks interesting. Will investigate more.

gostars - My stock options are in the lockout period till later this year. As soon as it opens up I plan to exercise and sell every quarter, and put the money into the three-fund portfolio.

sailaway
Posts: 924
Joined: Fri May 12, 2017 1:11 pm

Re: Need advice on how to save more

Post by sailaway » Thu Aug 30, 2018 12:25 pm

FiveK wrote:
Thu Aug 30, 2018 2:15 am
ered wrote:
Thu Aug 30, 2018 2:10 am
Since the income from my wife's business is just additional income, we're planning to save whatever the maximum is, so it continues to grow and save us on self-employment tax. Is this a good move?
Probably.

The question about the traditional balance at retirement goes to whether you will have "too much" in traditional - does that make sense?
It does not save on self employment tax, just income tax. FICA and SS still need to be paid.

Topic Author
ered
Posts: 14
Joined: Wed Oct 05, 2016 8:41 pm

Re: Need advice on how to save more

Post by ered » Thu Aug 30, 2018 1:28 pm

sailaway wrote:
Thu Aug 30, 2018 12:25 pm
FiveK wrote:
Thu Aug 30, 2018 2:15 am
ered wrote:
Thu Aug 30, 2018 2:10 am
Since the income from my wife's business is just additional income, we're planning to save whatever the maximum is, so it continues to grow and save us on self-employment tax. Is this a good move?
Probably.

The question about the traditional balance at retirement goes to whether you will have "too much" in traditional - does that make sense?
It does not save on self employment tax, just income tax. FICA and SS still need to be paid.
Sorry it was late. I really meant save money on personal income tax - the final number on Schedule C.

User avatar
Duckie
Posts: 6990
Joined: Thu Mar 08, 2007 2:55 pm
Location: California Bay Area

Re: Need advice on how to save more

Post by Duckie » Thu Aug 30, 2018 7:25 pm

ered wrote:My plan is to do the following:
  1. Me:
    1. Transfer SEP-IRA to Traditional IRA
    2. Transfer Traditional IRA to company 401(k) plan
    3. Open new traditional IRA account
    4. Contribute $5,500 post-tax money
    5. Call and convert the $5,500 to a Roth IRA
    6. Repeat step 4 and step 5 annually
  2. Her:
    1. Open a solo 401(k)
    2. Transfer Traditional IRA to solo 401(k)
    3. Open new traditional IRA account
    4. Contribute $5,500 post-tax money
    5. Call and convert the $5,500 to a Roth IRA
    6. Repeat step 4 and step 5 annually.
Unless you intend to switch custodians, both can skip #3.

And don't forget to fill out two Form 8606s when you do your taxes. (Practice filling them out on paper beforehand so you'll know what they're supposed to look like.)

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