Understanding 401k / IRA after moving to the US

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Neoseo1300
Posts: 8
Joined: Sat May 12, 2018 8:46 am

Understanding 401k / IRA after moving to the US

Post by Neoseo1300 » Mon Sep 24, 2018 1:36 pm

Hi everyone,

First of all, I wanted to thank this great community for the quantity of information that is provided on the Wiki and the forum. I would like to take the opportunity of this topic to do a preliminary assessment of my situation and confirm with you my understanding of retirement accounts in the US.

Some info about me: I’m a 29-year old European worker that moved to the US at the end of last year. I work in banking and I expect to make $130,000 (Base) +$50,000 (bonus) this year. This amount is expected to increase steadily in the years to come, until I decide to quit banking and find something else to do (within the next 5-8 years). My wife (26) just started working today and is making $99,000 per year as a Physician Assistant (PA). We have filed separately last year but we intend to file jointly from now on. Total household pro forma income (i.e. full year) is therefore ~$280,000 per year and will grow in the coming years. Now a few questions:

About the 401K:
• The funding priority page on the WIKI indicates that it is better to invest in an IRA first instead of a 401K (i.e. for the portion above the full employer match). Why is that? Is it because of the potentially limited choices in terms of investment vehicles provided by the employer? or are there other reasons?

• [Warning dumb question] From a practical standpoint, my 401K is with Fidelity. When deciding my contribution, I can select anything between 0% and 75% of my income. If I were to select 75% for example, would Fidelity automatically stop withdrawing money from my income when I reach the 401K contribution limit? If so, a max contribution of $18,500 represents 14.23% of my gross base annual income ($130K). Given that my employer matches up to 4%, I should be able to select a contribution rate of 11% to automatically maximize my 401k every year? (11% from me, 4% from the employer, -> 15% of $130K = $19.5k, which would reach the limit)

• If I haven’t kept up with maximizing my 401k this year, can I make higher contributions in the last few months of the year to reach the limit? (i.e. my 401K was set up at 4% to get the employer match, but this is not enough to max out the account)[/list]

Once I maxed out the 401k, I would turn towards an IRA:
• I don’t expect my future tax rate / income at retirement to be any higher than it is today or in the coming years, so I would rather favor a Traditional IRA than Roth IRA. However I understand that given my household income, any capital placed in my traditional IRA would be non-deductible. Therefore would it make more sense to invest in a Roth IRA instead (via a back door)? Or should I still go with a traditional non-deductible IRA?

• If the annual contribution limit of an IRA is calendar-based, and I currently don’t have such account. Could I open one in the coming months (before year end) and max it out with one payment so I’m done for 2018?

• I believe my work also gives me access to a HAS. I’m not familiar at all with this though so I still need to read more about it to check if I should avoid it in certain circumstances. Would there be any specific things to check given my situation before funding such account?

After all that, I would open a traditional taxable account and invest the remaining there.

About brokers:
• Because I work for a bank, I’m required to use specific designated brokers if I want to open a brokerage account (both for retirement or traditional investments). Based on the list below, would you have any recommendation on which one to choose? (you’ll note that unfortunately vanguard is not in the list)
o Bancwest / Charles Schwab / Chase Investment Services corp / Citi Wealth Management / E-Trade / Fidelity / JP Morgan Securities / Merrill Lynch / Morgan Stanley / Northwestern Mutual / Oppenheimer / Scottraade / TD Ameritrade / UBS / Wells Fargo Advisors
• More generally, what criteria would you use to assess these brokers and make an educated decision? I would initially lean towards Schwab because I would have access to cheap ETFs (similar to what I would find at Vanguard)

Overall, Does this plan make sense to you? Or am I missing something important here ? Are there other types of tax-deferred / tax-efficient accounts I’m missing here?

Thanks a lot for your help

retiredjg
Posts: 33875
Joined: Thu Jan 10, 2008 12:56 pm

Re: Understanding 401k / IRA after moving to the US

Post by retiredjg » Mon Sep 24, 2018 2:39 pm

Neoseo1300 wrote:
Mon Sep 24, 2018 1:36 pm
About the 401K:
• The funding priority page on the WIKI indicates that it is better to invest in an IRA first instead of a 401K (i.e. for the portion above the full employer match). Why is that? Is it because of the potentially limited choices in terms of investment vehicles provided by the employer? or are there other reasons?
It was written with 2 ideas in mind. One, that the IRA may provide better and lower cost investment choices than many work plans. Two, that having pre-tax money (in the 401k) and after-tax money (Roth IRA) is a form of tax diversification.

This general guideline does not apply to all and not everyone agrees in that order. With your income, you should be able to do both so the order does not really matter.

• [Warning dumb question] From a practical standpoint, my 401K is with Fidelity. When deciding my contribution, I can select anything between 0% and 75% of my income. If I were to select 75% for example, would Fidelity automatically stop withdrawing money from my income when I reach the 401K contribution limit? If so, a max contribution of $18,500 represents 14.23% of my gross base annual income ($130K). Given that my employer matches up to 4%, I should be able to select a contribution rate of 11% to automatically maximize my 401k every year? (11% from me, 4% from the employer, -> 15% of $130K = $19.5k, which would reach the limit)
Ask your employer about this one. You may not get the entire match if you don't contribute every paycheck.

• If I haven’t kept up with maximizing my 401k this year, can I make higher contributions in the last few months of the year to reach the limit? (i.e. my 401K was set up at 4% to get the employer match, but this is not enough to max out the account)[/list]
Yes. You can change how much you contribute.

Once I maxed out the 401k, I would turn towards an IRA:
• I don’t expect my future tax rate / income at retirement to be any higher than it is today or in the coming years, so I would rather favor a Traditional IRA than Roth IRA. However I understand that given my household income, any capital placed in my traditional IRA would be non-deductible. Therefore would it make more sense to invest in a Roth IRA instead (via a back door)? Or should I still go with a traditional non-deductible IRA?
You should use Roth IRA, back door if necessary and if you have no other IRA accounts.

• If the annual contribution limit of an IRA is calendar-based, and I currently don’t have such account. Could I open one in the coming months (before year end) and max it out with one payment so I’m done for 2018?
Yes. You even have until tax day (April 15) in 2019 to make your 2018 contribution. If you do that, be sure you designate what year the contribution is for.

• I believe my work also gives me access to a HAS. I’m not familiar at all with this though so I still need to read more about it to check if I should avoid it in certain circumstances. Would there be any specific things to check given my situation before funding such account?
Do you mean HSA - Health Savings Account? This is generally a good thing if the high deductible health insurance (required for the HSA) is suitable for your family's health needs.




A
bout brokers:
• Because I work for a bank, I’m required to use specific designated brokers if I want to open a brokerage account (both for retirement or traditional investments). Based on the list below, would you have any recommendation on which one to choose? (you’ll note that unfortunately vanguard is not in the list)
o Bancwest / Charles Schwab / Chase Investment Services corp / Citi Wealth Management / E-Trade / Fidelity / JP Morgan Securities / Merrill Lynch / Morgan Stanley / Northwestern Mutual / Oppenheimer / Scottraade / TD Ameritrade / UBS / Wells Fargo Advisors
• More generally, what criteria would you use to assess these brokers and make an educated decision? I would initially lean towards Schwab because I would have access to cheap ETFs (similar to what I would find at Vanguard)
What funds do you want and what do you have to pay to hold them would be the questions to ask. You should have very few if any fees if you make the right choice.

Fidelity and Schwab are the two most discussed here. E-Trade and Merrill Lynch, TDAmeritrade and Wells Fargo get some discussion as well. I believe E-trade just announced this week they will offer Vanguard ETFs on their no transaction fee list. Most here consider banks to be a poor location for investments other than CDs. Fidelity has a nice list of no transaction fee iShares ETFs and Fidelity index funds too.


I think your biggest decision will depend on how these accounts are handled when/if you go back to your home country. TAx treaties, etc. Much advice we give here may not apply to what is best for you.

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Duckie
Posts: 5958
Joined: Thu Mar 08, 2007 2:55 pm

Re: Understanding 401k / IRA after moving to the US

Post by Duckie » Mon Sep 24, 2018 6:31 pm

Neoseo1300 wrote:The funding priority page on the WIKI indicates that it is better to invest in an IRA first instead of a 401K (i.e. for the portion above the full employer match). Why is that? Is it because of the potentially limited choices in terms of investment vehicles provided by the employer? or are there other reasons?
There are three reasons:
  1. Frequently employer plans have limited options and/or high expense ratios.
  2. You're stuck with your employer plan but you can move your IRA to a different custodian if desired.
  3. Getting a Roth option.
From a practical standpoint, my 401K is with Fidelity. When deciding my contribution, I can select anything between 0% and 75% of my income. If I were to select 75% for example, would Fidelity automatically stop withdrawing money from my income when I reach the 401K contribution limit? If so, a max contribution of $18,500 represents 14.23% of my gross base annual income ($130K). Given that my employer matches up to 4%, I should be able to select a contribution rate of 11% to automatically maximize my 401k every year? (11% from me, 4% from the employer, -> 15% of $130K = $19.5k, which would reach the limit)
The $18.5K limit applies to just your contributions. Any employer matching is on top of that. So to contribute the max you would need 14.23%, unless the bonus counts, too.
If I haven’t kept up with maximizing my 401k this year, can I make higher contributions in the last few months of the year to reach the limit? (i.e. my 401K was set up at 4% to get the employer match, but this is not enough to max out the account)
Yes.
I don’t expect my future tax rate / income at retirement to be any higher than it is today or in the coming years, so I would rather favor a Traditional IRA than Roth IRA. However I understand that given my household income, any capital placed in my traditional IRA would be non-deductible. Therefore would it make more sense to invest in a Roth IRA instead (via a back door)? Or should I still go with a traditional non-deductible IRA?
Use the Backdoor Roth IRA method for both you and your wife.
If the annual contribution limit of an IRA is calendar-based, and I currently don’t have such account. Could I open one in the coming months (before year end) and max it out with one payment so I’m done for 2018?
Yes.
I believe my work also gives me access to a HAS. I’m not familiar at all with this though so I still need to read more about it to check if I should avoid it in certain circumstances. Would there be any specific things to check given my situation before funding such account?
A Health Savings Account is usually a good idea if you can get it. In some states (California is one) the contributions are not tax deductible.
Because I work for a bank, I’m required to use specific designated brokers if I want to open a brokerage account (both for retirement or traditional investments). Based on the list below, would you have any recommendation on which one to choose?
I'd choose Fidelity with Schwab as a backup.
More generally, what criteria would you use to assess these brokers and make an educated decision? I would initially lean towards Schwab because I would have access to cheap ETFs (similar to what I would find at Vanguard)
I prefer mutual funds and Fidelity has some excellent low-cost index funds. But if you prefer ETFs then Schwab might be better. Although you can get the the Three-fund portfolio in ETFs at Fidelity (ITOT, IXUS, AGG) commission-free.

Neoseo1300
Posts: 8
Joined: Sat May 12, 2018 8:46 am

Re: Understanding 401k / IRA after moving to the US

Post by Neoseo1300 » Mon Sep 24, 2018 8:26 pm

Thanks to both of you for your precise answers, much appreciated :o

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