After 401K and Traditional IRA max?

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mj415
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Joined: Sat Apr 18, 2020 12:10 am

After 401K and Traditional IRA max?

Post by mj415 » Sat Apr 18, 2020 12:12 am

Hello,

I have a 401K, Traditional IRA, brokerage account, and emergency fund. I am doing the annual max in my 401K (~19.5K + match) and Traditional IRA (6K) —do I just invest in my brokerage account now? Or do i do mega backdoor roth? I'm not sure how do to a mega backdoor roth and if it's for me. Details appreciated.

mroe800
Posts: 165
Joined: Mon Jan 27, 2020 1:37 am

Re: After 401K and Traditional IRA max?

Post by mroe800 » Sat Apr 18, 2020 2:29 am

MBR if it's available in your plan though and how it becomes available to you to backdoor and whether or not there's a taxable event due to tIRA are all factors.

First thing is to check whether your 401K plan offers after-tax contributions. Next check whether or not it offers in-plan Roth rollover/conversions. Then check whether it offers in-service withdrawals and how funds qualify for it.

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Noobvestor
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Re: After 401K and Traditional IRA max?

Post by Noobvestor » Sat Apr 18, 2020 2:36 am

HSAs potentially - lots of tax advantages, but a low limit and some hoops and state-specific regulations: https://www.bogleheads.org/wiki/Health_savings_account

Also, Series I and Series EE federal savings bonds. I use these to effectively expand my tax-advantaged space. Advantages include:

1) State tax exempt
2) Federal tax deferred (e.g. I Bonds can be cashed in a low-tax, early-retirement year)
3) I Bonds will track inflation for 30 years, but can be cashed out after 1 year if something better comes along (like TIPS, but higher yield)
4) EE Bonds will double after 20 years, for an effective annualized return of ~3.5%, far higher than Treasuries of similar duration
5) Together, I and EE Bonds hedge inflation and deflation well for a long-term portfolio at good rates and the safety of Treasuries
6) No interest rate risk - if rates go up, no loss of NAV, simply cash in to get higher rates
7) After 1 year, I Bonds can be treated as a combination bond/emerging fun expansion
8) Some exemptions and special uses cases for educational purposes

Downsides: limit $10,000 per type per person per year (e.g. $40K/year for a couple). Illiquid for the first year. Need a Treasury Direct account.

https://www.bogleheads.org/wiki/I_savings_bonds
https://www.bogleheads.org/wiki/EE_savings_bonds

Personal experience: I've maxed out I and EE bonds for around a decade now and as yields go down they look better every year.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

Topic Author
mj415
Posts: 2
Joined: Sat Apr 18, 2020 12:10 am

Re: After 401K and Traditional IRA max?

Post by mj415 » Sat Apr 18, 2020 5:00 am

Thank you both. I'm going to look into mega backdoor roth as I like the investment options there and tax savings.

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FiveK
Posts: 9346
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Re: After 401K and Traditional IRA max?

Post by FiveK » Sat Apr 18, 2020 10:52 am

Appears you have it well in hand, but see Prioritizing investments and Investment Order for more if interested.

Samosa22
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Joined: Tue Dec 31, 2019 10:51 am

Re: After 401K and Traditional IRA max?

Post by Samosa22 » Sat Apr 18, 2020 11:02 am

Noobvestor wrote:
Sat Apr 18, 2020 2:36 am
HSAs potentially - lots of tax advantages, but a low limit and some hoops and state-specific regulations: https://www.bogleheads.org/wiki/Health_savings_account

Also, Series I and Series EE federal savings bonds. I use these to effectively expand my tax-advantaged space. Advantages include:

1) State tax exempt
2) Federal tax deferred (e.g. I Bonds can be cashed in a low-tax, early-retirement year)
3) I Bonds will track inflation for 30 years, but can be cashed out after 1 year if something better comes along (like TIPS, but higher yield)
4) EE Bonds will double after 20 years, for an effective annualized return of ~3.5%, far higher than Treasuries of similar duration
5) Together, I and EE Bonds hedge inflation and deflation well for a long-term portfolio at good rates and the safety of Treasuries
6) No interest rate risk - if rates go up, no loss of NAV, simply cash in to get higher rates
7) After 1 year, I Bonds can be treated as a combination bond/emerging fun expansion
8) Some exemptions and special uses cases for educational purposes

Downsides: limit $10,000 per type per person per year (e.g. $40K/year for a couple). Illiquid for the first year. Need a Treasury Direct account.

https://www.bogleheads.org/wiki/I_savings_bonds
https://www.bogleheads.org/wiki/EE_savings_bonds

Personal experience: I've maxed out I and EE bonds for around a decade now and as yields go down they look better every year.
Thanks Noobvestor. I didn't know about these options. Do you think I and EE bonds are a better deal than a total US bond fund? Thanks.
Lesson learned from 2008 financial crisis: "In the fury of the final hour, all correlations went to 1".

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JoMoney
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Re: After 401K and Traditional IRA max?

Post by JoMoney » Sat Apr 18, 2020 11:04 am

Sounds like you're doing great.
My preference is to add to the after-tax 401k, even if you don't expedite the mega-backdoor roth process, just getting the money into the account gives you more options than if you didn't put it in. There might be some exception if your 401k is especially bad (high fees, poor choices), but having the money inside a tax-deferred account I believe is the best choice. You will likely (inevitably) roll those after-tax contributions into a Roth, if not while you're with the employer then when you leave and roll the whole account over to IRA.
Having the money in the tax-deferred account allows you to "rebalance" and make changes to the investments without causing a tax impact. It shields it from potential legal judgement situations. It gives you a better focus for the money's purpose "retirement" as opposed to other spending money. There are plenty of methods to take early withdrawal of money from a tax-deferred account, but there isn't any good way to get extra money into those accounts later on.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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ruralavalon
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Location: Illinois

Re: After 401K and Traditional IRA max?

Post by ruralavalon » Sat Apr 18, 2020 12:48 pm

mj415 wrote:
Sat Apr 18, 2020 12:12 am
Hello,

I have a 401K, Traditional IRA, brokerage account, and emergency fund. I am doing the annual max in my 401K (~19.5K + match) and Traditional IRA (6K) —do I just invest in my brokerage account now? Or do i do mega backdoor roth? I'm not sure how do to a mega backdoor roth and if it's for me. Details appreciated.
mj415 wrote:
Sat Apr 18, 2020 5:00 am
Thank you both. I'm going to look into mega backdoor roth as I like the investment options there and tax savings.
In general see the wiki article "Prioritizing Investments".

1) Pay off any higher interest debt.

2) Use a Health Savings Account (HSA) if you can get a High Deductible Health Plan (HDHP) at work, and if that is suitable for you health care needs.

3) Here is some information about doing "The Elusive Mega Backdoor Roth".

4) Otherwise open a taxable brokerage account a low cost provider like Vanguard of Fidelity, investing in very tax-efficient stock index funds. Wiki article "Tax-efficient Fund Placement" .
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Noobvestor
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Re: After 401K and Traditional IRA max?

Post by Noobvestor » Sat Apr 18, 2020 1:05 pm

Samosa22 wrote:
Sat Apr 18, 2020 11:02 am
Thanks Noobvestor. I didn't know about these options. Do you think I and EE bonds are a better deal than a total US bond fund? Thanks.
In the context of having taxable accounts: yes, I do. By that I mean that if you're going to hold some money in taxable anyway, I see these as much better than Total Bond (with its SEC yield of 1.77% and tax drag). Right now, they look a lot better than other normal-market equivalents, too. I Bonds yield more than TIPS (and have more flexibility in terms of cashing them in, paying taxes, etc...). EE Bonds yield more than 20-year Treasuries (and if yields go up, you can cash EE Bonds in, losing out on the doubling effect if held to 20 years but buying into lower-cost bonds at higher yields). Both are also safer than Total Bond in terms of default risk, because TB holds not just Treasuries but also corporate bonds.

The one other limitation to keep in mind is that they aren't as easy to rebalance. I personally hold a combination of I Bonds, EE Bonds, Treasuries and TIPS funds - the latter two I can easily rebalance. I Bonds I could rebalance with a few days' lag but EE Bonds I plan to hold until they double (unless yields skyrocket on TIPS/Treasuries and I forego the doubling for even higher yields, which seems unlikely but is theoretically possible).

So if your main bond holding is Total Bond, it's probably good to keep some of that in tax-advantaged space so you can rebalance as needed. But anything you're likely not to need for rebalancing purposes in a taxable account I would (and personally do) put into I and EE Bonds.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

mroe800
Posts: 165
Joined: Mon Jan 27, 2020 1:37 am

Re: After 401K and Traditional IRA max?

Post by mroe800 » Sat Apr 18, 2020 8:44 pm

JoMoney wrote:
Sat Apr 18, 2020 11:04 am
Sounds like you're doing great.
My preference is to add to the after-tax 401k, even if you don't expedite the mega-backdoor roth process, just getting the money into the account gives you more options than if you didn't put it in. There might be some exception if your 401k is especially bad (high fees, poor choices), but having the money inside a tax-deferred account I believe is the best choice. You will likely (inevitably) roll those after-tax contributions into a Roth, if not while you're with the employer then when you leave and roll the whole account over to IRA.
Having the money in the tax-deferred account allows you to "rebalance" and make changes to the investments without causing a tax impact. It shields it from potential legal judgement situations. It gives you a better focus for the money's purpose "retirement" as opposed to other spending money. There are plenty of methods to take early withdrawal of money from a tax-deferred account, but there isn't any good way to get extra money into those accounts later on.
Interesting - I hadn't considered this. I don't contribute after-tax because my plan affords no way for me to perform IRR or withdraw it via in-service withdrawal due to wacky SPD rules that lock this behavior out for employees <5 yrs. The earnings of those contributions will be taxed on conversion and I expect my tax bracket to continue rising in the near-term. Theoretically, Fidelity should cut me two checks when I terminate, so I would be able to avoid a taxable event...but this plan is pretty good and who knows what my next employer will have. To me there are too many unknowns in just contributing after-tax without a mechanism to convert/withdraw aside from a rollover termination.

wootwoot
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Re: After 401K and Traditional IRA max?

Post by wootwoot » Sat Apr 18, 2020 8:48 pm

529 contribution

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JoMoney
Posts: 9340
Joined: Tue Jul 23, 2013 5:31 am

Re: After 401K and Traditional IRA max?

Post by JoMoney » Sat Apr 18, 2020 9:10 pm

mroe800 wrote:
Sat Apr 18, 2020 8:44 pm
JoMoney wrote:
Sat Apr 18, 2020 11:04 am
Sounds like you're doing great.
My preference is to add to the after-tax 401k, even if you don't expedite the mega-backdoor roth process, just getting the money into the account gives you more options than if you didn't put it in. There might be some exception if your 401k is especially bad (high fees, poor choices), but having the money inside a tax-deferred account I believe is the best choice. You will likely (inevitably) roll those after-tax contributions into a Roth, if not while you're with the employer then when you leave and roll the whole account over to IRA.
Having the money in the tax-deferred account allows you to "rebalance" and make changes to the investments without causing a tax impact. It shields it from potential legal judgement situations. It gives you a better focus for the money's purpose "retirement" as opposed to other spending money. There are plenty of methods to take early withdrawal of money from a tax-deferred account, but there isn't any good way to get extra money into those accounts later on.
Interesting - I hadn't considered this. I don't contribute after-tax because my plan affords no way for me to perform IRR or withdraw it via in-service withdrawal due to wacky SPD rules that lock this behavior out for employees <5 yrs. The earnings of those contributions will be taxed on conversion and I expect my tax bracket to continue rising in the near-term. Theoretically, Fidelity should cut me two checks when I terminate, so I would be able to avoid a taxable event...but this plan is pretty good and who knows what my next employer will have. To me there are too many unknowns in just contributing after-tax without a mechanism to convert/withdraw aside from a rollover termination.
If you had the option to convert the after-tax 401k contribution to roth immediately, that would I think unquestionably be best, but putting that option aside... there are lots of considerations that make me continue with my preference for doing it. Particularly ones current tax rate, expectations for future tax rate, and what type of investment(s) the money is going into.
If the money is being invested in bonds, REITs, or other assets that won't benefit from a special qualified dividends/LT capital gains rate then there's no advantage to the tax treatment in a taxable account. If the special capital gains/qualified dividend rate changes other stocks may lose that preferential treatment as well. If there's any chance you'll rebalance or trade the investment, even better that it's in tax-deferred. There's potential asset protection/judgment exemption benefits for having the money in a retirement account. I expect that when I get to the point of withdrawing the money in even my taxable retirement account, my tax rate will be even lower than the special LT CG/Qualified dividend rate in my current bracket.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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