What to do after maxing 401k and emergency fund?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Broadway2018
Posts: 305
Joined: Sat May 13, 2017 3:34 pm

What to do after maxing 401k and emergency fund?

Post by Broadway2018 »

Trying to make sure we are on the right track and wondering what to do with extra income now that we are maxing our 401ks and have a healthy emergency fund. We have about $3-5k a month after tax we could invest. Also, any advice on minimizing taxes would be great. Thoughts?

Stats
Age: 31, 35
Income: $215k, $105k – income is cash till end of year, in 2021, $215k drops to $160k and difference is RSUs
Emergency Fund: $35k
Tax Filing Status: Married (as on Jan 2020)
Live in Washington state so no state tax
Car Loan: $0 but need to buy a car over next 3 months as we do not have one now
Mortgage: $3850 all in including HOA, Taxes, Interest, etc.
Mortgage Balance: $593k @ 3.5% fixed 30 year term

Investments
1. Vanguard 401k from prior employer: $111,937
  • Vanguard Equity Income Fund Admiral (VEIRX): $5,216
    • Vanguard Growth Index Fund (VIGIX): $19,516
    • Vanguard Target Retirement 2055 Trust: $64,632
    • Vanguard Institutional 500 Index Trust: $22,573
2. Fidelity 401k current employer plan: $27,549
Annually invest 401k max; company match is ~$3,100 a year if max out
Also, doing 10% after tax for mega back door roth; this I just setup automatically.
  • VANG INST 500 IDX TR : $12,145
    • SS RSL LGCPGR IDX C : $6,517
    • SS RSL LGCPVAL IDX C : $5,621
    • Amazon Stock: $3,266
3. Fidelity Individual Account: $4,839
  • AMERICAN AIRLINES GROUP INC COM: $1,123.50
    • ALARM COM HLDGS INC COM: $472.90
    • CARNIVAL CORP: $472.20
    • DELTA AIR LINES INC: $478.99
    • NORDSTROM INC COM: $467.77
    • NORWEGIAN CRUISE LINE HLDG: $485.46
    • TRIP COM GROUP LTD: $106.28
    • UNITED AIRLS HLDGS: $448.64
    • VANGUARD INDEX FDS VANGUARD TOTAL STK MKT ETF: $768.55
4. Wife’s 401k Plan: $35,000
Annually invest 401k max; company match is $0
VSTAX: ~$35,000
5. Wife’s Pension: ~$95,000
Wife is leaving current job in July and has the option to roll this over to an IRA
theorist
Posts: 770
Joined: Sat Sep 28, 2019 11:39 am

Re: What to do after maxing 401k and emergency fund?

Post by theorist »

— you can make individual IRA contributions for yourself and your spouse? At your age, maybe that is 6K each?

— you can open a taxable brokerage account at e.g. Vanguard (I’ve done this). If you invest in muni bonds (or low yield taxable bonds — low yields are easy to find now! 🙂) and low turnover index funds like VTSAX and VTIAX, tax efficient investing is easy.
TravelforFun
Posts: 2270
Joined: Tue Dec 04, 2012 11:05 pm

Re: What to do after maxing 401k and emergency fund?

Post by TravelforFun »

Save your excess money for the car purchase which you stated you would need it in three months.

TravelforFun
lakpr
Posts: 6746
Joined: Fri Mar 18, 2011 9:59 am

Re: What to do after maxing 401k and emergency fund?

Post by lakpr »

Looks like you are in the 24% tax bracket with your combined income, and therefore you are not eligible to make direct contributions to Roth IRA.

Luckily, you don't have any Traditional IRAs -- at least I do not see mention of one. What you can do therefore is the Backdoor Roth process.

In this process, for each of you:
- contribute $6k to a non-deductible Traditional IRA
- wait 2 days (and this time period is only to make sure the funds are transferred out of your bank account to the brokerage account, settle)
- Convert that Traditional IRA to a Roth IRA
- File a "Form 8606" to the IRS detailing that you made a non-deductible contribution to the Traditional IRA for the tax-year

Read the link, the BIGGEST catch is that you should not have any Rollover IRA or Traditional IRA beforehand. If you do, you get caught with the pro-rata rule, and only unnecessarily be adding to the taxable income.

Repeat every year.

Even if you have already filed taxes for 2019, both of you can STILL take advantage of this before July 15th. The key here is that your tax liability neither increases nor decreases by making a non-deductible contribution. A key point you should also remember is that, you are making a n-d-tIRA contribution today, for 2019, so the Form 8606 for 2019 contains only CONTRIBUTIONS. The form also has fields for you to fill out for Roth conversion, but remember, the Roth conversion is being made IN 2020, so you need to report that with 2020 taxes NEXT YEAR by April 15th.

This should take care of $24k easily for you ($6k for 2019 + $6k for 2020, * 2 for self + spouse) for right now; and $12k for every year going forward.

And by the way, ask your wife to NOT ROLLOVER that 401k plan into a Rollover IRA. If she gets a new job, let her rollover the old 401k to the new 401k. Never to an IRA.
Topic Author
Broadway2018
Posts: 305
Joined: Sat May 13, 2017 3:34 pm

Re: What to do after maxing 401k and emergency fund?

Post by Broadway2018 »

lakpr wrote: Sun May 31, 2020 7:46 pm Looks like you are in the 24% tax bracket with your combined income, and therefore you are not eligible to make direct contributions to Roth IRA.

Luckily, you don't have any Traditional IRAs -- at least I do not see mention of one. What you can do therefore is the Backdoor Roth process.

In this process, for each of you:
- contribute $6k to a non-deductible Traditional IRA
- wait 2 days (and this time period is only to make sure the funds are transferred out of your bank account to the brokerage account, settle)
- Convert that Traditional IRA to a Roth IRA
- File a "Form 8606" to the IRS detailing that you made a non-deductible contribution to the Traditional IRA for the tax-year

.....
And by the way, ask your wife to NOT ROLLOVER that 401k plan into a Rollover IRA. If she gets a new job, let her rollover the old 401k to the new 401k. Never to an IRA.
Thanks for the advice! I didn't think we could do this since the income limit. I have 3 questions:
1. In my 401k plan there is an aftertax contribution of 10% that automatically converts to roth (mega backdoor roth). However the limit is 10% of my salary. Can I also take advantage of the above backdoor roth?
2. Also, what happens if I already filed my 2019 taxes?
3. What should we do with my wife's pension? I understand I can roll the 401k to another 401k, so no issue there. But, where do I roll the pension to?
lakpr
Posts: 6746
Joined: Fri Mar 18, 2011 9:59 am

Re: What to do after maxing 401k and emergency fund?

Post by lakpr »

1. Yes. Backdoor Roth is individual, and Mega Backdoor Roth is company-offering. One has nothing to do with the other, you may max both out if you can.

2. You just fill out the Form 8606, one for each of you, and send to IRS snail mail. Since a n-d-tIRA contribution neither increases nor decreases your tax liability, sending them as stand alone forms is allowed.

3. That depends really on the new employer plan rules. Perhaps they will allow pension lumpsum to be rolled into the 401k plan also. Otherwise, if the sum is small enough, convert to Roth IRA. That is always allowed.

Leaving the pension with the old employer is also an option. Just make sure they always have your current address and contact information

Edit: I reread your original post, and see that the amount is $95k. Given that Roth conversion of this amount only causes steep increase in taxes, either leave in place or roll to new employer 401k if allowed.
User avatar
FiveK
Posts: 10882
Joined: Sun Mar 16, 2014 2:43 pm

Re: What to do after maxing 401k and emergency fund?

Post by FiveK »

Answering the thread title: see Investment Order and Prioritizing investments - Bogleheads generic answers.

They may not apply to everyone, but probably apply to most.
User avatar
whodidntante
Posts: 9630
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

Re: What to do after maxing 401k and emergency fund?

Post by whodidntante »

HSA's are great. See if you are eligible or if it would make sense to change to a HSA eligible HDHP at open enrollment so you can be eligible.

Taxable investing can be pretty tax efficient. Your taxable portfolio looks more like an ashtray though. :twisted:

Also, it looks like you work for Amazon. So I wouldn't hold their stock any longer than I had to.
User avatar
badbreath
Posts: 987
Joined: Mon Jul 18, 2016 7:50 pm

Re: What to do after maxing 401k and emergency fund?

Post by badbreath »

Here is what I see, you are all over the place and need to consolidate.
Investments
1. Vanguard 401k from prior employer: $111,937
Vanguard Equity Income Fund Admiral (VEIRX): $5,216 Move to Vanguard Institutional 500 Index Trust
• Vanguard Growth Index Fund (VIGIX): $19,516 Move to Vanguard Institutional 500 Index Trust
• Vanguard Target Retirement 2055 Trust: $64,632 Move to Vanguard Institutional 500 Index Trust
• Vanguard Institutional 500 Index Trust: $22,573

2. Fidelity 401k current employer plan: $27,549
Annually invest 401k max; company match is ~$3,100 a year if max out
Also, doing 10% after tax for mega back door roth; this I just setup automatically.
VANG INST 500 IDX TR : $12,145
• SS RSL LGCPGR IDX C : $6,517 move to VANG INST 500 IDX TR
• SS RSL LGCPVAL IDX C : $5,621move to VANG INST 500 IDX TR
• Amazon Stock: $3,266 move to VANG INST 500 IDX TR
3. Fidelity Individual Account: $4,839 move to VANG INST 500 IDX TR
AMERICAN AIRLINES GROUP INC COM: $1,123.50 move to VANG INST 500 IDX TR
• ALARM COM HLDGS INC COM: $472.90 move to VANG INST 500 IDX TR
• CARNIVAL CORP: $472.20 move to VANG INST 500 IDX TR
• DELTA AIR LINES INC: $478.99move to VANG INST 500 IDX TR
• NORDSTROM INC COM: $467.77move to VANG INST 500 IDX TR
• NORWEGIAN CRUISE LINE HLDG: $485.46 move to VANG INST 500 IDX TR
• TRIP COM GROUP LTD: $106.28 move to VANG INST 500 IDX TR
• UNITED AIRLS HLDGS: $448.64 move to VANG INST 500 IDX TR
• VANGUARD INDEX FDS VANGUARD TOTAL STK MKT ETF: $768.55 Keep but up
4. Wife’s 401k Plan: $35,000
Annually invest 401k max; company match is $0
VSTAX: ~$35,000
V
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx
User avatar
BrandonBogle
Posts: 3637
Joined: Mon Jan 28, 2013 11:19 pm

Re: What to do after maxing 401k and emergency fund?

Post by BrandonBogle »

Just a note that the Fidelity Individual Account (item #3) is unlikely to have the Vanguard Institutional 500 Index Trust as an available option. If it doesn’t, direct everything in this account earmarked for that fund to VTI.
Topic Author
Broadway2018
Posts: 305
Joined: Sat May 13, 2017 3:34 pm

Re: What to do after maxing 401k and emergency fund?

Post by Broadway2018 »

whodidntante wrote: Sun May 31, 2020 10:34 pm Also, it looks like you work for Amazon. So I wouldn't hold their stock any longer than I had to.
Why wouldn't you hold Amazon stock? It is the only positive move in my 401k this year.
Topic Author
Broadway2018
Posts: 305
Joined: Sat May 13, 2017 3:34 pm

Re: What to do after maxing 401k and emergency fund?

Post by Broadway2018 »

badbreath wrote: Sun May 31, 2020 11:19 pm Here is what I see, you are all over the place and need to consolidate.
Investments
1. Vanguard 401k from prior employer: $111,937
Vanguard Equity Income Fund Admiral (VEIRX): $5,216 Move to Vanguard Institutional 500 Index Trust
• Vanguard Growth Index Fund (VIGIX): $19,516 Move to Vanguard Institutional 500 Index Trust
• Vanguard Target Retirement 2055 Trust: $64,632 Move to Vanguard Institutional 500 Index Trust
• Vanguard Institutional 500 Index Trust: $22,573

2. Fidelity 401k current employer plan: $27,549
Annually invest 401k max; company match is ~$3,100 a year if max out
Also, doing 10% after tax for mega back door roth; this I just setup automatically.
VANG INST 500 IDX TR : $12,145
• SS RSL LGCPGR IDX C : $6,517 move to VANG INST 500 IDX TR
• SS RSL LGCPVAL IDX C : $5,621move to VANG INST 500 IDX TR
• Amazon Stock: $3,266 move to VANG INST 500 IDX TR
3. Fidelity Individual Account: $4,839 move to VANG INST 500 IDX TR
AMERICAN AIRLINES GROUP INC COM: $1,123.50 move to VANG INST 500 IDX TR
• ALARM COM HLDGS INC COM: $472.90 move to VANG INST 500 IDX TR
• CARNIVAL CORP: $472.20 move to VANG INST 500 IDX TR
• DELTA AIR LINES INC: $478.99move to VANG INST 500 IDX TR
• NORDSTROM INC COM: $467.77move to VANG INST 500 IDX TR
• NORWEGIAN CRUISE LINE HLDG: $485.46 move to VANG INST 500 IDX TR
• TRIP COM GROUP LTD: $106.28 move to VANG INST 500 IDX TR
• UNITED AIRLS HLDGS: $448.64 move to VANG INST 500 IDX TR
• VANGUARD INDEX FDS VANGUARD TOTAL STK MKT ETF: $768.55 Keep but up
4. Wife’s 401k Plan: $35,000
Annually invest 401k max; company match is $0
VSTAX: ~$35,000
V
Why would you put everything in Vanguard Institutional 500 Index Trust? In my vanguard account over 3 years, that was the worst performing fund. Vanguard Equity Income Fund Admiral (VEIRX) had 27% growth over 3 years, however, a slightly higher expense ratio.
User avatar
TomatoTomahto
Posts: 11655
Joined: Mon Apr 11, 2011 1:48 pm

Re: What to do after maxing 401k and emergency fund?

Post by TomatoTomahto »

Broadway2018 wrote: Mon Jun 01, 2020 8:29 am
whodidntante wrote: Sun May 31, 2020 10:34 pm Also, it looks like you work for Amazon. So I wouldn't hold their stock any longer than I had to.
Why wouldn't you hold Amazon stock? It is the only positive move in my 401k this year.
Nothing against Amazon. Nothing against my wife’s employer either, but we sell RSUs the first legal moment after they vest. It’s overloading to put so many eggs into one basket. And, don’t you have unvested RSUs remaining?

Besides, Amazon figures prominentLy in indices that “buy the haystack.”
I get the FI part but not the RE part of FIRE.
Topic Author
Broadway2018
Posts: 305
Joined: Sat May 13, 2017 3:34 pm

Re: What to do after maxing 401k and emergency fund?

Post by Broadway2018 »

TomatoTomahto wrote: Mon Jun 01, 2020 8:46 am
Broadway2018 wrote: Mon Jun 01, 2020 8:29 am
whodidntante wrote: Sun May 31, 2020 10:34 pm Also, it looks like you work for Amazon. So I wouldn't hold their stock any longer than I had to.
Why wouldn't you hold Amazon stock? It is the only positive move in my 401k this year.
Nothing against Amazon. Nothing against my wife’s employer either, but we sell RSUs the first legal moment after they vest. It’s overloading to put so many eggs into one basket. And, don’t you have unvested RSUs remaining?

Besides, Amazon figures prominentLy in indices that “buy the haystack.”
Yes, I have ~$180k unvested RSUs. I started about 14 months ago so don't have much vested. Also, I will most likely leave before the other bulk of my RSUs vest - but that is another topic.
User avatar
TomatoTomahto
Posts: 11655
Joined: Mon Apr 11, 2011 1:48 pm

Re: What to do after maxing 401k and emergency fund?

Post by TomatoTomahto »

Broadway2018 wrote: Mon Jun 01, 2020 8:58 am
TomatoTomahto wrote: Mon Jun 01, 2020 8:46 am
Broadway2018 wrote: Mon Jun 01, 2020 8:29 am
whodidntante wrote: Sun May 31, 2020 10:34 pm Also, it looks like you work for Amazon. So I wouldn't hold their stock any longer than I had to.
Why wouldn't you hold Amazon stock? It is the only positive move in my 401k this year.
Nothing against Amazon. Nothing against my wife’s employer either, but we sell RSUs the first legal moment after they vest. It’s overloading to put so many eggs into one basket. And, don’t you have unvested RSUs remaining?

Besides, Amazon figures prominentLy in indices that “buy the haystack.”
Yes, I have ~$180k unvested RSUs. I started about 14 months ago so don't have much vested. Also, I will most likely leave before the other bulk of my RSUs vest - but that is another topic.
Not in the same industry, but we have always had new employer “buy” us out of unvested RSUs from old employer. It becomes an issue, but if they want you, they have to pony up.
I get the FI part but not the RE part of FIRE.
User avatar
retired@50
Posts: 4190
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: What to do after maxing 401k and emergency fund?

Post by retired@50 »

Broadway2018 wrote: Mon Jun 01, 2020 8:29 am
whodidntante wrote: Sun May 31, 2020 10:34 pm Also, it looks like you work for Amazon. So I wouldn't hold their stock any longer than I had to.
Why wouldn't you hold Amazon stock? It is the only positive move in my 401k this year.
Why would you put everything in Vanguard Institutional 500 Index Trust? In my vanguard account over 3 years, that was the worst performing fund. Vanguard Equity Income Fund Admiral (VEIRX) had 27% growth over 3 years, however, a slightly higher expense ratio.
Broadway2018,
It appears you're guiding your investment decisions based on what has performed well. This is sometimes called performance chasing. This often leads to buying into a stock or fund at a high point, which leads to lower performance (for you) since you got into the position after the period of good performance.

In addition to that, holding a high concentration of your portfolio in company stock (the company that YOU work for) is considered risky. There are many stories of how people have been devastated by this strategy. The general advice is to unload the company stock as soon as it is vested or becomes saleable. By buying the overall US Market (S&P 500) you'll spread your risk over many companies.

As hard as this may be to believe, it's regarded as the best long term strategy since it doesn't require you to constantly pay attention to your stock holdings and to what is going on in the market.

See link. https://www.bogleheads.org/wiki/Boglehe ... philosophy

Regards,
This is one person's opinion. Nothing more.
livesoft
Posts: 74606
Joined: Thu Mar 01, 2007 8:00 pm

Re: What to do after maxing 401k and emergency fund?

Post by livesoft »

It sure looks like someone is gambling with those stock picks. I like that you put those out there. Were those choices recommended by friends back at the market lows? They are almost the identical stocks that my neighbor told me that he had sold short back in early March.
Wiki This signature message sponsored by sscritic: Learn to fish.
Topic Author
Broadway2018
Posts: 305
Joined: Sat May 13, 2017 3:34 pm

Re: What to do after maxing 401k and emergency fund?

Post by Broadway2018 »

livesoft wrote: Mon Jun 01, 2020 9:52 am It sure looks like someone is gambling with those stock picks. I like that you put those out there. Were those choices recommended by friends back at the market lows? They are almost the identical stocks that my neighbor told me that he had sold short back in early March.
For the Fidelity individual fund, I picked those for fun - not to keep investing in. I will add to the vanguard 500 trust fund for long term. The other 401k stocks I picked to further diversify. I will probably roll over everything to fidelity and close the vanguard account to simplify.

Also, I will get rid of the amazon stocks in my 401k - they are automatically added every paycheck since amazon gives the company match in more amazon stocks.

I may hold onto my RSUs since they have had a good track record so far and seem to be recession proof.
dandinsac
Posts: 209
Joined: Sat Jul 30, 2016 8:34 am

Re: What to do after maxing 401k and emergency fund?

Post by dandinsac »

TravelforFun wrote: Sun May 31, 2020 7:23 pm Save your excess money for the car purchase which you stated you would need it in three months.

TravelforFun
+1

You should also look to refinance before your wife leaves her job. With your incomes and no car loan (yet), you may be able to do a no-cost refinance and lower your interest rate and payments.
jibantik
Posts: 474
Joined: Fri Nov 24, 2017 1:05 pm

Re: What to do after maxing 401k and emergency fund?

Post by jibantik »

badbreath wrote: Sun May 31, 2020 11:19 pm Here is what I see, you are all over the place and need to consolidate.
Investments
1. Vanguard 401k from prior employer: $111,937
Vanguard Equity Income Fund Admiral (VEIRX): $5,216 Move to Vanguard Institutional 500 Index Trust
• Vanguard Growth Index Fund (VIGIX): $19,516 Move to Vanguard Institutional 500 Index Trust
• Vanguard Target Retirement 2055 Trust: $64,632 Move to Vanguard Institutional 500 Index Trust
• Vanguard Institutional 500 Index Trust: $22,573

2. Fidelity 401k current employer plan: $27,549
Annually invest 401k max; company match is ~$3,100 a year if max out
Also, doing 10% after tax for mega back door roth; this I just setup automatically.
VANG INST 500 IDX TR : $12,145
• SS RSL LGCPGR IDX C : $6,517 move to VANG INST 500 IDX TR
• SS RSL LGCPVAL IDX C : $5,621move to VANG INST 500 IDX TR
• Amazon Stock: $3,266 move to VANG INST 500 IDX TR
3. Fidelity Individual Account: $4,839 move to VANG INST 500 IDX TR
AMERICAN AIRLINES GROUP INC COM: $1,123.50 move to VANG INST 500 IDX TR
• ALARM COM HLDGS INC COM: $472.90 move to VANG INST 500 IDX TR
• CARNIVAL CORP: $472.20 move to VANG INST 500 IDX TR
• DELTA AIR LINES INC: $478.99move to VANG INST 500 IDX TR
• NORDSTROM INC COM: $467.77move to VANG INST 500 IDX TR
• NORWEGIAN CRUISE LINE HLDG: $485.46 move to VANG INST 500 IDX TR
• TRIP COM GROUP LTD: $106.28 move to VANG INST 500 IDX TR
• UNITED AIRLS HLDGS: $448.64 move to VANG INST 500 IDX TR
• VANGUARD INDEX FDS VANGUARD TOTAL STK MKT ETF: $768.55 Keep but up
4. Wife’s 401k Plan: $35,000
Annually invest 401k max; company match is $0
VSTAX: ~$35,000
V
I just threw up in my mouth
Topic Author
Broadway2018
Posts: 305
Joined: Sat May 13, 2017 3:34 pm

Re: What to do after maxing 401k and emergency fund?

Post by Broadway2018 »

Other than the Fidelity Individual Account, I am unsure why my allocations are wrong. Wouldn't it be more risky to put all my funds in the Vanguard Institutional 500 Index Trust? I picked 4 different stocks to diversify to large/mid cap and international - is this not the right way to think about it?

The individual account I opened with $5k play money since stocks are way down. And the amazon stock in my 401k is less than 2 shares. Sure I will exchange it but every month amazon will give me my match in amazon stock so i would need to do this exchange every month. In addition, it is the only thing keeping my 401k balance in check - up 36% from Jan 1.
Topic Author
Broadway2018
Posts: 305
Joined: Sat May 13, 2017 3:34 pm

Re: What to do after maxing 401k and emergency fund?

Post by Broadway2018 »

lakpr wrote: Sun May 31, 2020 9:32 pm 1. Yes. Backdoor Roth is individual, and Mega Backdoor Roth is company-offering. One has nothing to do with the other, you may max both out if you can.

2. You just fill out the Form 8606, one for each of you, and send to IRS snail mail. Since a n-d-tIRA contribution neither increases nor decreases your tax liability, sending them as stand alone forms is allowed.

3. That depends really on the new employer plan rules. Perhaps they will allow pension lumpsum to be rolled into the 401k plan also. Otherwise, if the sum is small enough, convert to Roth IRA. That is always allowed.

Leaving the pension with the old employer is also an option. Just make sure they always have your current address and contact information

Edit: I reread your original post, and see that the amount is $95k. Given that Roth conversion of this amount only causes steep increase in taxes, either leave in place or roll to new employer 401k if allowed.
I am looking to do this today and want to make sure I have this correct. Also, wife has a roth ira with ~$5k in it, does that matter?

1) Open traditional ira and put $6k in it.
2) Open roth ira and transfer funds in 2-3 days.
3) Fill out form 8606 and send to irs.
4) Repeat every year for both my wife and I.
lakpr
Posts: 6746
Joined: Fri Mar 18, 2011 9:59 am

Re: What to do after maxing 401k and emergency fund?

Post by lakpr »

Broadway2018 wrote: Mon Jun 08, 2020 6:58 pm
lakpr wrote: Sun May 31, 2020 9:32 pm 1. Yes. Backdoor Roth is individual, and Mega Backdoor Roth is company-offering. One has nothing to do with the other, you may max both out if you can.

2. You just fill out the Form 8606, one for each of you, and send to IRS snail mail. Since a n-d-tIRA contribution neither increases nor decreases your tax liability, sending them as stand alone forms is allowed.

3. That depends really on the new employer plan rules. Perhaps they will allow pension lumpsum to be rolled into the 401k plan also. Otherwise, if the sum is small enough, convert to Roth IRA. That is always allowed.

Leaving the pension with the old employer is also an option. Just make sure they always have your current address and contact information

Edit: I reread your original post, and see that the amount is $95k. Given that Roth conversion of this amount only causes steep increase in taxes, either leave in place or roll to new employer 401k if allowed.
I am looking to do this today and want to make sure I have this correct. Also, wife has a roth ira with ~$5k in it, does that matter?

1) Open traditional ira and put $6k in it.
2) Open roth ira and transfer funds in 2-3 days.
3) Fill out form 8606 and send to irs.
4) Repeat every year for both my wife and I.
Roth IRAs are good, they do not interfere with the backdoor Roth process. Only Traditional IRAs are problematic.
You got the steps right!

Step-2 too, please note, there is no hard and fast rule that you MUST wait 2 to 3 days. I put it in there only because the funds must exit your bank account (assuming you are funding it through bank account), AND appear in the Traditional IRA balance in your brokerage account.

If you happen to have some money already in the brokerage account, you can simply transfer into the Traditional IRA first, then to Roth IRA next. That conduit must be maintained, don't just contribute directly to the Roth IRA account.
Olemiss540
Posts: 1613
Joined: Fri Aug 18, 2017 8:46 pm

Re: What to do after maxing 401k and emergency fund?

Post by Olemiss540 »

Broadway2018 wrote: Tue Jun 02, 2020 11:28 am Other than the Fidelity Individual Account, I am unsure why my allocations are wrong. Wouldn't it be more risky to put all my funds in the Vanguard Institutional 500 Index Trust? I picked 4 different stocks to diversify to large/mid cap and international - is this not the right way to think about it?

The individual account I opened with $5k play money since stocks are way down. And the amazon stock in my 401k is less than 2 shares. Sure I will exchange it but every month amazon will give me my match in amazon stock so i would need to do this exchange every month. In addition, it is the only thing keeping my 401k balance in check - up 36% from Jan 1.
There are only two free lunches with regards to investing. Diversity (to improve RISK adjusted returns) and (low) costs. The vanguard institutional 500 index has over 500 holdings and tracks the s&p500. The s&p 500 has returned approximately 10% over the last NINETY YEARS. Individual stocks have been known to go to zero. Do you see how individual stocks (even Amazon), while potentially more lucrative, are also much more RISKY than indexing the market itself?

Quit performance chasing. There have been many studies that have shown that performance chasing is one of the leading behavioral investment mistakes made and the fact a fund outperformed over the previous 5 years actually makes it more likely to underperform the next 5. Research reversion to the mean.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.
Post Reply