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Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Mon Sep 07, 2020 8:55 am
by Goldwater85
I always thought of my V-10 stint as a highly paid residency—great training from top-of-their-field lawyers with lots and lots of flight hours. But, like a residency, 3-5 years from now you’ll have to look up and decide what you want to do.

While I was an associate, I focused on building up a chunk of cash and knocked out all of my loans. I have never regretted it.

If you choose to stay in Big Law, the opportunity cost relative to your long term income will be meaningless. But if as 4th year you want to jump to the DOJ or public interest or small law (which can actually pay well but takes time to ramp) or not be a lawyer or whatever, you don’t have to factor lack of liquidity or debt service into your decision making.

Congrats on the Big Law gig, but you won’t really be choosing a career for a few years. Would prioritize flexibility then over tax optimization now.

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Mon Sep 07, 2020 9:43 am
by Compound
quenchgum wrote: Sun Sep 06, 2020 11:41 pm
Yes, that’s true and a helpful point! My understanding is that since my 401k holds these amounts in separate sub accounts, then I could simply punt the growth portion — if any — toward my tIRA.
Please clarify. Do you have money in a traditional IRA account at present? If so, you will be subject to the pro rata rule if you choose to do a backdoor Roth IRA, unless you rollover the money presently in the traditional IRA into a 401k.

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Mon Sep 07, 2020 9:51 am
by Compound
quenchgum wrote: Sun Sep 06, 2020 11:32 pm My 401k offers me, among other options, the Vanguard target retirement date funds at a .08% ER. Is that generally considered a good ER? I’m relatively unsophisticated in that area and was OK with the aggressiveness of the targeted retirement fund, though would be happy to hear any hesitations or general wisdom on the point (if any).
Yes, that expense ratio (ER) is very reasonable. Target date funds with low ERs, such as what you have available to you, are excellent investment choices. As you move along in your investing career, you may choose to specifically tailor the asset allocation to your particular situation and move away from target date funds. That said, many people simply stick with target retirements funds because they are so simple and cheap.

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Mon Sep 07, 2020 1:41 pm
by quenchgum
anon_investor wrote: Mon Sep 07, 2020 8:39 am
If your 401k plan has it, the in-plan Roth Conversion is just converting the after-tax 401k contribution to Roth. Some 401k plans have weird restrictions (limited times a year, etc.), some do it online or even automatically, while some require phone calls, etc. For my 401k plan there are no restrictions, I can do it as many times as I like, it is all online and if I do it on payday before 4pm the conversion will take effect before the contributions are invested so I avoid any taxable growth. My 401k plan has lower expense rations than my Vanguard Roth IRA, so no rush to rollover, also each rollover costs me $5, but I can do in-service rollovers of my MBDR funds anytime, I cannot access my nonMBDR funds (individual contribution/company match) until I leave my employer. I have substantial balances in both my Roth IRA, taxable account and HSA, so no sense of urgency rolling over either, but I can do it anytime. If I did rollover, my money would likely be out of the market for 1 to 2 weeks, while it was transfered from my 401k to Roth IRA.

One thing to also remember is 401k funds generally receive superior protection from creditors vs. IRAs (although some states grant IRA funds the same level of protection from creditors).

You probably want to fund (at least a little) your roth IRA via the backdoor this year to start the 5 year clock (which starts upon funding not creation).
Thanks, that's interesting and helpful to hear. Would it be accurate, then, to say that there aren't any tax or other consequences associated letting the money sit in my Roth 401(k) and then pulling the trigger to stash it in the Roth IRA whenever/if I ever need to pull out the principal? [With the caveat that I should put a small amount in the Roth IRA to get the normal 5 year clock started.] If so, I suppose that if my suite of investment options are equal between the Roth IRA and the 401(k), then I should be indifferent between letting the money sit in the Roth 401(k) or in the Roth IRA.

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Mon Sep 07, 2020 1:54 pm
by quenchgum
Goldwater85 wrote: Mon Sep 07, 2020 8:55 am I always thought of my V-10 stint as a highly paid residency—great training from top-of-their-field lawyers with lots and lots of flight hours. But, like a residency, 3-5 years from now you’ll have to look up and decide what you want to do.

While I was an associate, I focused on building up a chunk of cash and knocked out all of my loans. I have never regretted it.

If you choose to stay in Big Law, the opportunity cost relative to your long term income will be meaningless. But if as 4th year you want to jump to the DOJ or public interest or small law (which can actually pay well but takes time to ramp) or not be a lawyer or whatever, you don’t have to factor lack of liquidity or debt service into your decision making.

Congrats on the Big Law gig, but you won’t really be choosing a career for a few years. Would prioritize flexibility then over tax optimization now.
Thanks, Goldwater. I agree completely that having flexibility in 2-4 years will be the single best thing that I can do for myself now. I suppose I just don't see myself as foregoing that flexibility even if I were to pursue the MBDR strategy very aggressively.

It seems that I could annually put 30k into the MBDR and, for the next couple of years, invest those amounts VERY conservatively (i.e., just to keep up with inflation). If so, then as a fourth year I should have the same flexibility that I would have had if I were to have instead aggressively prepaid the loans: I could simply pull the principal and wipe out the loans, if desired, with no harm or lost opportunity (besides perhaps some small difference between my actual return within the Roth IRA and my "guaranteed" return on the low-rate refinanced loans, which will be somewhere from 1-3%). The difference is that if I were to decide at that point to ride out the actual remaining debt a bit more (as at that point, I'd be at about ~80k left or so) and refinance to lower monthly payments (if necessary), then all the power to me for the remainder of my life to have those Roth amounts growing tax-free in perpetuity.

I suppose that this mental trick wouldn't necessary work for everyone -- i.e., I imagine that there's a psychological benefit to having the loans paid off as compared to having a sizeable account to pull from that could pay off the loans at your leisure -- but I feel relatively well-versed on the topic by now and imagine that I could be equally comfortable with both options. I suppose what I'm looking for is for someone to tell me why the above "mental trick" doesn't actually pan out -- i.e., some piece of the picture that I seem to be missing, some understanding of the rules that I have mixed up, etc.

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Mon Sep 07, 2020 2:09 pm
by quenchgum
Compound wrote: Mon Sep 07, 2020 9:43 am
quenchgum wrote: Sun Sep 06, 2020 11:41 pm
Yes, that’s true and a helpful point! My understanding is that since my 401k holds these amounts in separate sub accounts, then I could simply punt the growth portion — if any — toward my tIRA.
Please clarify. Do you have money in a traditional IRA account at present? If so, you will be subject to the pro rata rule if you choose to do a backdoor Roth IRA, unless you rollover the money presently in the traditional IRA into a 401k.
I haven't yet opened either a tIRA or a Roth IRA account. [I haven't yet done any MBDR or normal backdoor Roth contributions for 2020 and have not made any retirement contributions before now.] My thinking is that if I were to go from the after-tax 401(k) --> Roth IRA, then any growth before that rollover could go to my tIRA account. That's part of my rationale for saying that if I were to have ~30k funds between my IRA and MBDR, then perhaps it makes sense to simply avoid the backdoor Roth and go exclusively into the MBDR: I would be able to stuff any growth in my tIRA without worrying about the pro rata rules. (Alternatively, it seems that I could simply do automatic rollovers to my Roth 401k to avoid any growth/pro rata issues. I'm planning to speak with my 401k administrator tomorrow to see what that after-tax 401k --> Roth IRA process looks like!)

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Mon Sep 07, 2020 2:19 pm
by thatme
As a fellow Biglaw worker, is the fact that your 401(k) plan allows after-tax contributions unique to your firm or is this a common attribute that I'm just not aware of? I've been maxing out my pre-tax 401(k) since joining the firm, but I wasn't aware that I could make additional contributions on an after-tax basis. Maybe I just needed to ask? Kind of curious now...

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Mon Sep 07, 2020 2:31 pm
by quenchgum
thatme wrote: Mon Sep 07, 2020 2:19 pm As a fellow Biglaw worker, is the fact that your 401(k) plan allows after-tax contributions unique to your firm or is this a common attribute that I'm just not aware of? I've been maxing out my pre-tax 401(k) since joining the firm, but I wasn't aware that I could make additional contributions on an after-tax basis. Maybe I just needed to ask? Kind of curious now...
I think it's relatively uncommon within biglaw. I only heard about it because I had scheduled a call with my firm's employee that administers our 401(k) plan, and he was thankfully very well-versed and was able to give me the heads up. I've told a couple of friends about this at other biglaw firms and their firms have not allowed it.

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Mon Sep 07, 2020 2:34 pm
by thatme
Got it, thanks. I've often wondered if there's some good reason why the firm doesn't utilize a portion of our year-end bonus as a "match" for our 401K. I'm sure it's a logistical nightmare, not everyone is maxing out, probably some tax code provision, highly comp'ed employee rules, etc... but it sure would be great if they did.

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Mon Sep 07, 2020 9:37 pm
by unbiased
quenchgum wrote: Sun Sep 06, 2020 11:48 pm
Thanks, unbiased. It’s helpful to hear that perspective to amp myself up on investing. Did you ever feel that the debt weighed you down/affected your lifestyle and career choices? The last thing that I want is for me to exacerbate the stress and pressure of biglaw unnecessarily by prolonging the mental torture of heavy debt. Even if I’m able to last a year longer mentally, that’s probably a win given the higher salary and ability to contribute to either loans or “retirement” funds.
Sorry, I thought I responded to your question, I must have left it in draft.

Short answer -- no. My student loan debt had super flexible repayment terms. I even deferred once no questions asked for six months when I was between jobs. No issue. I don't know if you have private loans with harsher terms. That would make the calculation a bit different. I switched to a graduated plan at one time when I took a lower paying job. I eventually surpassed my old salary after a few years, and the payments grew with it.

I understand you'll get different opinions--both valid--whether paying off debt or building an asset base is more important at your stage of life. Personally, I felt the long term power of compound returns more compelling. I just figured I would be dealing with debt for all my working life but building a "savers" habit young would be the single most important step to financial freedom. I'm now at a point where my assets are well above my debts and could pay everything off tomorrow if I chose to with plenty left over. Everyone has debt. Not everyone saves.

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Mon Sep 07, 2020 9:52 pm
by Chadnudj
I haven't read thru this whole thread, so take this with a grain of salt.....but as a former big law attorney myself, my advice:

Pay off the debt as fast as you can.

Look, you might end up ahead by investing. In fact, you probably will. But if the firm hits a rough patch (and I've been at firms that hit rough patches since I graduated in 2006), you're better off not having debt as a monthly expense you have to pay. Losing the student loan albatross opens up your career options in some really great ways as a lawyer.

(Note: this is a lesson I wish I had followed, as I'm still paying law school student loans today).

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Mon Sep 07, 2020 10:51 pm
by TIAX
Refinance with first republic at 1.95% and definitely don't prepay.

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Tue Sep 08, 2020 9:17 pm
by quenchgum
Thanks very much to all for your perspectives and thoughts.

Is anyone aware of a resource -- perhaps a relatively simple spreadsheet -- that they'd recommend to help model out the tax savings over, say, 30 years at an expected growth of 8% if I were to (1) aggressively prepay the loans in ~3 years versus instead (2) ride out the 1.95% student loan to a 7-year term and end up leaving all excess cash in the Roth IRA? I'm new to the forum and unsure whether there is a stickied resource that would be a good base to work from to model out those scenarios.

TIA and thank you all regardless!

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Tue Sep 15, 2020 9:33 pm
by quenchgum
I came across a follow-up question regarding the interaction between the MBDR and the normal backdoor Roth, and was hoping someone could confirm my reasoning if they came across this and had knowledge!

Say that my after-tax non-Roth 401(k) amounts accrue interest before I move them to the Roth IRA. If so, I can simply move the principal to the Roth IRA and move the growth to a traditional IRA. If I had no other IRA balances in any other IRA accounts, would any such growth amounts within a traditional IRA create an aggregation / pro rata / other type of issue when executing a normal backdoor Roth?

I think the answer is that the aggregation rules do NOT create an issue because the growth would not be considered a pre-tax amount within the IRA. Is that right? Thank you!

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Tue Sep 15, 2020 9:57 pm
by Thrifty Femme
quenchgum wrote: Tue Sep 15, 2020 9:33 pm I came across a follow-up question regarding the interaction between the MBDR and the normal backdoor Roth, and was hoping someone could confirm my reasoning if they came across this and had knowledge!

Say that my after-tax non-Roth 401(k) amounts accrue interest before I move them to the Roth IRA. If so, I can simply move the principal to the Roth IRA and move the growth to a traditional IRA. If I had no other IRA balances in any other IRA accounts, would any such growth amounts within a traditional IRA create an aggregation / pro rata / other type of issue when executing a normal backdoor Roth?

I think the answer is that the aggregation rules do NOT create an issue because the growth would not be considered a pre-tax amount within the IRA. Is that right? Thank you!
You would run into pro rata trouble if you did not send the growth back your 401k. Check to see if your 401k plan allows you to rollover money into your 401k account.

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Tue Sep 15, 2020 10:23 pm
by quenchgum
Thrifty Femme wrote: Tue Sep 15, 2020 9:57 pm
quenchgum wrote: Tue Sep 15, 2020 9:33 pm I came across a follow-up question regarding the interaction between the MBDR and the normal backdoor Roth, and was hoping someone could confirm my reasoning if they came across this and had knowledge!

Say that my after-tax non-Roth 401(k) amounts accrue interest before I move them to the Roth IRA. If so, I can simply move the principal to the Roth IRA and move the growth to a traditional IRA. If I had no other IRA balances in any other IRA accounts, would any such growth amounts within a traditional IRA create an aggregation / pro rata / other type of issue when executing a normal backdoor Roth?

I think the answer is that the aggregation rules do NOT create an issue because the growth would not be considered a pre-tax amount within the IRA. Is that right? Thank you!
You would run into pro rata trouble if you did not send the growth back your 401k. Check to see if your 401k plan allows you to rollover money into your 401k account.
Is there a specific rule (or perhaps blog article) that you could point me to? I don't think I understand -- I had thought that the pro rata rule only caused an issue if you had both pre-tax and post-tax assets within your tIRA. Would you say that that's an inaccurate summary, or are you instead suggesting that the growth from the after-tax amounts would be considered as "pre-tax" once within the tIRA? Or is there something else entirely that I'm missing?

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Tue Sep 15, 2020 10:35 pm
by anon_investor
quenchgum wrote: Tue Sep 15, 2020 10:23 pm
Thrifty Femme wrote: Tue Sep 15, 2020 9:57 pm
quenchgum wrote: Tue Sep 15, 2020 9:33 pm I came across a follow-up question regarding the interaction between the MBDR and the normal backdoor Roth, and was hoping someone could confirm my reasoning if they came across this and had knowledge!

Say that my after-tax non-Roth 401(k) amounts accrue interest before I move them to the Roth IRA. If so, I can simply move the principal to the Roth IRA and move the growth to a traditional IRA. If I had no other IRA balances in any other IRA accounts, would any such growth amounts within a traditional IRA create an aggregation / pro rata / other type of issue when executing a normal backdoor Roth?

I think the answer is that the aggregation rules do NOT create an issue because the growth would not be considered a pre-tax amount within the IRA. Is that right? Thank you!
You would run into pro rata trouble if you did not send the growth back your 401k. Check to see if your 401k plan allows you to rollover money into your 401k account.
Is there a specific rule (or perhaps blog article) that you could point me to? I don't think I understand -- I had thought that the pro rata rule only caused an issue if you had both pre-tax and post-tax assets within your tIRA. Would you say that that's an inaccurate summary, or are you instead suggesting that the growth from the after-tax amounts would be considered as "pre-tax" once within the tIRA? Or is there something else entirely that I'm missing?
Any growth of the after-tax funds prior to a roth conversion is considered "pre-tax". This is why after-tax 401k contributions are only advantagous if in plan roth conversions OR in service Roth IRA rollovers are possible.

This is one reason for simplicity I just do in-plan roth conversions of my after-tax contributions to my 401k, especially since my plan allows me to rollover the now converted roth funds to my Roth IRA anytime I want (for a small $5 fee per transaction). Never any risk of "taxable growth".

However, from a practical perspective, assuming you are doing Roth IRA rollovers every pay check, the small amount of taxable growth should not be too painful to just convert to Roth and just pay the tax. How much growth can there be in such a short period of time? The hassle of trying to rollover a few dollars back into your 401k is probably not worth the hassle of saving a couple of bucks in tax (like literally $2 probably).

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Tue Sep 15, 2020 10:45 pm
by quenchgum
anon_investor wrote: Tue Sep 15, 2020 10:35 pm
quenchgum wrote: Tue Sep 15, 2020 10:23 pm
Thrifty Femme wrote: Tue Sep 15, 2020 9:57 pm
quenchgum wrote: Tue Sep 15, 2020 9:33 pm I came across a follow-up question regarding the interaction between the MBDR and the normal backdoor Roth, and was hoping someone could confirm my reasoning if they came across this and had knowledge!

Say that my after-tax non-Roth 401(k) amounts accrue interest before I move them to the Roth IRA. If so, I can simply move the principal to the Roth IRA and move the growth to a traditional IRA. If I had no other IRA balances in any other IRA accounts, would any such growth amounts within a traditional IRA create an aggregation / pro rata / other type of issue when executing a normal backdoor Roth?

I think the answer is that the aggregation rules do NOT create an issue because the growth would not be considered a pre-tax amount within the IRA. Is that right? Thank you!
You would run into pro rata trouble if you did not send the growth back your 401k. Check to see if your 401k plan allows you to rollover money into your 401k account.
Is there a specific rule (or perhaps blog article) that you could point me to? I don't think I understand -- I had thought that the pro rata rule only caused an issue if you had both pre-tax and post-tax assets within your tIRA. Would you say that that's an inaccurate summary, or are you instead suggesting that the growth from the after-tax amounts would be considered as "pre-tax" once within the tIRA? Or is there something else entirely that I'm missing?
Any growth of the after-tax funds prior to a roth conversion is considered "pre-tax". This is why after-tax 401k contributions are only advantagous if in plan roth conversions OR in service Roth IRA rollovers are possible.

This is one reason for simplicity I just do in-plan roth conversions of my after-tax contributions to my 401k, especially since my plan allows me to rollover the now converted roth funds to my Roth IRA anytime I want (for a small $5 fee per transaction). Never any risk of "taxable growth".

However, from a practical perspective, assuming you are doing Roth IRA rollovers every pay check, the small amount of taxable growth should not be too painful to just convert to Roth and just pay the tax. How much growth can there be in such a short period of time? The hassle of trying to rollover a few dollars back into your 401k is probably not worth the hassle of saving a couple of bucks in tax (like literally $2 probably).
Thanks so much. For some reason, not sure why, I had thought that the "after-tax" character would stay given the "after-tax" principal it grew from.

The only rationale is that I want to be able to withdraw all of my MBDR principal from my Roth IRA without having to pay a penalty, even if I were to withdraw within five years (and I don't have any direct contributions to pad the starting balance). So, I really want to avoid having any "taxable conversions" that get stacked before my "non-taxable conversions" (my after-tax principal). I spoke with my 401(k) plan administrator -- I think, in part, based upon your comments! -- and they also do not automate in-plan Roth conversions, so I figure I'll likely have some growth regardless of approach (unless I'm super vigilant). So, I'll need to either put that into my Roth IRA (which I believe is a "taxable conversion") or put that into my tIRA, where it will cause issues when executing a normal backdoor Roth (unless I'm able to roll it back into my 401(k) - not sure whether that's available, I'll have to call tomorrow).

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Wed Sep 16, 2020 7:00 am
by anon_investor
quenchgum wrote: Tue Sep 15, 2020 10:45 pm
anon_investor wrote: Tue Sep 15, 2020 10:35 pm
quenchgum wrote: Tue Sep 15, 2020 10:23 pm
Thrifty Femme wrote: Tue Sep 15, 2020 9:57 pm
quenchgum wrote: Tue Sep 15, 2020 9:33 pm I came across a follow-up question regarding the interaction between the MBDR and the normal backdoor Roth, and was hoping someone could confirm my reasoning if they came across this and had knowledge!

Say that my after-tax non-Roth 401(k) amounts accrue interest before I move them to the Roth IRA. If so, I can simply move the principal to the Roth IRA and move the growth to a traditional IRA. If I had no other IRA balances in any other IRA accounts, would any such growth amounts within a traditional IRA create an aggregation / pro rata / other type of issue when executing a normal backdoor Roth?

I think the answer is that the aggregation rules do NOT create an issue because the growth would not be considered a pre-tax amount within the IRA. Is that right? Thank you!
You would run into pro rata trouble if you did not send the growth back your 401k. Check to see if your 401k plan allows you to rollover money into your 401k account.
Is there a specific rule (or perhaps blog article) that you could point me to? I don't think I understand -- I had thought that the pro rata rule only caused an issue if you had both pre-tax and post-tax assets within your tIRA. Would you say that that's an inaccurate summary, or are you instead suggesting that the growth from the after-tax amounts would be considered as "pre-tax" once within the tIRA? Or is there something else entirely that I'm missing?
Any growth of the after-tax funds prior to a roth conversion is considered "pre-tax". This is why after-tax 401k contributions are only advantagous if in plan roth conversions OR in service Roth IRA rollovers are possible.

This is one reason for simplicity I just do in-plan roth conversions of my after-tax contributions to my 401k, especially since my plan allows me to rollover the now converted roth funds to my Roth IRA anytime I want (for a small $5 fee per transaction). Never any risk of "taxable growth".

However, from a practical perspective, assuming you are doing Roth IRA rollovers every pay check, the small amount of taxable growth should not be too painful to just convert to Roth and just pay the tax. How much growth can there be in such a short period of time? The hassle of trying to rollover a few dollars back into your 401k is probably not worth the hassle of saving a couple of bucks in tax (like literally $2 probably).
Thanks so much. For some reason, not sure why, I had thought that the "after-tax" character would stay given the "after-tax" principal it grew from.

The only rationale is that I want to be able to withdraw all of my MBDR principal from my Roth IRA without having to pay a penalty, even if I were to withdraw within five years (and I don't have any direct contributions to pad the starting balance). So, I really want to avoid having any "taxable conversions" that get stacked before my "non-taxable conversions" (my after-tax principal). I spoke with my 401(k) plan administrator -- I think, in part, based upon your comments! -- and they also do not automate in-plan Roth conversions, so I figure I'll likely have some growth regardless of approach (unless I'm super vigilant). So, I'll need to either put that into my Roth IRA (which I believe is a "taxable conversion") or put that into my tIRA, where it will cause issues when executing a normal backdoor Roth (unless I'm able to roll it back into my 401(k) - not sure whether that's available, I'll have to call tomorrow).
Yes, the taxable growth rolled over to your Roth IRA is a taxable conversion. However, realistically how much growth will there be? My 401k plan also requires manual roth conversion of after-tax contributions. On the occasions I have not immediately converted (done so a few days later, the grow has been peanuts (so I convert and pay the tax at tax time). If I failed to be vigilant and waited a day or 2 before converting, the tax for the year likely would have been a couple of bucks at most. I just make it a habit now to make my conversions every pay day before 4pm.

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Wed Sep 16, 2020 7:44 am
by sd323232
Get rid of student loan asap. Yes, math does not make sense to do so, but psychological effect will make ur life aloooot easier.

Imagine to live with this debt for over 5 years? That's not even an option, pay loan even if it is at 0% interest.

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Wed Sep 16, 2020 8:12 am
by MrJedi
If you can't max both normal Backdoor Roth and Mega Backdoor Roth, there is a small benefit for maxing the normal one first. That is the chance that your employer fails the 401k ACP test (discrimination testing) and some of your after tax 401k contributions have to be returned since you may be considered an HCE. If your employer has a well setup plan, this may not be a concern for you.

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Wed Sep 16, 2020 8:18 am
by MrJedi
quenchgum wrote: Mon Sep 07, 2020 1:41 pm
anon_investor wrote: Mon Sep 07, 2020 8:39 am
If your 401k plan has it, the in-plan Roth Conversion is just converting the after-tax 401k contribution to Roth. Some 401k plans have weird restrictions (limited times a year, etc.), some do it online or even automatically, while some require phone calls, etc. For my 401k plan there are no restrictions, I can do it as many times as I like, it is all online and if I do it on payday before 4pm the conversion will take effect before the contributions are invested so I avoid any taxable growth. My 401k plan has lower expense rations than my Vanguard Roth IRA, so no rush to rollover, also each rollover costs me $5, but I can do in-service rollovers of my MBDR funds anytime, I cannot access my nonMBDR funds (individual contribution/company match) until I leave my employer. I have substantial balances in both my Roth IRA, taxable account and HSA, so no sense of urgency rolling over either, but I can do it anytime. If I did rollover, my money would likely be out of the market for 1 to 2 weeks, while it was transfered from my 401k to Roth IRA.

One thing to also remember is 401k funds generally receive superior protection from creditors vs. IRAs (although some states grant IRA funds the same level of protection from creditors).

You probably want to fund (at least a little) your roth IRA via the backdoor this year to start the 5 year clock (which starts upon funding not creation).
Thanks, that's interesting and helpful to hear. Would it be accurate, then, to say that there aren't any tax or other consequences associated letting the money sit in my Roth 401(k) and then pulling the trigger to stash it in the Roth IRA whenever/if I ever need to pull out the principal? [With the caveat that I should put a small amount in the Roth IRA to get the normal 5 year clock started.] If so, I suppose that if my suite of investment options are equal between the Roth IRA and the 401(k), then I should be indifferent between letting the money sit in the Roth 401(k) or in the Roth IRA.
This is plan dependent, but your plan may or may not allow your distributable amounts to be distributed in-service after the Roth 401k conversion. My plan for example does not, though the IRS does allow it. I still opt for the 401k route because my logic is that if I really need early access to those funds, then I must have separated from my employer and thus won't be restricted from rolling it out to a Roth IRA at that time.

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Wed Sep 16, 2020 10:12 am
by HootingSloth
petulant wrote: Sat Sep 05, 2020 2:01 pm I feel like one thing I've seen is that my friends who paid off the loans or never had very large loans from the start actually did better in biglaw--probably something about less psychological pressure etc.
As someone who has stayed in biglaw for many years now, I think this point cannot be emphasized enough. The financial returns you get from biglaw will be dominated by how long you are able to stay and continue to save at a high rate, not by your investment decisions (within a range of reasonable options). Biglaw is a marathon, and you need to take care of your mental health more than anything else. For many people, including myself, paying off the debt as early as possible has had returns that far outweigh an uncertain gain of a few percentage points of growth on a portfolio that is just starting out.

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Wed Sep 16, 2020 10:17 am
by mcraepat9
Chadnudj wrote: Mon Sep 07, 2020 9:52 pm I haven't read thru this whole thread, so take this with a grain of salt.....but as a former big law attorney myself, my advice:

Pay off the debt as fast as you can.

Look, you might end up ahead by investing. In fact, you probably will. But if the firm hits a rough patch (and I've been at firms that hit rough patches since I graduated in 2006), you're better off not having debt as a monthly expense you have to pay. Losing the student loan albatross opens up your career options in some really great ways as a lawyer.

(Note: this is a lesson I wish I had followed, as I'm still paying law school student loans today).
+1

Signed, NYC biglaw partner who summered in 2008 and started in 2009.

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Wed Sep 16, 2020 10:50 am
by financiallycurious
I haven't read thru this whole thread, so take this with a grain of salt.....but as a former big law attorney myself, my advice:

Pay off the debt as fast as you can.

Look, you might end up ahead by investing. In fact, you probably will. But if the firm hits a rough patch (and I've been at firms that hit rough patches since I graduated in 2006), you're better off not having debt as a monthly expense you have to pay. Losing the student loan albatross opens up your career options in some really great ways as a lawyer.

+ 2 - someone who put in more than enough years in big law and left for greener pastures, with zero student loan debt, a healthy 401k and zero regrets.

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Wed Sep 16, 2020 2:15 pm
by quenchgum
HootingSloth wrote: Wed Sep 16, 2020 10:12 am
petulant wrote: Sat Sep 05, 2020 2:01 pm I feel like one thing I've seen is that my friends who paid off the loans or never had very large loans from the start actually did better in biglaw--probably something about less psychological pressure etc.
As someone who has stayed in biglaw for many years now, I think this point cannot be emphasized enough. The financial returns you get from biglaw will be dominated by how long you are able to stay and continue to save at a high rate, not by your investment decisions (within a range of reasonable options). Biglaw is a marathon, and you need to take care of your mental health more than anything else. For many people, including myself, paying off the debt as early as possible has had returns that far outweigh an uncertain gain of a few percentage points of growth on a portfolio that is just starting out.
mcraepat9 wrote: Wed Sep 16, 2020 10:17 am
Chadnudj wrote: Mon Sep 07, 2020 9:52 pm I haven't read thru this whole thread, so take this with a grain of salt.....but as a former big law attorney myself, my advice:

Pay off the debt as fast as you can.

Look, you might end up ahead by investing. In fact, you probably will. But if the firm hits a rough patch (and I've been at firms that hit rough patches since I graduated in 2006), you're better off not having debt as a monthly expense you have to pay. Losing the student loan albatross opens up your career options in some really great ways as a lawyer.

(Note: this is a lesson I wish I had followed, as I'm still paying law school student loans today).
+1

Signed, NYC biglaw partner who summered in 2008 and started in 2009.
financiallycurious wrote: Wed Sep 16, 2020 10:50 am

+ 2 - someone who put in more than enough years in big law and left for greener pastures, with zero student loan debt, a healthy 401k and zero regrets.
Thank you to all three of you (HootingSloth, mcraepat9, financiallycurious) for your perspectives. (And to others!) As a stressed rising second year.. it is very appreciated and timely advice that I am considering with gravity.

I wanted to push back to get your thoughts on how my specific investment strategy changes your recommendation, if at all. I would agree without hesitation -- for the same reasons that all three of you listed -- that for junior biglaw associates, prepaying student debt is probably preferable to investing excess amounts in a taxable account that's tied up in the market (likely largely in stocks), but only because those amounts would be subject to the market, such that I couldn't rely on pulling them if needed. However, to the extent that I were to pursue the MBDR option, I would instead invest any amounts that are in my Roth IRA very conservatively (perhaps targeting 1-2%) over the next few years, such that I could fully rely upon pulling the principal at any point without tax or penalty and at extremely low market risk, especially given that I don't expect to need to pull large amounts in even the most dire of scenarios. Another complicating difference is the tax-free growth going forward, for 40+ years. [Of course, that's the only reason to want to do this anyway - why else "invest in the market" to target 2% when you can pay off your loan with the same guaranteed rate?]

Does the above at all affect your advice? If it doesn't affect your advice, then is that because you think it's unlikely that I'll be to fully psychologically equate the Roth IRA amounts with paying off my debt [if so, I think that that's a fair point] or is it instead for some other reason?

Thank you, all!

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Wed Sep 16, 2020 2:26 pm
by gclancer
quenchgum wrote: Wed Sep 16, 2020 2:15 pm Does the above at all affect your advice? If it doesn't affect your advice, then is that because you think it's unlikely that I'll be to fully psychologically equate the Roth IRA amounts with paying off my debt [if so, I think that that's a fair point] or is it instead for some other reason?

Thank you, all!
This is really more a psychology question than it is financial one. The feedback you’re getting is that having the debt paid off will have a significant non-financial return on investment, including lessening the chance of burnout so that you can continue earning a big law salary (feeling like you’re choosing to work somewhere feels a lot better than feeling like you have to work somewhere).

What you’re saying makes complete sense. The question is, will having a side Roth account big enough to pay off your student loans impart the same psychological benefits as actually paying them off? Or will you feel hesitant to drain a Roth account you worked so hard to build up and continue working in a job you don’t enjoy to avoid doing so? Only you can answer that question.

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Wed Sep 16, 2020 2:57 pm
by financiallycurious
Does the above at all affect your advice? If it doesn't affect your advice, then is that because you think it's unlikely that I'll be to fully psychologically equate the Roth IRA amounts with paying off my debt [if so, I think that that's a fair point] or is it instead for some other reason?
I’m probably imposing my own psychological hang-ups on you and your mileage may vary. After my loans were paid off completely, I slept better at night and hated my job in big law less. Maybe you love big law and will always feel that way. Maybe knowing that you have enough money in a Roth IRA to pay off your student loan is enough for you. It wouldn't have been for me. After I burned out in big law, I took a salary cut for a job that suits me much better. Now, a little more than a decade into my career, I still *only* make a salary similar to yours from my legal practice, but I’ve managed to accumulate 7 figures in NW not including home equity, my kids’ 529 accounts, or my husband’s retirement/company stock. My strategy was very simple: max out 401k every year, pay down student loan as fast as possible, then redirect money previously allocated to debt pay down to new investments.

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Wed Sep 16, 2020 3:31 pm
by anon_investor
quenchgum wrote: Wed Sep 16, 2020 2:15 pm
HootingSloth wrote: Wed Sep 16, 2020 10:12 am
petulant wrote: Sat Sep 05, 2020 2:01 pm I feel like one thing I've seen is that my friends who paid off the loans or never had very large loans from the start actually did better in biglaw--probably something about less psychological pressure etc.
As someone who has stayed in biglaw for many years now, I think this point cannot be emphasized enough. The financial returns you get from biglaw will be dominated by how long you are able to stay and continue to save at a high rate, not by your investment decisions (within a range of reasonable options). Biglaw is a marathon, and you need to take care of your mental health more than anything else. For many people, including myself, paying off the debt as early as possible has had returns that far outweigh an uncertain gain of a few percentage points of growth on a portfolio that is just starting out.
mcraepat9 wrote: Wed Sep 16, 2020 10:17 am
Chadnudj wrote: Mon Sep 07, 2020 9:52 pm I haven't read thru this whole thread, so take this with a grain of salt.....but as a former big law attorney myself, my advice:

Pay off the debt as fast as you can.

Look, you might end up ahead by investing. In fact, you probably will. But if the firm hits a rough patch (and I've been at firms that hit rough patches since I graduated in 2006), you're better off not having debt as a monthly expense you have to pay. Losing the student loan albatross opens up your career options in some really great ways as a lawyer.

(Note: this is a lesson I wish I had followed, as I'm still paying law school student loans today).
+1

Signed, NYC biglaw partner who summered in 2008 and started in 2009.
financiallycurious wrote: Wed Sep 16, 2020 10:50 am

+ 2 - someone who put in more than enough years in big law and left for greener pastures, with zero student loan debt, a healthy 401k and zero regrets.
Thank you to all three of you (HootingSloth, mcraepat9, financiallycurious) for your perspectives. (And to others!) As a stressed rising second year.. it is very appreciated and timely advice that I am considering with gravity.

I wanted to push back to get your thoughts on how my specific investment strategy changes your recommendation, if at all. I would agree without hesitation -- for the same reasons that all three of you listed -- that for junior biglaw associates, prepaying student debt is probably preferable to investing excess amounts in a taxable account that's tied up in the market (likely largely in stocks), but only because those amounts would be subject to the market, such that I couldn't rely on pulling them if needed. However, to the extent that I were to pursue the MBDR option, I would instead invest any amounts that are in my Roth IRA very conservatively (perhaps targeting 1-2%) over the next few years, such that I could fully rely upon pulling the principal at any point without tax or penalty and at extremely low market risk, especially given that I don't expect to need to pull large amounts in even the most dire of scenarios. Another complicating difference is the tax-free growth going forward, for 40+ years. [Of course, that's the only reason to want to do this anyway - why else "invest in the market" to target 2% when you can pay off your loan with the same guaranteed rate?]

Does the above at all affect your advice? If it doesn't affect your advice, then is that because you think it's unlikely that I'll be to fully psychologically equate the Roth IRA amounts with paying off my debt [if so, I think that that's a fair point] or is it instead for some other reason?

Thank you, all!
Conservative investments at your age in Roth is a waste. You have time on your side. Your Roth space should be 100% equities. You are better paying off your loans than wasting roth space in that manner.

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Wed Sep 16, 2020 3:37 pm
by mcraepat9
financiallycurious wrote: Wed Sep 16, 2020 2:57 pm
Does the above at all affect your advice? If it doesn't affect your advice, then is that because you think it's unlikely that I'll be to fully psychologically equate the Roth IRA amounts with paying off my debt [if so, I think that that's a fair point] or is it instead for some other reason?
I’m probably imposing my own psychological hang-ups on you and your mileage may vary. After my loans were paid off completely, I slept better at night and hated my job in big law less. Maybe you love big law and will always feel that way. Maybe knowing that you have enough money in a Roth IRA to pay off your student loan is enough for you. It wouldn't have been for me. After I burned out in big law, I took a salary cut for a job that suits me much better. Now, a little more than a decade into my career, I still *only* make a salary similar to yours from my legal practice, but I’ve managed to accumulate 7 figures in NW not including home equity, my kids’ 529 accounts, or my husband’s retirement/company stock. My strategy was very simple: max out 401k every year, pay down student loan as fast as possible, then redirect money previously allocated to debt pay down to new investments.
+1

This is how I feel too. OP you are applying a strictly mathematical, analytical approach to this. Normally, I agree with that approach, and do when it comes to thing like whether to pay down your mortgage vs investing etc. This is a different animal. Biglaw in particular is undergoing substantial and industry-shaking changes, some Covid-related, some have been simmering for years. You can see it from reading ATL. It's been a stodgy, white shoe, by-the-book profession for most of my career, but it's changing now that older Millennials are ascending to positions of power at these law firms. The student loans will keep you trapped in biglaw longer than you'd like.

You can say it won't (maybe many Boglehead junior associates would say that), but I've seen it firsthand. The ones who got out of their loans quickest ended up taking less crap, leaving for better in-house (GCs at companies you've heard of) and non-legal positions (mostly finance and finance-adjacent), and ultimately ended up having better lives. Invariably, the associates who ended up eating the most crap, working the hardest and hating the job most, were ones with substantial student loan debt - even at low interest rates. There is an emotional element the analysis of which is not susceptible to merely evaluating numbers on a computer screen. My old firm has alumni events every few years, and those who left the profession look the youngest, best and have lived the fuller lives. The ones who aged the worst and were generally run down? Biglaw partners through and through, most of whom had substantial student loans that altered their career trajectory.

I followed an investment/loan paydown path very similar to financiallycurious, and didn't take nearly as much garbage as others once I knew i had the freedom to PTFO when I wanted to. That attitude and general approach to this job gave me the confidence to focus on doing excellent work that I actually enjoyed doing - I ended up outperforming and making partner relatively easily. Biglaw has its downsides (you already know them), but when you are able to leave whenever you want, your workload becomes surprisingly manageable.

Not sure I can add much more than that.

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Wed Sep 16, 2020 4:56 pm
by gclancer
anon_investor wrote: Wed Sep 16, 2020 3:31 pm Conservative investments at your age in Roth is a waste. You have time on your side. Your Roth space should be 100% equities. You are better paying off your loans than wasting roth space in that manner.
Not if it’s a side fund earmarked for paying off his student loans in the event of an unexpected turn of events. The idea would be to capture the annual Roth space available to him each year as a “student loan payoff fund” while simultaneously maxing out tax deferred contributions and paying down the student loans. As he manages to pay off the student loans without tapping the Roth money he could continue to shift more money into equities within the Roth student loan payoff fund.

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Wed Sep 16, 2020 5:16 pm
by anon_investor
gclancer wrote: Wed Sep 16, 2020 4:56 pm
anon_investor wrote: Wed Sep 16, 2020 3:31 pm Conservative investments at your age in Roth is a waste. You have time on your side. Your Roth space should be 100% equities. You are better paying off your loans than wasting roth space in that manner.
Not if it’s a side fund earmarked for paying off his student loans in the event of an unexpected turn of events. The idea would be to capture to annual Roth space available to him each year as a “student loan payoff fund” while simultaneously making out tax deferred contributions and paying down the student loans. As he manages to pay off the student loans without tapping the Roth money he could continue to shift more money into equities within the Roth student loan payoff fund.
Still seems like a waste. But then again I paid off my law school loans as soon as possible. That freedom was priceless.

Re: Prepay student loans OR megabackdoor Roth? (26 y/o in Biglaw; 190k salary; 180k debt)

Posted: Wed Sep 16, 2020 7:14 pm
by quenchgum
Thank you all very much for the follow-up round of considerate, thoughtful and personal responses. It’s helpful to hear your perspective and to have it be somewhat doubled down on — i.e., even in this somewhat non traditional situation, the psychological point nonetheless stands as a major consideration.

I agree that prepaying the debt would probably be more beneficial to my mental health. And I agree that that’s probably about the best thing I can do for myself right now, even if only for my own financial purposes, funnily enough. Though I had acknowledged and logically understood this point, I appreciate and was affected by the multiple posters that encouraged me to recognize (and helped to illustrate) its gravity.

I’ll probably end up splitting the baby for the remainder of 2020 and see how things feel. Maybe I’ll track some big knockout number — my outstanding principal minus any MBDR principal in the “student debt payoff fund” — and gauge how satisfying (or unsatisfying) it feels. It’s hard to get a sense at this point of whether/the extent to which I’ll be able to successfully pull off the psychological trick.... until then, perhaps I’ll have to ensure I use up my 2020 MBDR space in the interim so as to not foreclose my options... (mostly a joke) :P :oops: