Questions about 401k and IRA investments - meeting limits?

[LordBarglebroth]

Hello. I have a few questions about 401k accounts and IRAs before I start allocating a lump sum I have received into a Bogleheads-style asset allocation. This is my first post here and I am new to this, so please bear with me.

I am 31 years old. I am putting 15% of my pre-tax income into my company's 401k. My company matches 6%, for a net total of 21% of my income in a 401k annually. At my income level of $102000, this is not reaching the maximum employee 401k contribution at $23000 for this year, instead reaching $15300 ($21400 with employer match). Is it worth putting more of my pre-tax income into the 401k? I also partake in my employer's ESPP at 5% of my income; if need be I can move that income into my 401k and be closer to reaching that ceiling, but I don't know if I can manage more than 20% of my gross income invested in this way.

As mentioned above, to supplement this I have a lump sum of $100000 that I intend to invest using a Bogleheads-style portfolio. Is it worth putting the maximum amount allowed of this money per year into an IRA if my goal for most of this money is retirement? My advisor told me it's not worth investing into an IRA if I am not reaching the max level of my 401k, but they are aware of this lump sum and it contradicts what is on the wiki for this place to not invest some of my lump sum in an IRA.

My concern with these questions is related to tax avoidance. I am aware that money will have to go in a non-tax sheltered account. Thank you for taking the time to read this and have a nice day.

[retired@50]

Hello. I have a few questions about 401k accounts and IRAs before I start allocating a lump sum I have received into a Bogleheads-style asset allocation. This is my first post here and I am new to this, so please bear with me.

I am 31 years old. I am putting 15% of my pre-tax income into my company's 401k. My company matches 6%, for a net total of 21% of my income in a 401k annually. At my income level (I do not wish to disclose exactly how much I make), this is not reaching the maximum employee 401k contribution at $23000 for this year. Is it worth putting more of my pre-tax income into the 401k? I also partake in my employer's ESPP at 5% of my income; if need be I can move that income into my 401k and be closer to reaching that ceiling, but I don't know if I can manage more than 20% of my gross income invested in this way.

As mentioned above, to supplement this I have a lump sum of an amount I also do not wish to disclose that I intend to invest using a Bogleheads-style portfolio. Is it worth putting the maximum amount allowed of this money per year into an IRA if my goal for most of this money is retirement? My advisor told me it's not worth investing into an IRA if I am not reaching the max level of my 401k, but they are aware of this lump sum and it contradicts what is on the wiki for this place to not invest some of my lump sum in an IRA.

My concern with these questions is related to tax avoidance. I am aware that money will have to go in a non-tax sheltered account. Thank you for taking the time to read this and have a nice day.

Welcome to the forum.

The lack of disclosure may limit the forum's ability to provide meaningful advice.

A couple things come to mind after reading your post.

1. Tell us more about your advisor, if you are willing.

2. It sounds as if you're struggling with how to prioritize your investment dollars. We have a wiki page that you might benefit from reading.
See link: https://www.bogleheads.org/wiki/Priorit ... nvestments

Regards,

[LordBarglebroth]

Welcome to the forum.

The lack of disclosure may limit the forum's ability to provide meaningful advice.

A couple things come to mind after reading your post.

1. Tell us more about your advisor, if you are willing.

2. It sounds as if you're struggling with how to prioritize your investment dollars. We have a wiki page that you might benefit from reading.
See link: https://www.bogleheads.org/wiki/Priorit ... nvestments

Regards,

Thanks for the reply. I will update the OP with more concrete details.

The advisor is a free Fidelity advisor, so I am not placing too much weight on their advice.

I have read that page. My question is what to do with money that can't go into my 401k.

[retired@50]

I have read that page. My question is what to do with money that can't go into my 401k.

Depending on your income level, consider a Roth IRA in addition to the workplace 401k.

There are income thresholds, and if you exceed them, then using a Roth IRA may come with some additional complications, but is still possible.

See link: https://www.bogleheads.org/wiki/Roth_IRA

Regards,

[retired@50]

At my income level of $102000,

This income level means you can use a Roth IRA.

Regards,

[retired@50]

I have a lump sum of $100000 that I intend to invest using a Bogleheads-style portfolio. Is it worth putting the maximum amount allowed of this money per year into an IRA if my goal for most of this money is retirement?

Yes, it's most likely worth it.

You're essentially transferring the $100k from your taxable account into your retirement account(s). Upping the percentage you devote to the 401k and starting a Roth IRA, and funding it for the next several years will slowly "use up" the $100k.

The one way this doesn't make sense is if you have a 401k plan with horrendously high fees...

Do you have HIGH fees in the 401k plan?

Regards,

[LordBarglebroth]

Yes, it's most likely worth it.

You're essentially transferring the $100k from your taxable account into your retirement account(s). Upping the percentage you devote to the 401k and starting a Roth IRA, and funding it for the next several years will slowly "use up" the $100k.

The one way this doesn't make sense is if you have a 401k plan with horrendously high fees...

Do you have HIGH fees in the 401k plan?

Regards,

No, the fees on my 401k are about .025%. That doesn't strike me as very high. But please correct me if I am wrong.

So, you suggest I find a way to increase my 401k contributions to max it out somehow? I don't think i will be able to afford to do that unless my salary increases, even if I divest from the ESPP completely.

[retired@50]

Yes, it's most likely worth it.

You're essentially transferring the $100k from your taxable account into your retirement account(s). Upping the percentage you devote to the 401k and starting a Roth IRA, and funding it for the next several years will slowly "use up" the $100k.

The one way this doesn't make sense is if you have a 401k plan with horrendously high fees...

Do you have HIGH fees in the 401k plan?

Regards,

No, the fees on my 401k are about .025%. That doesn't strike me as very high. But please correct me if I am wrong.

That's low. Proceed. You can increase your 401k contributions, and start a Roth IRA.

If you want guidance on what funds to choose, then you'd need to provide some detail about your 401k plan choices, and which custodian you'll be using for your new Roth IRA.

Regards,

[LordBarglebroth]

My 401k is a Vanguard Target Retirement 2060 fund. It's about 53.4% domestic stock, 35.4% foreign stock, 9.7% bonds, and 1.5% short term assets. I use Fidelity to manage this, as that's what my company uses.

I was planning to be slightly riskier with this new IRA/taxable account, with 5% or less bonds.

[retired@50]

My 401k is a Vanguard Target Retirement 2060 fund. It's about 53.4% domestic stock, 35.4% foreign stock, 9.7% bonds, and 1.5% short term assets. I use Fidelity to manage this, as that's what my company uses.

I was planning to be slightly riskier with this new IRA/taxable account, with 5% or less bonds.

Sounds good.

Some purists will argue that you shouldn't include bonds in a Roth IRA at all.

The reasoning is that since stock funds have the highest growth potential, you wouldn't want to limit growth in a Roth IRA since future withdrawals will be tax free - assuming you follow the Roth rules. So, with this special tax-free withdrawal opportunity in the future, you'd want to maximize the growth in the Roth account by using 100% stock.

When considering asset allocation try to think of your whole portfolio (all accounts) as one big entity, not 3 separate accounts that each need their own specific asset allocation. Then, determine the amount you want in bonds, and achieve that amount inside the tax-deferred 401k plan. That way, all other investments in Roth and a taxable account can be stock index funds.

For more on this line of thinking, consider the wiki page on tax efficient fund placement.
https://www.bogleheads.org/wiki/Tax-eff ... _placement

Regards,

[avalpert1]

Yes you should max out your 401k and contribute to an IRA.

You can always fund your cash flow from the lump sum amount to cover any shortfall created by the 401k increase.

[LordBarglebroth]

Yes you should max out your 401k and contribute to an IRA.

You can always fund your cash flow from the lump sum amount to cover any shortfall created by the 401k increase.

How would that work? I can't afford about $8000 more taken out of my paychecks each year without having a negative budget. Are you telling me to use that $8000 from my lump sum instead?

[retired@50]

Yes you should max out your 401k and contribute to an IRA.

You can always fund your cash flow from the lump sum amount to cover any shortfall created by the 401k increase.

How would that work? I can't afford about $8000 more taken out of my paychecks each year without having a negative budget. Are you telling me to use that $8000 from my lump sum instead? <- Yes.

See above in blue.

This is what I was getting at earlier.

You're going to slowly dwindle down the taxable account because you'll be spending from taxable, while at the same time you'll be contributing more to the 401k plan and to your Roth IRA each year.

It may take several years, but your retirement accounts will swell during this time frame, while your taxable account is shrinking.

If you have other plans for the $100k in taxable, then none of this makes sense, but you mentioned that you wanted to save it for retirement. So, by getting the money into retirement accounts, you're achieving your goal in a tax efficient way.

Regards,

[avalpert1]

Yes you should max out your 401k and contribute to an IRA.

You can always fund your cash flow from the lump sum amount to cover any shortfall created by the 401k increase.

How would that work? I can't afford about $8000 more taken out of my paychecks each year without having a negative budget. Are you telling me to use that $8000 from my lump sum instead?

Yes, exactly. Money is fungible, you should see it all as one pot. This has the same effect as if you spent the money in your paycheck and just deposited the lump sum into the 401k to save.

[LordBarglebroth]

Is it worth cutting out the ESPP from my investments in order to better meet that goal?

[avalpert1]

Is it worth cutting out the ESPP from my investments in order to better meet that goal?

Is there a discount in your ESPP program, how much is it, and do you have any waiting period before you can sell the shares after they are issued?

[jajajaja]

Maybe what I have is special case, but here is what I do.

1. My 401K allows for "after-tax" contribution, paving the way for Mega-Roth IRA.
2. My company does not match the after-tax contributions. So I only set my pre-tax 401K up to a point where my company will match it. Then, the bulk I put in as after-tax. For example, 8% pretax (max company match), 22% after-tax because of total 30% limit to 401K contribution.
3. I "withdraw"/"rollover" my after tax contribution to Roth IRA (ie Mega-Roth IRA strategy). Why do this? mainly because Roth IRA has much more investment options such as buying individual stocks which I cant do in 401K. Also, I can withdraw the principal from Roth IRA without penalty in the future, ie better liquidity. Drawback is Roth IRA is less protected than 401K for bankruptcy etc.
4. Research your fees. My 401K and IRA are in Fidelity and they do not charge fees for Mega-Roth IRA strategy but it is a pain because I have to call them every paycheck. The after-tax contribution has to be moved to Roth IRA as soon as possible, because after-tax gains are considered pre-tax.
5. Declare this during tax filing. You will receive 401K 1099-R form. It is pretty easy to declare it using tax software.

[LordBarglebroth]

Is it worth cutting out the ESPP from my investments in order to better meet that goal?

Is there a discount in your ESPP program, how much is it, and do you have any waiting period before you can sell the shares after they are issued?

There is a 15% discount on opening price or closing price for the quarter (whichever is lower is the price you get), but shares must be held for a year before they can be sold.

[avalpert1]

Is it worth cutting out the ESPP from my investments in order to better meet that goal?

Is there a discount in your ESPP program, how much is it, and do you have any waiting period before you can sell the shares after they are issued?

There is a 15% discount on opening price or closing price for the quarter (whichever is lower is the price you get), but shares must be held for a year before they can be sold.

I personally wouldn't bother with a 12 month lock-up period, but it wouldn't be 'wrong' either way.

[sailaway]

Yes, it's most likely worth it.

You're essentially transferring the $100k from your taxable account into your retirement account(s). Upping the percentage you devote to the 401k and starting a Roth IRA, and funding it for the next several years will slowly "use up" the $100k.

The one way this doesn't make sense is if you have a 401k plan with horrendously high fees...

Do you have HIGH fees in the 401k plan?

Regards,

No, the fees on my 401k are about .025%. That doesn't strike me as very high. But please correct me if I am wrong.

So, you suggest I find a way to increase my 401k contributions to max it out somehow? I don't think i will be able to afford to do that unless my salary increases, even if I divest from the ESPP completely.

You have $100k available to spend, of course you can afford to increase your contributions.

[LordBarglebroth]

I would like to thank you all for your advice thus far.

My parents were suggesting that I not invest the money in a Roth IRA just "in case" I need to pay off my outstanding home loan all at once. I think this is unnecessary. Am I correct?

Sorry about this question, all of this is a lot of thought and decisions to make at once and I am feeling a tad overwhelmed. I hope that once I have made my decisions and everything is in place, I can calm down.

[retired@50]

I would like to thank you all for your advice thus far.

My parents were suggesting that I not invest the money in a Roth IRA just "in case" I need to pay off my outstanding home loan all at once. I think this is unnecessary. Am I correct?

Sorry about this question, all of this is a lot of thought and decisions to make at once and I am feeling a tad overwhelmed. I hope that once I have made my decisions and everything is in place, I can calm down.

You (and your parents) should learn about the rules related to Roth IRAs. You can always withdraw contributions with no penalty or tax, regardless of your age.
See link: https://www.bogleheads.org/wiki/Roth_IRA#Distributions

Just as an aside, why would you need to pay off your home loan all at once?

Regards,