Build 401K and Live off Cash or Invest it in Vanguard? Help!

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Topic Author
JustWantToGetItRight
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Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by JustWantToGetItRight » Thu Sep 06, 2018 9:45 am

What would be better for overall tax efficiency and investment growth...( am 54 years old and only make about gross 60K with my employer. Sometimes I gross another 10K as a freelancer)

First, here is my Current accounts:
-401 K (non matching): 60K
-Roth IRA: 27k
-Money Market: $313,000

Now, here is the situation: Should I...

1) Make a full 100% contribution at work into my 401K where I have a Vanguard Target 2030 Fund and live off of my money market fund, OR....

2) Invest the money market fund (into Vanguard Total Stock Index,Total Stock International Index,Vanguard Total Stock Bond and Total International Bond index) and just make a 10% contribution from my job into my 401K and invest any freelance dollars I get (unpredictable amount) into the Roth.

Thank you....

PFInterest
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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by PFInterest » Thu Sep 06, 2018 10:19 am

this is a no brainer. max tax advantaged accounts (401k and rIRA) before taxable investing.
even at your age you are still assuming to live another 30 years.

Topic Author
JustWantToGetItRight
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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by JustWantToGetItRight » Thu Sep 06, 2018 10:51 am

PFInterest wrote:
Thu Sep 06, 2018 10:19 am
this is a no brainer. max tax advantaged accounts (401k and rIRA) before taxable investing.
even at your age you are still assuming to live another 30 years.
Where should I keep the lump sum of money (which I already paid taxes on) so that I have it to pay expenses while contributing 90% of my income to the 401K? By the way, the 401K is non-matching....

Thanks

PFInterest
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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by PFInterest » Thu Sep 06, 2018 11:16 am

JustWantToGetItRight wrote:
Thu Sep 06, 2018 10:51 am
PFInterest wrote:
Thu Sep 06, 2018 10:19 am
this is a no brainer. max tax advantaged accounts (401k and rIRA) before taxable investing.
even at your age you are still assuming to live another 30 years.
Where should I keep the lump sum of money (which I already paid taxes on) so that I have it to pay expenses while contributing 90% of my income to the 401K? By the way, the 401K is non-matching....

Thanks
Any high interest saving account if you need it this year.

Living Free
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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by Living Free » Thu Sep 06, 2018 12:27 pm

1) Make a full 100% contribution at work into my 401K where I have a Vanguard Target 2030 Fund and live off of my money market fund,
You mention that your income is between 60 and 70k per year. The max possible contribution if over 50 years old in 2018 per individual is 18,500 + 6,000 catch up for a total of $24,500. Would you be able to live off the difference between what you contribute to max the 401k (reduce gross income by $24,500) plus max out roth IRA (total $6,500 per year post tax including the catch up)? If so then you could keep however much of this money market fund you need for an emergency fund in something safe and liquid (such as money market or high yield savings account) and invest the remainder into some index funds as per your asset allocation preferences

If you don't get a match on the 401k then I'd consider doing the IRA as a priority (roth vs traditional depending upon your tax strategy) as you have more flexibility in investment options...

Topic Author
JustWantToGetItRight
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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by JustWantToGetItRight » Thu Sep 06, 2018 10:18 pm

Living Free wrote:
Thu Sep 06, 2018 12:27 pm
1) Make a full 100% contribution at work into my 401K where I have a Vanguard Target 2030 Fund and live off of my money market fund,
You mention that your income is between 60 and 70k per year. The max possible contribution if over 50 years old in 2018 per individual is 18,500 + 6,000 catch up for a total of $24,500. Would you be able to live off the difference between what you contribute to max the 401k (reduce gross income by $24,500) plus max out roth IRA (total $6,500 per year post tax including the catch up)? If so then you could keep however much of this money market fund you need for an emergency fund in something safe and liquid (such as money market or high yield savings account) and invest the remainder into some index funds as per your asset allocation preferences

If you don't get a match on the 401k then I'd consider doing the IRA as a priority (roth vs traditional depending upon your tax strategy) as you have more flexibility in investment options...
Thanks for these tips: So to be clear, What do you think about these options:

Age: 54
Salary: 60K Gross Income
Goal: Retirement Only!

401K: 60K invested
Roth IRA : 27K invested
Money Market: 313,000K
———————————-

Option 1:
Contribute all income into my 401K to max 24K limit
Contribute the remainder of my income into the Roth to max 6,500 limit
Draw down the $313K money market into checking every couple months for expenses


Option 2:
Contribute only 10% of my income into my 401K
Pay all my monthly expenses with the remainder of my income and make No Roth contribution
Invest $313,000K today into total stock and total bond index fund in a taxable account


Option 3:
Contribute all income into my 401K to max 24K limit (for another 3 years)
Contribute the remainder of my income into the Roth to max 6,500 limit (for another 3 years)
Draw down the $100K money market into checking every couple months for expenses for 3 another years
Invest $213,000K today into total stock and total bond index fund in a taxable account

Please anyone is free to answer this. I'd appreciate it......

Topic Author
JustWantToGetItRight
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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by JustWantToGetItRight » Thu Sep 06, 2018 10:21 pm

PFInterest wrote:
Thu Sep 06, 2018 10:19 am
this is a no brainer. max tax advantaged accounts (401k and rIRA) before taxable investing.
even at your age you are still assuming to live another 30 years.
So you would pick the first option then for sure?

Age: 54
Salary: 60K Gross Income
Goal: Retirement Only!

401K: 60K invested
Roth IRA : 27K invested
Money Market: 313,000K
———————————-

Option 1:
Contribute all income into my 401K to max 24K limit
Contribute the remainder of my income into the Roth to max 6,500 limit
Draw down the $313K money market into checking every couple months for expenses


Option 2:
Contribute only 10% of my income into my 401K
Pay all my monthly expenses with the remainder of my income and make No Roth contribution
Invest $313,000K today into total stock and total bond index fund in a taxable account


Option 3:
Contribute all income into my 401K to max 24K limit (for another 3 years)
Contribute the remainder of my income into the Roth to max 6,500 limit (for another 3 years)
Draw down the $100K money market into checking every couple months for expenses for 3 another years
Invest $213,000K today into total stock and total bond index fund in a taxable account

Topic Author
JustWantToGetItRight
Posts: 159
Joined: Sat Aug 18, 2018 2:18 pm

Re: Fidelity 3 Funds Portfolio for my 401k

Post by JustWantToGetItRight » Thu Sep 06, 2018 10:23 pm

[Post moved into here from: Fidelity 3 Funds Portfolio for my 401k --admin LadyGeek]
gostars wrote:
Thu Sep 06, 2018 12:44 am
I would suggest reaching out to the HR/benefits department at your employer, or whoever is responsible for selecting the funds, and asking them to work with Fidelity to add the US Bond Index fund. It's extremely common to find this in Fidelity 401k plans, to the point that I'm a bit surprised that yours doesn't offer it.
I have a similar issue with trying to figure out what to do with my 401K, but it has to do more with contributions and placement. Would you mind taking a look at it?

Age: 54
Salary: 60K Gross Income
Goal: Retirement Only!

401K: 60K invested
Roth IRA : 27K invested
Money Market: 313,000K
———————————-

Option 1:
Contribute all income into my 401K to max 24K limit
Contribute the remainder of my income into the Roth to max 6,500 limit
Draw down the $313K money market into checking every couple months for expenses


Option 2:
Contribute only 10% of my income into my 401K
Pay all my monthly expenses with the remainder of my income and make No Roth contribution
Invest $313,000K today into total stock and total bond index fund in a taxable account


Option 3:
Contribute all income into my 401K to max 24K limit (for another 3 years)
Contribute the remainder of my income into the Roth to max 6,500 limit (for another 3 years)
Draw down the $100K money market into checking every couple months for expenses for 3 another years
Invest $213,000K today into total stock and total bond index fund in a taxable account

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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by LadyGeek » Thu Sep 06, 2018 11:09 pm

JustWantToGetItRight - In order to provide appropriate advice, it's best to keep all the info in one spot. Additionally, it lets us focus on your own situation. I moved your post back into the original thread. If you have any questions, ask them here.

Feel free to edit your posts to consolidate the content. You can edit your posts by clicking on the "pencil" icon in the top-right corner of the post.

Please allow time for members to reply.
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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by gostars » Thu Sep 06, 2018 11:30 pm

Option 3 sounds fine to me, and I'd probably consider doing it for more than 3 years, unless you're planning to retire at that point.

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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by JustWantToGetItRight » Fri Sep 07, 2018 12:21 am

gostars wrote:
Thu Sep 06, 2018 11:30 pm
Option 3 sounds fine to me, and I'd probably consider doing it for more than 3 years, unless you're planning to retire at that point.

The only way that would be able to afford to continue maxing out the 401k and Roth IRA would be to continue drawing down the money market fund (and not investing it so that I am sure that it is there when I need it each year to cover my expenses---rent, lease, phone, etc.).

The reason why I chose three years is so that I can get the best of both worlds----build up the 401k and Roth a little more while also getting some of the money market funds invested in stocks and bonds without worrying about it if the market goes down.

After the three year year mark, I would go to a 10% contribution at my employer and live off of my income to pay bills.

Thoughts?
Last edited by JustWantToGetItRight on Fri Sep 07, 2018 12:24 am, edited 2 times in total.

Topic Author
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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by JustWantToGetItRight » Fri Sep 07, 2018 12:23 am

LadyGeek wrote:
Thu Sep 06, 2018 11:09 pm
JustWantToGetItRight - In order to provide appropriate advice, it's best to keep all the info in one spot. Additionally, it lets us focus on your own situation. I moved your post back into the original thread. If you have any questions, ask them here.

Feel free to edit your posts to consolidate the content. You can edit your posts by clicking on the "pencil" icon in the top-right corner of the post.

Please allow time for members to reply.
Thank you Ladygeek. Just want to say that you are amazing! I hope the other bloggers have told you that. I m so impressed with your management of this blog and your dedication to keeping it aligned. I am so sorry if I put things in the wrong place or if I am not concise in my posts. I am new at this stuff and am trying. Thanks for your patience. Sorry!

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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by gostars » Fri Sep 07, 2018 12:52 am

JustWantToGetItRight wrote:
Fri Sep 07, 2018 12:21 am
gostars wrote:
Thu Sep 06, 2018 11:30 pm
Option 3 sounds fine to me, and I'd probably consider doing it for more than 3 years, unless you're planning to retire at that point.

The only way that would be able to afford to continue maxing out the 401k and Roth IRA would be to continue drawing down the money market fund (and not investing it so that I am sure that it is there when I need it each year to cover my expenses---rent, lease, phone, etc.).

The reason why I chose three years is so that I can get the best of both worlds----build up the 401k and Roth a little more while also getting some of the money market funds invested in stocks and bonds without worrying about it if the market goes down.

After the three year year mark, I would go to a 10% contribution at my employer and live off of my income to pay bills.

Thoughts?
Also look at perhaps starting a solo 401k for your side gig and making contributions from the employer side, which wouldn't count against your employee contribution limit at the main job. It probably wouldn't be ton, but every little bit adds up.

SoAnyway
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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by SoAnyway » Fri Sep 07, 2018 1:25 am

JustWantToGetItRight wrote:
Fri Sep 07, 2018 12:21 am
gostars wrote:
Thu Sep 06, 2018 11:30 pm
Option 3 sounds fine to me, and I'd probably consider doing it for more than 3 years, unless you're planning to retire at that point.
The only way that would be able to afford to continue maxing out the 401k and Roth IRA would be to continue drawing down the money market fund (and not investing it so that I am sure that it is there when I need it each year to cover my expenses---rent, lease, phone, etc.).

The reason why I chose three years is so that I can get the best of both worlds----build up the 401k and Roth a little more while also getting some of the money market funds invested in stocks and bonds without worrying about it if the market goes down.

After the three year year mark, I would go to a 10% contribution at my employer and live off of my income to pay bills.

Thoughts?
Option 3, with a few caveats:
1. I believe the 401k max for 2018 (incl. catch-up at your age) is $24,500 rather than $24k, no?
2. You have a ton in cash - hopefully in Prime MMF or HY account or similar. I'm not sure what the magic is in your 3-year timeframe or 10% mark on 401K. It would be helpful to know if Roth 401k is an option at your current employer, when you plan to leave your employer, and whether they'll allow you to keep your 401k vs. forcing you to rollover or cash out when you leave. (The former might make you eligible for the "age 55 separation from service" exception to the 59 1/2 rule if you pull the trigger in the year you turn 55 or later.)
3. Bottom line: Prioritize Roth/tax-deferred, and keep enough in short-term accounts to draw from if needed while doing so until you're SS-eligible. Anything leftover can go to 3-fund. Another poster mentioned potentially setting up a solo 401k for the side-gig income. It's correct, but perhaps more complexity/high learning curve than you can deal with now given the numbers you've shared. It will always be an option later so I'd not sweat it for now.

Edit: What are your Roth/401k invested in currently?
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TwstdSista
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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by TwstdSista » Fri Sep 07, 2018 4:08 am

Option 4:
Contribute all income into 401K to max 24,500 limit (for another 10 years)
Contribute the remainder of my income into the Roth to max 6,500 limit (for another 10 years)
Draw down the $213,000 money market into checking every couple months for expenses for 10 another years
Leave $100,000 in money market account as emergency fund and reevaluate in either 10 years or when you run out of the $213,000 or when you actually retire (whichever comes first)

Just be wary of lifestyle creep since you have over $200k just waiting to be "spent".

Topic Author
JustWantToGetItRight
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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by JustWantToGetItRight » Fri Sep 07, 2018 11:34 am

Might a SEP account also be something that could be available to me in addition to my 401K at work and my individual Roth IRA? Thoughts?
Last edited by JustWantToGetItRight on Fri Sep 07, 2018 11:39 am, edited 2 times in total.

Topic Author
JustWantToGetItRight
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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by JustWantToGetItRight » Fri Sep 07, 2018 11:37 am

SoAnyway wrote:
Fri Sep 07, 2018 1:25 am
JustWantToGetItRight wrote:
Fri Sep 07, 2018 12:21 am
gostars wrote:
Thu Sep 06, 2018 11:30 pm
Option 3 sounds fine to me, and I'd probably consider doing it for more than 3 years, unless you're planning to retire at that point.
The only way that would be able to afford to continue maxing out the 401k and Roth IRA would be to continue drawing down the money market fund (and not investing it so that I am sure that it is there when I need it each year to cover my expenses---rent, lease, phone, etc.).

The reason why I chose three years is so that I can get the best of both worlds----build up the 401k and Roth a little more while also getting some of the money market funds invested in stocks and bonds without worrying about it if the market goes down.

After the three year year mark, I would go to a 10% contribution at my employer and live off of my income to pay bills.

Thoughts?
Option 3, with a few caveats:
1. I believe the 401k max for 2018 (incl. catch-up at your age) is $24,500 rather than $24k, no?
2. You have a ton in cash - hopefully in Prime MMF or HY account or similar. I'm not sure what the magic is in your 3-year timeframe or 10% mark on 401K. It would be helpful to know if Roth 401k is an option at your current employer, when you plan to leave your employer, and whether they'll allow you to keep your 401k vs. forcing you to rollover or cash out when you leave. (The former might make you eligible for the "age 55 separation from service" exception to the 59 1/2 rule if you pull the trigger in the year you turn 55 or later.)
3. Bottom line: Prioritize Roth/tax-deferred, and keep enough in short-term accounts to draw from if needed while doing so until you're SS-eligible. Anything leftover can go to 3-fund. Another poster mentioned potentially setting up a solo 401k for the side-gig income. It's correct, but perhaps more complexity/high learning curve than you can deal with now given the numbers you've shared. It will always be an option later so I'd not sweat it for now.

Edit: What are your Roth/401k invested in currently?

Thanks for the help: In the 401K I have Vanguard Target 2030 fund....However, I was thinking of changing that to a Vanguard Total stock index, total bond index, total international stock index and total international bond index (four funds). The payroll service my employer uses is ADP and I believe they can set what amounts of my income should go into which funds and I believe they would rebalance year as well.

On the Roth side, I am still in a money market (1.8%)---long story, but I was invested with a money manager and got rid of him and the holdings too. Should I put the same thing that I have in the 401K into the Roth?

Topic Author
JustWantToGetItRight
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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by JustWantToGetItRight » Fri Sep 07, 2018 11:44 am

TwstdSista wrote:
Fri Sep 07, 2018 4:08 am
Option 4:
Contribute all income into 401K to max 24,500 limit (for another 10 years)
Contribute the remainder of my income into the Roth to max 6,500 limit (for another 10 years)
Draw down the $213,000 money market into checking every couple months for expenses for 10 another years
Leave $100,000 in money market account as emergency fund and reevaluate in either 10 years or when you run out of the $213,000 or when you actually retire (whichever comes first)

Just be wary of lifestyle creep since you have over $200k just waiting to be "spent".

Wow! Thanks for the advice. You are right though. It could get comfortable knowing that I do not have to balance a check book, worry about bills, etc because I have 200K to fall back on. BUT that would be the wrong thing. The goal would be too stay on the same budget and build up the retirement accounts.

Topic Author
JustWantToGetItRight
Posts: 159
Joined: Sat Aug 18, 2018 2:18 pm

Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by JustWantToGetItRight » Fri Sep 07, 2018 12:07 pm

SoAnyway wrote:
Fri Sep 07, 2018 1:25 am
JustWantToGetItRight wrote:
Fri Sep 07, 2018 12:21 am
gostars wrote:
Thu Sep 06, 2018 11:30 pm
Option 3 sounds fine to me, and I'd probably consider doing it for more than 3 years, unless you're planning to retire at that point.
The only way that would be able to afford to continue maxing out the 401k and Roth IRA would be to continue drawing down the money market fund (and not investing it so that I am sure that it is there when I need it each year to cover my expenses---rent, lease, phone, etc.).

The reason why I chose three years is so that I can get the best of both worlds----build up the 401k and Roth a little more while also getting some of the money market funds invested in stocks and bonds without worrying about it if the market goes down.

After the three year year mark, I would go to a 10% contribution at my employer and live off of my income to pay bills.

Thoughts?
Option 3, with a few caveats:
1. I believe the 401k max for 2018 (incl. catch-up at your age) is $24,500 rather than $24k, no?
2. You have a ton in cash - hopefully in Prime MMF or HY account or similar. I'm not sure what the magic is in your 3-year timeframe or 10% mark on 401K. It would be helpful to know if Roth 401k is an option at your current employer, when you plan to leave your employer, and whether they'll allow you to keep your 401k vs. forcing you to rollover or cash out when you leave. (The former might make you eligible for the "age 55 separation from service" exception to the 59 1/2 rule if you pull the trigger in the year you turn 55 or later.)
3. Bottom line: Prioritize Roth/tax-deferred, and keep enough in short-term accounts to draw from if needed while doing so until you're SS-eligible. Anything leftover can go to 3-fund. Another poster mentioned potentially setting up a solo 401k for the side-gig income. It's correct, but perhaps more complexity/high learning curve than you can deal with now given the numbers you've shared. It will always be an option later so I'd not sweat it for now.

Edit: What are your Roth/401k invested in currently?
Here are the other answers to your questions:

Yes, $24,500 is my max. My bad. Thanks for the correction.

I do have a ton of cash--- I just sold out of all of my positions that I had with a money manager and have finally got wise about Index funds. I just transferred everything over to Vanguard and I am now figuring out what to do....

The 3 year magic number was that I figured I would keep enough in the more liquid Vanguard money market to live off while maxing the 401K and Roth, while still benefiting from investing the rest of the cash into Vanguard Index funds. This is how I see it.... The money in the 401K is going to be slowly dripping into my investments in the 401K, and the leftover money from my employer will probably just be paid in full at the first of the year directly into the Roth IRA. All the while, I have tons of money in a money market that could be getting market returns (which could be a good thing or a bad thing). That being said, I thought I would split the difference. Keep enough in the money market to live for three years, and take the rest of the cash and invest in a taxable account. Thoughts?

Yes, I do have a Roth 401K at my work, but I figured that I would do the 401K to shelter some of my taxes (I gross 60K, not much, but....) and an individual ROTH IRA so that I can add an extra $6,500.

I will continue to work at my job for as long as they will have me---keep my head down, avoid politics, smile, etc....LOL. I am 54 and teach as an adjunct instructor---I have been there 15 years but always treated it like I could be gone tomorrow. They could start scheduling for less hours and then I am screwed. But that has not happened in 15 years. So...... I do other adjunct work as well at other schools, I am an author and earn royalties on books, and I also consult.....but this only brings an extra 5 to 20K (unpredictable). That is why I base most of my estimates on the main teaching gig.

I have never looked into whether my work would force me to rollover when leaving. I have a feeling they would NOT.

Any more ideas you have would be helpful. Thanks.

ExitStageLeft
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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by ExitStageLeft » Fri Sep 07, 2018 1:50 pm

JustWantToGetItRight wrote:
Fri Sep 07, 2018 12:07 pm
...
I have never looked into whether my work would force me to rollover when leaving. I have a feeling they would NOT.

Any more ideas you have would be helpful. Thanks.
I imagine it's a very rare retirement plan that requires you to rollover when you separate. It's my opinion they would much rather keep your assets in the plan and perhaps charge you a nominal fee for being "inactive". You could probably keep your account in the plan until you reach age 70, at which point you would have to decide how to start making the required minimum distribution (RMD).

I would look into setting up a solo 401k account to allow you to save your freelance earnings in tax-deferred or Roth savings. Fidelity or Schwab might be good options. As reported here, Vanguard doesn't offer as much flexibility in their 401k plan offerings.

With $70k income, if you save $24.5k in your 401k that brings your income down to $45.5k. Subtract $12k in standard deduction and your taxable income is $33.5k. That makes your federal income tax top bracket 12%. If you set up the solo 401k, ideally with both tax-deferred and Roth options, you could put any additional freelance income into a tax-advantaged account.

Assuming everything goes exactly as I imagine it, then if you earn an additional $10k in freelance income you could put it all in the solo 401k as an employer contribution. For a self-employed individual you can contribute to the retirement plan as an an employer as well as an employee. So if $10k goes into the solo 401k, you could have $5k go into Roth contributions and $5k go into tax-deferred. The net effect is you maximize your Roth contributions at the 12% tax bracket and also further increase your tax-deferred savings.

gostars
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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by gostars » Fri Sep 07, 2018 3:22 pm

The $18500 ($24500 with catch-up) employee elective contribution limit applies across all plans combined, so if you're maxing out employee contributions at the day job then you can't contribute as an employee to a solo 401k. The solo 401k would be limited to contributions on the employer side, which is is normally limited to 25% of employee compensation, with a good bit of math to figure out exactly how much that is once taxes figure in. In this case it probably end up being only a couple thousand a year, but if the goal is to maximize tax-advantaged space, it's one more way to do it.

Topic Author
JustWantToGetItRight
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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by JustWantToGetItRight » Fri Sep 07, 2018 11:05 pm

gostars wrote:
Fri Sep 07, 2018 3:22 pm
The $18500 ($24500 with catch-up) employee elective contribution limit applies across all plans combined, so if you're maxing out employee contributions at the day job then you can't contribute as an employee to a solo 401k. The solo 401k would be limited to contributions on the employer side, which is is normally limited to 25% of employee compensation, with a good bit of math to figure out exactly how much that is once taxes figure in. In this case it probably end up being only a couple thousand a year, but if the goal is to maximize tax-advantaged space, it's one more way to do it.
Thanks for all the help with this. But one thing I keep considering:

Say Person A and Person B make the same amount of money at their jobs.

Say person A puts $24,000 cash----into a taxable brokerage account invested in a total stock index fund and a total bond index fund for one year. he contributes nothing to a 401K.

Say person B has no lump sum of cash but contributes $2k monthly for 12 months (one year) invested in the same total stock index fund and total bond index fund as person A.

Who wins at the end of the 12 months factoring in tax advantages and disadvantages as well as capital growth and compounding? NOTE: This could be hard math, but what do you think....Please all contribute? Person A or Person B?

TwstdSista
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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by TwstdSista » Sat Sep 08, 2018 3:14 am

^ This is basically the lump sum vs. dollar cost averaging question. There are numerous threads and discussions on this question.

Something like 2/3 of the time lump sum wins. Regardless, read about Bob the world's worst market timer: viewtopic.php?t=166730

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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by JustWantToGetItRight » Sat Sep 08, 2018 7:30 am

TwstdSista wrote:
Sat Sep 08, 2018 3:14 am
^ This is basically the lump sum vs. dollar cost averaging question. There are numerous threads and discussions on this question.

Something like 2/3 of the time lump sum wins. Regardless, read about Bob the world's worst market timer: viewtopic.php?t=166730
Thanks----I did read that section of the BLOG just now and found it very helpful. However, all of this stuff is so scary to me. I really don't know what to do----there is so many factors to consider and I do not know what will be the best decision.

Do I just throw the $300,000 LUMP SUM of money I have in a taxable brokerage account and make it work for me in index funds funds for 13 years till retirement while I contribute 10% a year of my INCOME into my 401K?

Or do I live off of the $300,000 lump sum of money while it sits in a money market fund over the next 13 years till retirement and I contribute 100% of my income into my 401K and Roth IRA to max those out?

In the first case, you benefit from the power of 300K working and compounding for more years and have far more flexibility in withdrawals, but you miss the tax deferred advantages and may be more stressed about monthly budgets.

In the second case, you benefit from the deferred tax advantages and be less stress over monthly budgets, but only have a gradual increase in principle growing and compounding over the 13 years and have more complex withdrawal schedules and penalties.

Help?

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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by JustWantToGetItRight » Sat Sep 08, 2018 9:11 am

ExitStageLeft wrote:
Fri Sep 07, 2018 1:50 pm
JustWantToGetItRight wrote:
Fri Sep 07, 2018 12:07 pm
...
I have never looked into whether my work would force me to rollover when leaving. I have a feeling they would NOT.

Any more ideas you have would be helpful. Thanks.
I imagine it's a very rare retirement plan that requires you to rollover when you separate. It's my opinion they would much rather keep your assets in the plan and perhaps charge you a nominal fee for being "inactive". You could probably keep your account in the plan until you reach age 70, at which point you would have to decide how to start making the required minimum distribution (RMD).

I would look into setting up a solo 401k account to allow you to save your freelance earnings in tax-deferred or Roth savings. Fidelity or Schwab might be good options. As reported here, Vanguard doesn't offer as much flexibility in their 401k plan offerings.

With $70k income, if you save $24.5k in your 401k that brings your income down to $45.5k. Subtract $12k in standard deduction and your taxable income is $33.5k. That makes your federal income tax top bracket 12%. If you set up the solo 401k, ideally with both tax-deferred and Roth options, you could put any additional freelance income into a tax-advantaged account.

Assuming everything goes exactly as I imagine it, then if you earn an additional $10k in freelance income you could put it all in the solo 401k as an employer contribution. For a self-employed individual you can contribute to the retirement plan as an an employer as well as an employee. So if $10k goes into the solo 401k, you could have $5k go into Roth contributions and $5k go into tax-deferred. The net effect is you maximize your Roth contributions at the 12% tax bracket and also further increase your tax-deferred savings.

Here is another way to look at it....

Guy has a small lump sum of money. After paying off all debts and setting a small emergency fund on the side, he wants to be sure to save money for his older years (time horizon is 13 years). Does he..

1. Invest the LUMP SUM of money into a potentially high yielding stock and bond index funds while contributing/saving 10% of his job’s income into a "non-matching" 401K (meeting 1/3 of the allowable limit) and paying monthly expenses with the remaining take-home income?

or does he…

2. Park the LUMP SUM into a low interest money market fund while contributing/saving 100% of his job’s income into a "non-matching 401K and Roth IRA (maxing out the allowable limits) and paying monthly expenses with the lump sum in the money market funds.

In the first case, he benefits from the power of a larger lump sum of money working and compounding for 13 years, has far more flexibility in withdrawals when he needs the money, and may be more conscious about balancing a monthly budget, BUT he might also be more stressed about balancing a monthly budget and doesn’t get as much in tax deferred advantages.

In the second case, he benefits from greater tax deferred advantages, “dollar-cost averaging (potentially) of gradually entering the markets,” and less stress about balancing a monthly budget, BUT he may also be less conscious of balancing a monthly budget, only has a gradual increase in principle growing and compounding over the 13 years and has more complex withdrawal schedules and potential penalties from the 401K and Roth IRA when he needs the money.

Choice One or two and why? Answer here or use the survey link: [link removed, see below. --admin LadyGeek]

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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by LadyGeek » Sat Sep 08, 2018 9:22 am

I removed your survey link, as anonymous polls are not permitted. Please see the site owner's guidance here: Subject: Polls Disabled I underlined the important points.
Alex Frakt wrote:
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After consultation with the Advisory Board, I have disabled polls on this site.

The general problem with self-selecting polls is that the results only tell you only about those who chose to respond to the poll. They cannot be relied on as reflecting the broader will of the participants of this forum, nor can they give any clear insights into the question asked. With written answers (beyond the pointless "+1"), a reader at least has the opportunity to review the respondent's reasoning for his or her answer. In addition to the lack of utility of polls, they required a disproportionate amount of moderator effort and were usually in violation of our requirements that posts be both personal and actionable.

I do understand some polls have a certain entertainment value, but our resources are limited and we prefer to focus on areas where we feel we can do the most direct good.
Trusting your life's savings to an anonymous survey (which can easily be gamed) is not the way to go. Answering here is the best course of action.

If you have any questions, feel free to PM me.
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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by teen persuasion » Sat Sep 08, 2018 9:22 am

Taxable vs tax advantaged retirement accounts are just different buckets you can put your investments into. Each has pluses and minuses (ease of access, tax avoidance, etc.). You should view your investments across all types of accounts. You are essentially moving money from one type (taxable) to another (tax advantaged). Since you can't directly add to your work retirement accounts, but only thru payroll deduction, you can increase your contributions thru payroll to the max and use excess taxable monies to spend instead of take home pay.

You mentioned liquidating your taxable investment account - ouch, what's the tax hit going to be on that? Shunting more $ to traditional 401k this year (at a minimum) should lower your AGI, helping to minimize any capital gains taxes due to the sale. Make sure you have enough tax withheld to cover the increased cap gains taxes, or enough to hit safe harbor rules.

You can use any types of accounts you like for investments, it is just that the ones with the best perks have limitations on how much you can contribute each year (or lose the option to contribute). So each year you should arrange your money in a way that allows you to put as much as possible into the best accounts first, and then into the remaining options until you run out of money, or options.

I would try to put the max in traditional 401k thru work, and then max an IRA, too, drawing from cash on hand only as needed to compensate for spending. The bulk of your liquidated investments should be reinvested in a taxable account, with some for EF and some for planned spending (although you could also use dividends from the taxable account for spending - don't reinvest in that account).

Try to strike a balance; ideally you are moving to a total investment portfolio with some of each type: traditional, Roth, and taxable accounts. You currently have the bulk in taxable, but have the option to shift some to the others over time. Figure out how much you might like in each to optimize taxes in retirement (especially if there's a benefit to reap in taxes in current years).

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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by JustWantToGetItRight » Sat Sep 08, 2018 9:39 am

teen persuasion wrote:
Sat Sep 08, 2018 9:22 am
Taxable vs tax advantaged retirement accounts are just different buckets you can put your investments into. Each has pluses and minuses (ease of access, tax avoidance, etc.). You should view your investments across all types of accounts. You are essentially moving money from one type (taxable) to another (tax advantaged). Since you can't directly add to your work retirement accounts, but only thru payroll deduction, you can increase your contributions thru payroll to the max and use excess taxable monies to spend instead of take home pay.

You mentioned liquidating your taxable investment account - ouch, what's the tax hit going to be on that? Shunting more $ to traditional 401k this year (at a minimum) should lower your AGI, helping to minimize any capital gains taxes due to the sale. Make sure you have enough tax withheld to cover the increased cap gains taxes, or enough to hit safe harbor rules.

You can use any types of accounts you like for investments, it is just that the ones with the best perks have limitations on how much you can contribute each year (or lose the option to contribute). So each year you should arrange your money in a way that allows you to put as much as possible into the best accounts first, and then into the remaining options until you run out of money, or options.

I would try to put the max in traditional 401k thru work, and then max an IRA, too, drawing from cash on hand only as needed to compensate for spending. The bulk of your liquidated investments should be reinvested in a taxable account, with some for EF and some for planned spending (although you could also use dividends from the taxable account for spending - don't reinvest in that account).

Try to strike a balance; ideally you are moving to a total investment portfolio with some of each type: traditional, Roth, and taxable accounts. You currently have the bulk in taxable, but have the option to shift some to the others over time. Figure out how much you might like in each to optimize taxes in retirement (especially if there's a benefit to reap in taxes in current years).

Thank you for this. I do agree there are advantages to both and that striking a balance to get the best of both worlds is smart
I will attempt to find the best way to do that---and I liked your suggestions about taking dividends and the such.

I don't make a lot at work, so to max out the 401K and Roth IRA, I would be locking up 100% of my job's income. This means I would have to withdrawal and live off of about 35K of the $300K in the taxable account per year just to survive.

So maybe here is the balance...

Maybe I could take 100K out of the $300K taxable account, live off of that for three years while I max out the 401K and Roth, and invest the other 200K in the taxable account into index funds that have the potential to grow over the next 13 years. This way I get the best of both worlds. I build up the 401K and Roth, and get a large sum of money invested.

I've asked others about this. What are your thoughts?

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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by ExitStageLeft » Sat Sep 08, 2018 9:52 am

Obviously a combination. I personally would lump sum it all into a taxable account consistent with your asset allocation. I would also max out the tax-advantaged savings at work. If is necessary to take occasionally out some of the taxable to meet monthly expenses then do so. There's no false equivalence here, you can both invest the sum and you can maximize your tax-advantaged savings. Just hold back a portion of the lump sum in a money market account in an amount that you are comfortable with.

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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by teen persuasion » Sat Sep 08, 2018 4:22 pm

I don't make a lot at work, so to max out the 401K and Roth IRA, I would be locking up 100% of my job's income. This means I would have to withdrawal and live off of about 35K of the $300K in the taxable account per year just to survive.
Aren't you already contributing 10% of your $60k income? It's not clear if you are also already contributing $6500 to your Roth IRA, but it's clear that maxing the 401k and IRA can't truly consume 100% of your income. You should only need to withdraw the extra contributions (above current levels) to make up lost take home pay. Actually, less, because you should save the taxes on anything contributed to traditional accounts (but not Roth).

Ok, perhaps you mean if you amp up your contributions right now to get the max in before the end of the year, it could take a larger portion of your paychecks from now until December 31. Check with your employer to learn the maximum you can contribute per paycheck - some posters have found their employer limits their contributions to 25% or 50%, etc. Start soon, if you want to get the maximum into a 401k this year. Then next year you can reset your contribution % lower to spread contributions over the whole year.

Another advantage to maxing your traditional 401k is that you might lower your AGI enough to benefit from the retirement savers credit.

I think the bigger thing you need to work on is a budget - what are you spending annually now, how much are you saving (adding to retirement, not just shifting around), and how much do you expect to need in retirement (to determine how big your stash needs to be: target = 25*expenses). Many of your comments seem to imply you need 100% (or more!) of your $60-70k income for expenses, but your current savings and low new savings rate look insufficient to replace that spending level in just a few years. I've found that the more taxes I can avoid thru prudent use of retirement accounts (and other vehicles) the more money I have to save in those retirement accounts, saving even more. But everyone's circumstances are unique - we're MFJ with kids (CTC and EITC) and college expenses (AOTC). You need to find the things applicable to you and your circumstances.

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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by JustWantToGetItRight » Sun Sep 09, 2018 11:01 am

teen persuasion wrote:
Sat Sep 08, 2018 4:22 pm
I don't make a lot at work, so to max out the 401K and Roth IRA, I would be locking up 100% of my job's income. This means I would have to withdrawal and live off of about 35K of the $300K in the taxable account per year just to survive.
Aren't you already contributing 10% of your $60k income? It's not clear if you are also already contributing $6500 to your Roth IRA, but it's clear that maxing the 401k and IRA can't truly consume 100% of your income. You should only need to withdraw the extra contributions (above current levels) to make up lost take home pay. Actually, less, because you should save the taxes on anything contributed to traditional accounts (but not Roth).

Ok, perhaps you mean if you amp up your contributions right now to get the max in before the end of the year, it could take a larger portion of your paychecks from now until December 31. Check with your employer to learn the maximum you can contribute per paycheck - some posters have found their employer limits their contributions to 25% or 50%, etc. Start soon, if you want to get the maximum into a 401k this year. Then next year you can reset your contribution % lower to spread contributions over the whole year.

Another advantage to maxing your traditional 401k is that you might lower your AGI enough to benefit from the retirement savers credit.

I think the bigger thing you need to work on is a budget - what are you spending annually now, how much are you saving (adding to retirement, not just shifting around), and how much do you expect to need in retirement (to determine how big your stash needs to be: target = 25*expenses). Many of your comments seem to imply you need 100% (or more!) of your $60-70k income for expenses, but your current savings and low new savings rate look insufficient to replace that spending level in just a few years. I've found that the more taxes I can avoid thru prudent use of retirement accounts (and other vehicles) the more money I have to save in those retirement accounts, saving even more. But everyone's circumstances are unique - we're MFJ with kids (CTC and EITC) and college expenses (AOTC). You need to find the things applicable to you and your circumstances.

Thank you so much for your interest. I will put together my budget and give you more clear numbers....Thanks for your help. It feels good to bounce this off of someone.

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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by JustWantToGetItRight » Sun Sep 09, 2018 6:25 pm

JustWantToGetItRight wrote:
Sun Sep 09, 2018 11:01 am
teen persuasion wrote:
Sat Sep 08, 2018 4:22 pm
I don't make a lot at work, so to max out the 401K and Roth IRA, I would be locking up 100% of my job's income. This means I would have to withdrawal and live off of about 35K of the $300K in the taxable account per year just to survive.
Aren't you already contributing 10% of your $60k income? It's not clear if you are also already contributing $6500 to your Roth IRA, but it's clear that maxing the 401k and IRA can't truly consume 100% of your income. You should only need to withdraw the extra contributions (above current levels) to make up lost take home pay. Actually, less, because you should save the taxes on anything contributed to traditional accounts (but not Roth).

Ok, perhaps you mean if you amp up your contributions right now to get the max in before the end of the year, it could take a larger portion of your paychecks from now until December 31. Check with your employer to learn the maximum you can contribute per paycheck - some posters have found their employer limits their contributions to 25% or 50%, etc. Start soon, if you want to get the maximum into a 401k this year. Then next year you can reset your contribution % lower to spread contributions over the whole year.

Another advantage to maxing your traditional 401k is that you might lower your AGI enough to benefit from the retirement savers credit.

I think the bigger thing you need to work on is a budget - what are you spending annually now, how much are you saving (adding to retirement, not just shifting around), and how much do you expect to need in retirement (to determine how big your stash needs to be: target = 25*expenses). Many of your comments seem to imply you need 100% (or more!) of your $60-70k income for expenses, but your current savings and low new savings rate look insufficient to replace that spending level in just a few years. I've found that the more taxes I can avoid thru prudent use of retirement accounts (and other vehicles) the more money I have to save in those retirement accounts, saving even more. But everyone's circumstances are unique - we're MFJ with kids (CTC and EITC) and college expenses (AOTC). You need to find the things applicable to you and your circumstances.


Hi Teen Persuasion....
Okay, so Here are the revised number after doing a budget, checking tax returns, etc…

—————-
Annual Take Home Pay (After Med, SS, Health, Dental)

Less Annual expenses (naming every expense possible down the printer ink)

Less A Small Contingency (for unexpected stuff)

Equals Zero
—————-

Note: Some years, I get back a few hundred in tax rebates from overpaying…

So, if I wanted to max out my 401K ($24,500) and my Roth IRA ($6,500), I would need to pay myself an income of $31,000 from the money market fund so that I could cover expenses.
I could afford to do that for 10 approx years if depleting the total 300K in the money market.

Or….

I could invest the total 300,000K in index funds and take advantage of lump sum investing https://investor.vanguard.com/investing ... t-lump-sum (assuming the markets are good over the next 15 years) and just work and use my income to pay bills (and if I’m lucky, make more money, find a ways to cut expenses even more), or get a new and higher paying job) so that I can contribute to my 401K and my Roth IRA.

Or, I could do a little of both….

I could pay myself $31,000 for three years ($93,000) while maxing out the retirement accounts each year, and invest $207,000 now to take advantage of LUMP SUM investment benefits This way I would build up the 401K, my Roth IRA, and a taxable account meant for retirement (that is, I could build these accounts assuming the market builds, dividends payoff, and compounding takes effect).

Now what are your thoughts that I have more precise numbers….

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Re: Build 401K and Live off Cash or Invest it in Vanguard? Help!

Post by teen persuasion » Mon Sep 10, 2018 9:24 am

ExitStageLeft wrote:
Sat Sep 08, 2018 9:52 am
Obviously a combination. I personally would lump sum it all into a taxable account consistent with your asset allocation. I would also max out the tax-advantaged savings at work. If is necessary to take occasionally out some of the taxable to meet monthly expenses then do so. There's no false equivalence here, you can both invest the sum and you can maximize your tax-advantaged savings. Just hold back a portion of the lump sum in a money market account in an amount that you are comfortable with.
+1

If you want to reap the benefits of being invested, then you should invest the taxable account, even if you intend to draw from it, with a portion in safer investments.

If you want to take advantage of the tax benefits of your employer's 401k plan, then contribute as much as you can for the greatest tax savings. I can't understand limiting yourself to 10% annually, or only to 3 years, or whatever. Do the math: compare your tax bill in each scenario ($0 to 401k, 10% to 401k, max to 401k) to see just how much each option saves or costs you. Those tax savings are $ you don't have to withdraw from the taxable account, they stay invested and growing.

Also do some forecasting. Assuming you do continue to max your 401k and Roth IRA by drawing down your taxable account until it is consumed, what will your traditional vs Roth ratio be at RMD time? What will you tax bill be based on SS plus RMDs? It might make sense to slow your conversion of taxable to traditional 401k as you approach retirement, keeping some taxable balance (though 3 years seems very short). Again, do the math (perhaps each year) to plot your trajectory.

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