Where to invest after 401k is full

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2000rpm
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Where to invest after 401k is full

Post by 2000rpm » Fri Aug 10, 2018 11:00 am

Situation: age 62, putting away enough to fill Roth 401k and 401k catchup. Have some extra income to save and wondering about two choices:
1) Non-deductible traditional IRA (not eligible for Roth IRA or deductible traditional IRA)
2) Just save it in taxable account

Expecting to be in 24% tax bracket in retirement due to RMD's.

Normal thinking says put it in #1 tax deferred space. In both cases the contributions are already taxed, so that's a wash. If I put it in #1 traditional IRA, gains are tax deferred, and taxed at normal income rates later. If I put it in #2, and commit to put it in TSM, the gains are "mostly" tax deferred (I realize there are some taxable dividends, but most of it will be capital gain). The tax rate on the gains will be 15% long term capital gains, instead of 24% normal income (mostly).

So it seems that #2 is a better choice (just save it and put it in TSM). Am I thinking this correctly?

nolesrule
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Re: Where to invest after 401k is full

Post by nolesrule » Fri Aug 10, 2018 11:03 am

If you do not have any balance in Traditional IRAs, you have another option. You can make a non-deductible contribution to a traditional IRA and convert it to a Roth IRA. This is known as the Backdoor Roth.

2000rpm
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Re: Where to invest after 401k is full

Post by 2000rpm » Fri Aug 10, 2018 11:14 am

nolesrule wrote:
Fri Aug 10, 2018 11:03 am
If you do not have any balance in Traditional IRAs, you have another option. You can make a non-deductible contribution to a traditional IRA and convert it to a Roth IRA. This is known as the Backdoor Roth.
Yes - thanks. I have some already in traditional IRA - it would take some work to go down that route.

jwaxjwax
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Re: Where to invest after 401k is full

Post by jwaxjwax » Fri Aug 10, 2018 11:21 am

How much is in your traditional IRA?

If it's too much to convert and just pay the taxes on, have you considered generating self-employment income, opening a solo 401k and then rolling your IRA into the solo 401k? This avoids the pro rata rule.

2000rpm
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Re: Where to invest after 401k is full

Post by 2000rpm » Fri Aug 10, 2018 12:59 pm

The backdoor Roth discussion is interesting, but I have too much to consider it. In particular I saddled myself with a rookie mistake decades ago by combining deductible and non-deductible contributions into a traditional IRA. Generally I don't think you can roll such into a 401k of any origin.

I'd like to return to the question, given the circumstance, of whether in this case a non-deductible IRA contribution is wise, given the higher tax rate it would incur later in life? (#1 or #2)

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celia
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Re: Where to invest after 401k is full

Post by celia » Fri Aug 10, 2018 1:22 pm

2000rpm wrote:
Fri Aug 10, 2018 12:59 pm
The backdoor Roth discussion is interesting, but I have too much to consider it. In particular I saddled myself with a rookie mistake decades ago by combining deductible and non-deductible contributions into a traditional IRA. Generally I don't think you can roll such into a 401k of any origin.
Well, you'll have to face it sometime, as RMDs will start in 8 years. If you don't separate out the non-deductible contributions (but not their growth) now, you will forever have to pro rate the taxes on every single withdrawal. I think it is cleaner if you make a definite split now, while you still have access to rolling over into a 401k.

Hopefully you still have your records from the years you made the non-deductible contributions and reported the contributions as such to the IRS. If not, that would be the first step to clean up.

Then look at all of your traditional IRAs and add up all the non-deductible contributions.
Move that amount into a new traditional IRA in a MM account (so it won't change value during this process).
Roll over the remaining traditional IRAs to the 401k.
Convert the non-deductible contributions in the new IRA to your Roth. (no tax consequence if the non-deductible contributions were reported to the IRS)
Now you are ready to do backdoor Roths. Clean and clear from now on.

Come back at tax time if you end up with questions.

----------------------
Edit (to allow more Roth conversions): Since your tax rate will be higher later on, you might consider keeping some of the deductible contributions / growth (the pre-tax part) with the new IRA containing the non-deductible contributions. Then you can convert it along with the non-deductible contributions. The IRS will consider all this money (in all your traditional IRAs) as co-mingled whether it is in one account or not. You could even spread the conversions over 2 or 3 years (however long you have until you retire and roll the 401K into an IRA, if that is your plan), but each conversion will be partly taxable. Each conversion is thought of as containing some post-tax money and some pre-tax money and only the pre-tax money part will be taxed. But you should get all this converted before RMDs start and before you rollover more money into tIRAs. This will allow you to avoid the pro rata rule from then on.

If you will be doing backdoor Roths, the money will be contributed to this IRA as a non-deductible contribution. All the growth will be pre-tax. So before you do this, be sure you understand it all. You might post a hypothetical scenario of multi-year contributions and conversions and how much of each conversion you think will be taxed and we can confirm it for you before you start.

2000rpm
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Re: Where to invest after 401k is full

Post by 2000rpm » Fri Aug 10, 2018 2:15 pm

celia wrote:
Fri Aug 10, 2018 1:22 pm
2000rpm wrote:
Fri Aug 10, 2018 12:59 pm
The backdoor Roth discussion is interesting, but I have too much to consider it. In particular I saddled myself with a rookie mistake decades ago by combining deductible and non-deductible contributions into a traditional IRA. Generally I don't think you can roll such into a 401k of any origin.
Well, you'll have to face it sometime, as RMDs will start in 8 years. If you don't separate out the non-deductible contributions (but not their growth) now, you will forever have to pro rate the taxes on every single withdrawal. I think it is cleaner if you make a definite split now, while you still have access to rolling over into a 401k.

Hopefully you still have your records from the years you made the non-deductible contributions and reported the contributions as such to the IRS. If not, that would be the first step to clean up.

Then look at all of your traditional IRAs and add up all the non-deductible contributions.
Move that amount into a new traditional IRA in a MM account (so it won't change value during this process).
Roll over the remaining traditional IRAs to the 401k.
Convert the non-deductible contributions in the new IRA to your Roth. (no tax consequence if the non-deductible contributions were reported to the IRS)
Now you are ready to do backdoor Roths. Clean and clear from now on.

Come back at tax time if you end up with questions.
...
I hadn't considered that there was a process for "un-co-mingling" an IRA with deductible and non-deductible contributions. In your steps:
1. Then look at all of your traditional IRAs and add up all the non-deductible contributions.
2. Move that amount into a new traditional IRA in a MM account (so it won't change value during this process).
3. Roll over the remaining traditional IRAs to the 401k.
4. Convert the non-deductible contributions in the new IRA to your Roth. (no tax consequence if the non-deductible contributions were reported to the IRS)
At step 3 above, the IRS does not apply the same "pro-rata" rules to a roll-over as they do with a withdrawl/conversion? I'm allowed to roll over just the pre-tax and gains in that fashion?

After step 4 above, I've essentially zero-ed the basis on form 8606. I assume a correctly filled out form 8606 will show zero basis at that point and ongoing?

Tnx!

2000rpm
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Re: Where to invest after 401k is full

Post by 2000rpm » Fri Aug 10, 2018 2:56 pm

Well, running into an issue. The mingled deductible/non-deductible IRA is of course not a rollover IRA, and my current 401k won't accept rolling over an IRA that is not a rollover IRA. So I think that nixes the idea.

TIAX
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Re: Where to invest after 401k is full

Post by TIAX » Fri Aug 10, 2018 3:18 pm

2000rpm wrote:
Fri Aug 10, 2018 2:56 pm
Well, running into an issue. The mingled deductible/non-deductible IRA is of course not a rollover IRA, and my current 401k won't accept rolling over an IRA that is not a rollover IRA. So I think that nixes the idea.
Whoever you talked at your 401k has no idea what they're talking about. Ask for your Summary Plan descriptions (SPD) and plan documents and they will likely state that the 401k accepts incoming rollovers from IRAs. There is no such thing as a "rollover IRA" despite some custodians using the term to mean an IRA to which you have rolled over funds.

annebert
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Re: Where to invest after 401k is full

Post by annebert » Fri Aug 10, 2018 3:25 pm

If you are eligible for a high deductible health plan and can open an HSA, that's another route for untaxed savings because you contribute pre-tax and you never pay tax when you use the funds for medical expenses. But hurry up, you are ineligible for HSA once you are 65.

sixty40
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Re: Where to invest after 401k is full

Post by sixty40 » Fri Aug 10, 2018 5:03 pm

I currently do #2, invest in taxable account. It works for me, I can do with it as I please. Just have to strategize offsetting gains and losses when you sell, unless you are good at investing and have no losses.

patrick
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Re: Where to invest after 401k is full

Post by patrick » Fri Aug 10, 2018 7:13 pm

You might want to check if the 401k allows non-Roth after tax contributions. If so, you may be able to put quite a bit more than the usual in the 401k.

FunnelCakeBob
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Re: Where to invest after 401k is full

Post by FunnelCakeBob » Fri Aug 10, 2018 7:57 pm

While you're looking into untangling the co-mingled deductible and non-deductible IRA contributions, I'd go with door #2. As you noted, a taxable account does not have RMD as with an IRA. If you invest for long-term capital appreciation in this account, then your capital gains tax rate is 15%, rather than the anticipated 24% income tax rate. Having a taxable account gives you flexibility of drawing your next dollar once you've taken your RMD each year.

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celia
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Re: Where to invest after 401k is full

Post by celia » Fri Aug 10, 2018 8:37 pm

2000rpm wrote:
Fri Aug 10, 2018 2:15 pm
1. Then look at all of your traditional IRAs and add up all the non-deductible contributions.
2. Move that amount into a new traditional IRA in a MM account (so it won't change value during this process).
3. Roll over the remaining traditional IRAs to the 401k.
4. Convert the non-deductible contributions in the new IRA to your Roth. (no tax consequence if the non-deductible contributions were reported to the IRS)
At step 3 above, the IRS does not apply the same "pro-rata" rules to a roll-over as they do with a withdrawl/conversion? I'm allowed to roll over just the pre-tax and gains in that fashion?
Correct! A 401k is NOT ALLOWED to accept non-deductible contributions. If they knowingly did, I think the whole plan could become disqualified (tax-wise). If someone later finds out they accidentally rolled in non-deductible contributions, we encourage them to get them pulled out. (They will also be taxed again at withdrawal.) One poster tried to remove his that were rolled accidentally and he told us they wouldn't let him "un-roll" anything. We told him to say some of the rollover was non-deductible. When he told them, they wanted that money out ASAP! :D
After step 4 above, I've essentially zero-ed the basis on form 8606. I assume a correctly filled out form 8606 will show zero basis at that point and ongoing?
Correct, unless somehow the account lost money such as if the converted amount was less than the non-deductible contribution. Warning: keep that money in a Money Market account to prevent this.

2000rpm wrote:
Fri Aug 10, 2018 2:56 pm
Well, running into an issue. The mingled deductible/non-deductible IRA is of course not a rollover IRA, and my current 401k won't accept rolling over an IRA that is not a rollover IRA. So I think that nixes the idea.
Not necessarily. First, let's understand what a 401k may and may not do:
A 401K MAY NOT accept a non-deductible rollover (from any post-tax source--Roth 401k, Roth IRA, non-deductible tIRA contributions.
A 401K MAY accept money from a traditional IRA. Some do and some don't.
A 401K MAY accept money from another 401K. Most 401Ks accept this (but aren't required to).

Since you have the middle case, check out the plan documents to see what the official policy is. You probably see the problem some 401K custodians would have if the plan participants had a mix of deductible and non-deductible contributions in an IRA. They wouldn't want to be responsible for accidentally accepting non-deductible contributions.
TIAX wrote:
Fri Aug 10, 2018 3:18 pm
Whoever you talked at your 401k has no idea what they're talking about. Ask for your Summary Plan descriptions (SPD) and plan documents and they will likely state that the 401k accepts incoming rollovers from IRAs.
Maybe or maybe not.
There is no such thing as a "rollover IRA" despite some custodians using the term to mean an IRA to which you have rolled over funds.
I disagree. I have one. It has ROLLOVER IRA in the name of the account with my name. They were very common until 8 to 10 years ago when they IRS loosened the rules of allowing them to basically be interchangeable with other traditional IRAs. I think a lot of people just wanted to simplify their accounts. But I think they should have left the distinction as to where the source of the money came from as we now-a-day have many people trying to do backdoor Roths but first have to move excess funds to their 401K. When they loosened the rules very few people knew about the backdoor Roth, but now it is more like mainstream knowledge. And since tIRAs have been in existence for 10 years longer by now, their account balances tend to be bigger. So the 401K rollover is becoming more important.

If your custodian won't accept the separated money (after reviewing plan documents), there are two options that might help you.

1. If you become self-employed for a short time before starting RMDs, you could get your own 401K plan and do the 401K rollover. But to be legit, you really need to be earning money. Or possibly change employers?

2. If the balance in the tIRA is low enough that it is feasible to convert the whole account in a few years, start doing that. DON'T rollover your 401K to the tIRA until after there is a year-end balance where all your tIRAs are empty.

bdpb
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Re: Where to invest after 401k is full

Post by bdpb » Sat Aug 11, 2018 12:27 pm

2000rpm wrote:
Fri Aug 10, 2018 11:00 am
Situation: age 62, putting away enough to fill Roth 401k and 401k catchup. Have some extra income to save and wondering about two choices:
1) Non-deductible traditional IRA (not eligible for Roth IRA or deductible traditional IRA)
You should change your Roth 401k contributions to deductible and make the equivalent Roth conversion from your IRA.

It will effectively put you in the same place on current year taxes and allow you to remove future taxation of the earnings on the non-deductible contributions proportionately converted to Roth.

If you expect your tax brackets to be the same now and at withdrawal then there may be benefit to using extra taxable funds to convert even more IRA to Roth.

2000rpm
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Re: Where to invest after 401k is full

Post by 2000rpm » Sat Aug 11, 2018 8:10 pm

bdpb wrote:
Sat Aug 11, 2018 12:27 pm
2000rpm wrote:
Fri Aug 10, 2018 11:00 am
Situation: age 62, putting away enough to fill Roth 401k and 401k catchup. Have some extra income to save and wondering about two choices:
1) Non-deductible traditional IRA (not eligible for Roth IRA or deductible traditional IRA)
You should change your Roth 401k contributions to deductible and make the equivalent Roth conversion from your IRA.

It will effectively put you in the same place on current year taxes and allow you to remove future taxation of the earnings on the non-deductible contributions proportionately converted to Roth.

If you expect your tax brackets to be the same now and at withdrawal then there may be benefit to using extra taxable funds to convert even more IRA to Roth.
Interesting idea. It seems like a wash though. It does remove future taxation of the gain on the converted funds. It however adds future taxation of the gain on 401k contributions that would have been Roth but are now "traditional".

bdpb
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Re: Where to invest after 401k is full

Post by bdpb » Sat Aug 11, 2018 9:48 pm

2000rpm wrote:
Sat Aug 11, 2018 8:10 pm
bdpb wrote:
Sat Aug 11, 2018 12:27 pm
2000rpm wrote:
Fri Aug 10, 2018 11:00 am
Situation: age 62, putting away enough to fill Roth 401k and 401k catchup. Have some extra income to save and wondering about two choices:
1) Non-deductible traditional IRA (not eligible for Roth IRA or deductible traditional IRA)
You should change your Roth 401k contributions to deductible and make the equivalent Roth conversion from your IRA.

It will effectively put you in the same place on current year taxes and allow you to remove future taxation of the earnings on the non-deductible contributions proportionately converted to Roth.

If you expect your tax brackets to be the same now and at withdrawal then there may be benefit to using extra taxable funds to convert even more IRA to Roth.
Interesting idea. It seems like a wash though. It does remove future taxation of the gain on the converted funds. It however adds future taxation of the gain on 401k contributions that would have been Roth but are now "traditional".
That's also a wash. The future taxation of the gain on the IRA is removed by converting to Roth.

The net gain comes strictly from removing the non-deductible contributions from the IRA.

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