Ways to maximize savings for retirement - If you are already maxing out your 401K

[npaden]

I get a chuckle out of some of the posts talking about investment advice and how much that is worth on a hunting forum, but I've actually read some fairly good ideas in a few of them.

I thought I would share one option that I'm aware of that allows people to put a little extra toward retirement if they are already maximizing their 401(k) contributions.

Depending on your income level, you can also make a contribution to a Roth IRA, but if you are over the income limit to contribute to a ROTH IRA, you can contribute to a traditional IRA (not tax deductible) and then immediately convert the traditional IRA to a ROTH IRA. Essentially this takes away the income limit for the ROTH IRA. For 2020, you can contribute up to $6,000 into an IRA if you are under 50 and $7,000 if you are over 50.

This is in addition to your 401(k) contributions. That is a completely separate limit.

This won't work if you already have a traditional IRA with a significant amount of money in it because you will be taxed on any earnings in the traditional IRA when it converts to the ROTH IRA. If you put the money in one day and then transfer it out to the ROTH the next day there really aren't any earnings to be taxed on though.

You can also contribute to a traditional IRA and then convert it to a ROTH IRA for your spouse as well even if they don't have earned income.

This probably doesn't apply to very many folks, but thought I would share because it can be helpful to some.

My 2 cents worth of free advice today.

Nathan

 

[buckbull]

Does the maximization of the 401k have any effect on converting a traditional IRA to Roth? Or is it your assertion that you should maximize your 401k before investing in IRA based on ROI?

This is good info to have. Thanks for posting.

 

[Deleted member 18333]

This is what I do as well.

I have an interesting investment problem that just came up again this year. I contribute the max into 401(k). However, at the end of the year when our plan goes through testing we fail on the ratio of contributions from highly compensated to non-highly compensated employees. Therefore, I get money returned to me, both my contributions as well as earnings on those contributions. Its not all of my 401(k) contributions but just a portion. This year its about 24%. That will get reported as income in this tax year and taxed accordingly. This has happened every year for the last three years. I have been taking that money, increasing it by the taxed amount and then putting that into an investment account to try to keep my investments whole but I still loose out on the employer match portion. Interested if this has happened to others and if anyone has a better idea than what I am doing to combat this.

 

[COEngineer]

The latest piece of advice that hadn't considered is that if you have access to an HSA (Health Savings Account), you should maximize your contributions to that first (before a 401k or IRA) because it is "triple tax advantaged." And then you should keep your HSA funds into retirement (instead of spending them on healthcare each year; pay your medical bills out of pocket).

https://www.investopedia.com/articles/personal-finance/091615/how-use-your-hsa-retirement.asp

 

[npaden]

I have an interesting investment problem that just came up again this year. I contribute the max into 401(k). However, at the end of the year when our plan goes through testing we fail on the ratio of contributions from highly compensated to non-highly compensated employees. Therefore, I get money returned to me, both my contributions as well as earnings on those contributions. Its not all of my 401(k) contributions but just a portion. This year its about 24%. That will get reported as income in this tax year and taxed accordingly. This has happened every year for the last three years. I have been taking that money, increasing it by the taxed amount and then putting that into an investment account to try to keep my investments whole but I still loose out on the employer match portion. Interested if this has happened to others and if anyone has a better idea than what I am doing to combat this.

It's fairly common to see.

If you have any say in what your company is doing for match you should push for them to go to a "safe harbor" plan. There are a few different options but they are all pretty low in my option. Essentially a 4% match gets them to safe harbor.

What Is a Safe Harbor 401(k)?

A safe harbor 401(k) is a type of retirement plan that allows small-business owners to skirt around a specific Internal Revenue Service test or requirement.

www.thebalance.com

If your company is meeting the safe harbor requirements you don't get your contribution returned as a highly compensated employee even if they fail the discrimination testing.

 

[npaden]

Does the maximization of the 401k have any effect on converting a traditional IRA to Roth? Or is it your assertion that you should maximize your 401k before investing in IRA based on ROI?

This is good info to have. Thanks for posting.

Maximizing the 401k really doesn't have any effect on the IRA side of things. If you had a terrible 401k plan with high fees, limited investment options, etc. you might want to do your own thing in the IRA before you maxed out the 401k. Just make sure you are contributing enough to get the match on the 401k.

 

[Deleted member 18333]

If you have any say in what your company is doing for match you should push for them to go to a "safe harbor" plan. There are a few different options but they are all pretty low in my option. Essentially a 4% match gets them to safe harbor.

If your company is meeting the safe harbor requirements you don't get your contribution returned as a highly compensated employee even if they fail the discrimination testing.

Did not know that Safe Harbor would remove this issue. We have not gone the Safe Harbor route due to our vesting schedule. As I understand Safe Harbor requires automatic vesting. We have run under a 5 year vesting schedule as turnover was rather high in the past. Just got off the phone with our corporate HR executive and given the scale of our problem and the significant reduction in turnover in the last 5 years we are going to look into Safe Harbor. We already meet the match requirements for Safe Harbor Thanks for the advice. Proof that Texas still has a few good people.

 

[npaden]

Did not know that Safe Harbor would remove this issue. We have not gone the Safe Harbor route due to our vesting schedule. As I understand Safe Harbor requires automatic vesting. We have run under a 5 year vesting schedule as turnover was rather high in the past. Just got off the phone with our corporate HR executive and given the scale of our problem and the significant reduction in turnover in the last 5 years we are going to look into Safe Harbor. We already meet the match requirements for Safe Harbor Thanks for the advice. Proof that Texas still has a few good people.

I had forgotten about the immediate vesting required to be a safe harbor plan. I could see how that would be a pain in a high turnover environment.

It is nice to not have to worry about not being able to max out your 401k though.

 

[justinch]

Yikes, this conversation reminds me of my first job out of college doing discrimination testing for a large third party administrator.

 

[pre6422hornet]

[QUOTE="npaden, post: 2952020, member: 18996"

It is nice to not have to worry about not being able to max out your 401k though.
[/QUOTE]

Yeah that would be nice. Mine has been maxed out for over 15 years. 19 years ago my boss gave me some advice that I have tried to instill into anyone who would listen. " Every time you get a raise, say it is 3%. Increase your 401k that same amount until you hit the max. Then start taking one % and keeping it, the rest into an IRA."

I did that and I am glad I did. Last years 32% rate of return was like getting an entire years salary dumped into the account.

 

[Addicting]

I feel ignorance in reading this thread. Thank God for a DOD retirement where I don’t have to worry about this stuff. I have my TSP too but never had to worry about maxing it out.

 

[Deleted member 18333]

I feel ignorance in reading this thread. Thank God for a DOD retirement where I don’t have to worry about this stuff. I have my TSP too but never had to worry about maxing it out.

I felt just as ignorant reading the TSP thread a few weeks ago.

 

[Addicting]

I felt just as ignorant reading the TSP thread a few weeks ago.

For me it was a insurance policy if I didn’t make it to retirement. I started it back when I was a e3 making next to nothing. After I hit E4 I started putting my 2.5% raises into it. Fast forward 10 years and I was averaging about $410 per month into it. For the last 5 years it all went into a Roth. I’ve always had most of it in a lifecycle fund and the C fund. I’ve done OK and now it’s going to be left to grow on its own. After March 30 when I’m officially retired I can no longer put into it. If I keep a average 7-8% interest rate return I should have a extra 200-300k waiting for me when I’m 60. So with that, my wife’s 401k, and my pension we should be ok into our golden years.

 

[memtb]

Aside from from some of the aforementioned investment strategies, there are a few other things to consider! Attempt to have all large purchase items paid off at retirement. Small things along the journey make differences. Think long term when making purchases. Buy quality items and keep them for many years. You don’t need to drive the newest autos. You don’t need to spend extravagantly on housing, restaurants, concerts, ect. Buy your toys ( boats, rv’s, atv’, ect.) used......let someone else take the big depreciation on new items. You don’t have to life like a “monk”, just be smart and live frugal.

And lastly, try to take care of yourself physically. You certainly can’t prevent a catastrophic illness, but being physically active and eating healthy can pay long term benefits. Many people are financially ruined by health issues, or they are too unhealthy to enjoy the money saved for retirement! memtb

 

[mdhunter]

I do this as well, I thought it was referred to as a “reverse Roth”. Anyhow, do it if you can...

 

[Pucky Freak]

I get a chuckle out of some of the posts talking about investment advice and how much that is worth on a hunting forum, but I've actually read some fairly good ideas in a few of them.

There's a correlation here. Broke and foolish persons are not spending a ton on hunting. They're living paycheck to paycheck, buying lottery tickets, and/or paying a host of financial institutions a pile of interest every month. Manage your finances and retirement planning well, and your hunting expenses are worry-free and guilt-free.

This won't work if you already have a traditional IRA with a significant amount of money in it because you will be taxed on any earnings in the traditional IRA when it converts to the ROTH IRA. If you put the money in one day and then transfer it out to the ROTH the next day there really aren't any earnings to be taxed on though.

It can and does work in many situations. My wife left her employer of 5 years and her employer portfolio included a pension, 457/403 accounts, a 401(k), and 401(k) roth. The reason for the variety was ownership changes in the company and new investment offerings over the years. Everything but the 401(k) roth was pre-tax, and we converted it all to a Roth IRA. We estimated the taxes due, paid quarterly tax payments during the tax year, and saved up a couple thousand more dollars to pay Uncle Sam come time to file the return. End result is we have another 25-30 years to let the fund grow and when we withdraw it's tax free. Not a good idea if you're close to retirement and your retirement income will be low enough to benefit from a lower tax bracket, but otherwise it could be.

 

[Carbon]

Is there an upper income limit on having both the 401k and IRA and doing a roth conversion? I assume you do the conversion each year in the IRA? Thanks!

 

[Irrelevant]

I've just recently started thinking about maximizing my money. Really trying to make it work the hardest for me. I've always just thrown money into my 401k but you can really add a lot to your net worth over time by penny pinching and maximizing investments. As in we refi-ed then stopped paying extra on our house, this was our go to for many years, it is a very low risk "investment" but it is also several percent lower than other options out there.

I know I certainly appreciate the financial advice on here, it's not all good, but like political opinions it helps formulate my own plan by listening to what others are doing.

 

[westbranch]

Is there an upper income limit on having both the 401k and IRA and doing a roth conversion? I assume you do the conversion each year in the IRA? Thanks!

A "Backdoor Roth" comes into play for married couples at $193,000 AGI and $122,000 for filing single. Below that you can do a regular Roth. AGI limit bumps up slightly for 2020, and there is a phase out. There is also a "Mega Backdoor Roth" for 401k plans that allow it, common enough that there are a lot of personal finance bloggers and other articles that talk about it, but not available in most 401k plans.

Roth Conversions are another strategy that can work for people that are retiring and have both IRA and after tax investments available for spending to cover the taxes, or having a down income year due to business losses or other activities that will absorb the income. With historically low tax rates some people with high IRA and 401k account balances are trying to get as much converted as possible and paying taxes up to the 24% bracket (321k for 2019) and converting it to Roth. Good problem to have.

Some info from a random blog I found on google, has screenshots for using a Vanguard IRA: https://www.physicianonfire.com/backdoor/

 

[Nemont]

I have clients who maxed out their tax advantaged savings: ie IRA, Roth IRA, 403B's, 401K's etc and now many complain that the government is basically in control of when and how they can take their money out.


I watch my parents who are in their 80's and scrimped and scratched and saved, now they are on positive cash flow just with social security because they don't do much given their health. Seems a better life balance would be in order to do some of the bucket list things now.


I max out too but also am working on building assets and equity outside of the stock market. The market right now seems so juiced on low interest rates, continued FED easy money QE and Trillion dollar deficit spending that it has more downside risk than upside potential IMHO, which is worth zero btw




Just my two cents.

Nemont