Where Next To Maximize Retirement Savings?

[Mr. Frugal]

Hi all! I want to aggressively increase my retirement contributions with the goal of FIRE in mind. I am trying to formulate my own personal plan but am having some difficulty determining the order in which I should fill the different accounts available to me and I would appreciate your advice.

I am a hospital employed health care professional and my MAGI last year was 186K. I am maxing out my contributions to my 403(b) and receiving a 6% match. After this, I’m not sure in what order I should be seeking to fill the different retirement vehicles available to me. My earning are too high to contribute to a traditional IRA and receive any tax benefits and I am close to being phased out entirely from contributing to a Roth. My hospital has a 457(b) plan but I am concerned about contributing to it due to the downsides outlined in Jim’s article here: https://www.whitecoatinvestor.com/should-you-use-your-457b/. It is a non-governmental plan and while remote, I think the chances of the hospital I work for going bankrupt (but likely being bought up) are higher than most. Plus, I think it is a fairly fee heavy laden plan. Next year we will have an HSA available to us and I plan to take advantage of contributing to it but at this point, it is not an option. Last of course would be a regular brokerage account. I do not think I can make after tax 403(b) contributions but haven’t really looked into it yet. These appear to be my personal options.

Additionally, I am married and my wife just started a small business so I have been trying to understand the different retirement account options available to her (Individual 401(k) & SEP-IRA - a SIMPLE IRA doesn't seem applicable) but am also not sure which would be best for her situation. She is in business with a 50/50 partner and they have no employees at this point but will be adding one employee later this year. Their business is in its infancy and while self sustaining it is not really profitable at this point so the maximum tax deductible employer contribution restriction of 25% of compensation would make her eligible contribution amount extremely low. We were able to receive a partial deduction on our taxes this past year by maxing out contributions to a traditional IRA for her.

So there you have it. What is the best and most tax efficient way for me to more aggressively save for retirement with FIRE as my goal? What should be my strategy and the right priority/order for contributing to the different retirement accounts that I have available to me? Thanks to all in advance for you advice.

[DMFA]

Backdoor Roth for both of you, solo 401(k) for her, HSA when available, consider 457 vs low-turnover, low-dividend holdings in a taxable account.

[Mr. Frugal]

Thanks for your advice DMFA. I am just wondering, why do you suggest we both do a Backdoor Roth when I can still contribute to one directly? Also, at this point in the year, I think my earnings will be less this year when compared to last.

[DMFA]

If you can do direct, do direct. But if you think there is a possibility your AGI will be above the minimum phase-out ($186,000 MFJ) for direct Roth contributions, then save yourself the trouble of withdrawing excess contributions vs recharacterizing and just do backdoor Roth from the beginning.

[childay]

Mr. Frugal wrote:

Thanks for your advice DMFA. I am just wondering, why do you suggest we both do a Backdoor Roth when I can still contribute to one directly? Also, at this point in the year, I think my earnings will be less this year when compared to last.

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I assume he was concerned you are close to the "phase out" income range.  So if you have unexpected income you would be able to contribute less than the 5500.  If you do a backdoor roth that is not an issue.

Otherwise I agree with DMFA except I also would be very hesitant to invest in hospital 457b (I am in similar situation at our hospital).  FIRE is going to require a large taxable account in a W2 job situation.

[Hatton]

Start a taxable account especially if you are thinking of FIRE.

[litovskyassetmanagement]

Mr. Frugal wrote:

Hi all! I want to aggressively increase my retirement contributions with the goal of FIRE in mind. I am trying to formulate my own personal plan but am having some difficulty determining the order in which I should fill the different accounts available to me and I would appreciate your advice.

I am a hospital employed health care professional and my MAGI last year was 186K. I am maxing out my contributions to my 403(b) and receiving a 6% match. After this, I’m not sure in what order I should be seeking to fill the different retirement vehicles available to me. My earning are too high to contribute to a traditional IRA and receive any tax benefits and I am close to being phased out entirely from contributing to a Roth. My hospital has a 457(b) plan but I am concerned about contributing to it due to the downsides outlined in Jim’s article here: https://www.whitecoatinvestor.com/should-you-use-your-457b/. It is a non-governmental plan and while remote, I think the chances of the hospital I work for going bankrupt (but likely being bought up) are higher than most. Plus, I think it is a fairly fee heavy laden plan. Next year we will have an HSA available to us and I plan to take advantage of contributing to it but at this point, it is not an option. Last of course would be a regular brokerage account. I do not think I can make after tax 403(b) contributions but haven’t really looked into it yet. These appear to be my personal options.

Additionally, I am married and my wife just started a small business so I have been trying to understand the different retirement account options available to her (Individual 401(k) & SEP-IRA – a SIMPLE IRA doesn’t seem applicable) but am also not sure which would be best for her situation. She is in business with a 50/50 partner and they have no employees at this point but will be adding one employee later this year. Their business is in its infancy and while self sustaining it is not really profitable at this point so the maximum tax deductible employer contribution restriction of 25% of compensation would make her eligible contribution amount extremely low. We were able to receive a partial deduction on our taxes this past year by maxing out contributions to a traditional IRA for her.

So there you have it. What is the best and most tax efficient way for me to more aggressively save for retirement with FIRE as my goal? What should be my strategy and the right priority/order for contributing to the different retirement accounts that I have available to me? Thanks to all in advance for you advice.

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A partnership with a non-spouse employee is a business that can adopt a range of plans:

http://quantiamd.com/player/ygrmdgmtk?cid=1467

The type of plan that your wife should adopt would depend on the needs of the other partner as well.  It can't be an individual plan because you'll be adding an employee.  But an employee would have to meet eligibility requirements and employer contribution would be subject to a vesting schedule with a 401k, and SEP also has eligibility rules.

A SEP can be an appropriate plan that depends on the demographics, and with one employee it might be doable. It gets very expensive very fast as you have to give all staff 25% of W2 if you want the partners to max out. SIMPLE is also a plan that can work for a small business:

http://www.dentaltown.com//Dentaltown/Article.aspx?i=403&aid=5625

It's a good startup plan.  Once the owners make significant money and can max out a 401k or a SEP, at that point they have to make a decision on what plan to set up.  If they plan to hire more staff, a 401k plan would be significantly better in terms of employer contribution cost (because you can exclude HCE staff, those who work 1000 hours or less, or 1099 contractors, while a SEP can exclude some staff based on their years of service with the practice, but thereafter they become fully eligible).

In short, if they can only make the 'SIMPLE' level contribution, start with a SIMPLE.  Typically a SEP does not work after the staff has worked for the business for 2 years, so after a SIMPLE they might want to do a 401k.  Again, this won't be a 'solo' or 'partnership' 401k, but a full blown ERISA 401k plan if they have non-spouse staff, but if they make enough and have few employees, this would work out very well.