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  • Advice on my investment plan needed please

    I had a post a few days ago and got a lot of good advice. I have updated our investment plan with advice given but still need some advice. First off thanks again for all the advice.

    Wife income=$125 age=31
    My income=$170 age=32

    Wife has 401k at work with 3% match with traditional or Roth 401k option

    I have simple IRA I am wanting to move to a solo 401k so I can do backdoor Roth without taxation pro rata IRA

    Plan:
    Max out wife's 401k to $18k with work match will be $21.5 total. Thinking should do Roth 401 not traditional but want advice.

    Max out my IRA to $12.5k with work match will be $17.5 total then convert to Solo 401k so I can do backdoor Roth as tax efficient as possible.

    Each do backdoor Roth IRA for $5.5k for a total of $11k in Roth IRA

    Max out HSA to $6.5k

    This would give us:
    $32.5k in after tax Roth accounts
    $17.5k in tax deferred solo 401k
    $6.5k in HSA
    Total is $56.5k a year on retirement savings

    We hope to have $30k-$50k a year in additional savings we will put in after tax brokerage funds at Vanguard and also invest in syndicated real estate in the future.

    Also will invest almost exclusively in Vanguard ETFs.

    Please let me know your thoughts. Thank you again for all the help and info.


  • #2
    Is there a reason you're working so hard to convert everything to a backdoor Roth? Seems like a lot of wasted tax paying. Long term you'll have more money if you take your tax money and invest it alongside your own (ie a deferred account). Its free leverage at your marginal rate.

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    • #3
      Figure we will be in high tax bracket in retirement also and we can put more into a Roth since it is after tax income.

      I am not set on doing this which is why I am asking you all for advice. Thanks for reply.

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      • #4
        You have space for both. Dont waste your deferred space, its extremely valuable.

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        • #5
          What do you mean zaphod? Aren't I maxing everything out I can?

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          • #6
            Look into a muni bond portfolio for taxable acct

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            • #7
              We or finally did a similar plan where I switched my company 401k from traditional to Roth 401k.

              The math shows that if you're in the same tax bracket then it's the same, if you think you're going to be in a higher bracket later then yes.

              So my thinking went. But really think if you're going to be in a higher tax bracket when you "retire" but actually you should think when you would withdraw.

              If you hold out and say don't do any withdraws till 70 1/2 when its mandatory. I'd be curious what you plan to be doing at that age where you have taxable income that exceeds what you're doing now, will you have taxable income above $300k at 70?

              Even if you throw your whole nest egg into VTI the dividends will be qualified which get taxed differently then earned.

              As we thought trough this I went back to the traditional 401k plan so I get the tax benefit now (our marginal tax rate is nearly to the top) you take money from the top (your top marginal tax rate), later when we "retire" I don't expect to have much taxable income in generating this the money I withdraw will be at the bottom of the marginal tax rate.

              Also will your work really let you just roll over into a solo 401k plan? Usually you need to quit the job before they let you move money.

              Is the simple IRA that high? Instead of trying to roll it into a 401k plan (not all plans allow this), just bite the bullet and pay the tax on the conversion w/ pro-rata. And since you're anticipating your tax bracket will be higher later (since you're purposely choosing Roth 401k over trad 401k) you want to pay the lower tax now.

              But again I would challenge if you really think you'll be in a higher tax bracket later when you're actually pulling the money out. But maybe!

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              • #8
                PenguinMD,

                Thanks for the detailed reply.

                With my wife's 401K that is the one where I am looking at doing traditional or roth.

                With my Simple IRA I can role it into a traditional account and then transfer from the traditional to a solo 401k.  I know I can because I have already transferred it from the Morgan Stanley Simple it is in now to a Vanguard Traditional IRA.  Planning on rolling it into a schwab or somewhere similar solo401k that accepts IRA roll ins.

                I don't think we will be in a higher tax bracket at retirement than now but figured it would be the same bracket or close.

                I am also guessing since tax rates now are rather low in my opinion from a historical standpoint they will go higher 30 years from now due to national debt and deficit.  Of course this is just a guess.

                Do you all think I should do traditional instead of roth?  How does my plan look overall?  Any suggestions.  Please let me know.

                Comment


                • #9




                  Look into a muni bond portfolio for taxable acct
                  Click to expand...


                  And I couldn't disagree more.
                  Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                  Comment


                  • #10
                    I have no problem with the objective of trying to get as much as possible into a tax-free Roth IRA as early as possible if you can pay the tax on any conversions from your taxable cash flow. The main advantages are:

                    1. 10- 12% long-term growth when in a properly diversified equity mutual fund/ETF portfolio (rebalanced annually) that is totally shielded from taxation

                    2. No requirement to take RMDs at age 70.5, therefore

                    3. Great estate planning tool


                    In my experience, by the time clients are ready to retire and have their finances in shape, they ABHOR being forced by the government to begin emptying their IRAs and paying tax on them at age 70.5. By then, they are thinking about the next generation and investing for them. And the next generation will be paying tax on inherited IRAs at their marginal tax rates, which probably will be higher than the retirees' bracket.

                    I think it's kind of nuts for people to predict what their tax bracket will be in retirement unless they are only a few years away and base the decision to contribute to or forego a Roth on that. Even then, you never know what the government will change. It's a crap shoot.

                    I also believe it is a mistake to put so much emphasis on taxation at the expense of growth in wealth. Which is why I would never advise anyone in their 30s to invest in bonds (or older, without a plan in place...and never bond funds.)
                    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                    Comment


                    • #11
                      If I recall correctly I think with a solo 401k can't you put up to $53k into there annually?

                      If you think the probability of you being in the same marginal tax or LOWER in the future is more likely then not, the reasoning goes you want to "defer the tax" till later.

                      If you're part of the boggleheads, mr mustache camp then you're likely subscribing to putting most investments into a basket of Vanguard index funds in which your future income will be primarily qualified dividends and you're actually retired w/o regular income coming in.

                      If you do believe you're in your highest marginal tax rate right now you're strategy is to "defer" as much tax paying till later. If that's the assumption then you would want to:

                      Setup the 401k as traditional and funding those as much as you can. If it's between $11k backdoor Roth IRA vs using that same money to stick in your solo 401k, you would want to put it in the solo 401k plan and max that first before messing with any backdoor Roth IRA.

                      At this point of time deferring as much money by putting them into a traditional 401k plan is more valuable then the Roth.

                      In our case we max out both my wife and my employer 401k plan and then do the backdoor Roth. But if we had the option to open a solo 401k and fund that, that would be more attractive but that would require my wife/boss to do some moonlighting which isn't going to happen. Every time I bring it up, her response is instead of thinking of ways for her to work more why don't I go and work some more --- end of conversation .

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                      • #12
                        My wife and I are both w2.  I do some contract work maybe once are year if that.  So only reason I am doing solo 401k is so I can get rid of my simple IRA and not have to pay tax on back door ira.  I don't have enough income coming in from contract work to put anymore money into solo 401k(maybe $1,000 a year).

                        So I am still at maxing out wife's 401k

                        Maxing out my simple IRA and turning into solo 401k each year.

                        doing backdoor roth ira's for both of us.

                        maxing hsa

                        Still trying to decide if roth or traditional for wife's 401k

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                        • #13
                          Have you had your SIMPLE at least 2 years? Don't forget there is a 25% penalty if you do anything other than move to another SIMPLE before then.
                          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                          • #14
                            yes i have

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                            • #15
                              If your wife's 401k plan similar to others you can always change your future contributions (Roth to traditional or back) so don't need to really over think it.

                              The most important thing is that you're actually savings so you're already starting in the right foot! Kudos!!!

                              You could start with Roth 401k and as you start making more and your joint income starts increasing your marginal tax bracket then switch to traditional 401k which will become more valuable.

                              In general the strategy is to defer the tax when your marginal tax rate will be the highest and pay the tax when it's not.

                              We did a similar strategy when both my wife and I took time off for our kid when he was born so at that time I favored Roth 401k, but now that we're both full-time I anticipate to be back at a much higher marginal rate and therefore choosing the Trad 401k now.

                              Best of luck!

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