Roth IRA to supplement 401(k)?

^^My company just started offering a Roth 401k option this year, it adds another wrinkle to the discussion of 401k, Roth401k, Roth IRA. I’m honestly not quite sure what the best split is for the 401k/Roth 401k option, and I’m sure its different for everybody. If a guy is in the 22% bracket and maxing all accounts, what’s a reasonable percentage split between 401k/Roth401k? For this year I split my contribution 75/25 between the two, but then also max a Roth IRA.

It really is different for everybody, and partly it’s just speculation on where taxes may go in the future. Generally, the more time you have on your side, the more valuable the Roth and why I can justify using it even if you fall in the 22-24% brackets. If you’re 5-10 years from retirement, that argument becomes more difficult, as the tax-free part of the Roth (the growth) simply won’t be as significant as someone with 20-30 years of compounding earnings in front of them. Bear in mind, the matching dollars from your employer can’t go into the Roth (since they get to write off the contributions), so if you put in 5% Roth and they match 5%, your balance is really 50/50 Roth/Traditional. Myriad things at play when it comes to what makes sense for you; we generally look at multiple years of tax returns and a balance sheet before making a recommendation.

Sidenote – the guys talking about the conversions are spot on. An excellent option for early retirees (or even regular-age retirees that haven’t yet turned on SS) that maybe have some after tax monies to live on for a couple of years. There are some considerations once we hit Medicare age and/or turn on social security, as the taxation on SS and premiums for Medicare are mostly driven by your AGI/MAGI.

Yeah I think I need to go heavier toward Roth401k, I have 20 years left even for an early retirement.

I just set up a Roth IRA and was about to move some money around to deposit the first funds into it. It asked me if I wanted to submit it for 2020 or 2021…what does that mean? Do they still take contributions for 2020? If that’s the case I could see an argument being made for contributing toward last year because I can still then hit the limit of maxing our for this year, but in my first year here I’m not sure I’ll end up maxing it out. Anyone have any thoughts on this?

Dan wrote:

I just set up a Roth IRA and was about to move some money around to deposit the first funds into it. It asked me if I wanted to submit it for 2020 or 2021…what does that mean? Do they still take contributions for 2020? If that’s the case I could see an argument being made for contributing toward last year because I can still then hit the limit of maxing our for this year, but in my first year here I’m not sure I’ll end up maxing it out. Anyone have any thoughts on this?

With an IRA you can usually invest in the previous year until April 15th.

Dan wrote:

I just set up a Roth IRA and was about to move some money around to deposit the first funds into it. It asked me if I wanted to submit it for 2020 or 2021…what does that mean? Do they still take contributions for 2020? If that’s the case I could see an argument being made for contributing toward last year because I can still then hit the limit of maxing our for this year, but in my first year here I’m not sure I’ll end up maxing it out. Anyone have any thoughts on this?

Yes you can still max out your 2020 ira until I believe april 15. No harm in filling up your 2020 allocation now and if you end up with excess funds later this year, then have the option to fill up for 2021

Good points, I can’t believe no one has mentioned an HSA (the other tax advantaged) investment option. It requires an employer to have high deductible health plan and offer an HSA. But depending on your financial situation (and the expense ratio of the investment plans within that HSA) it can be the next best option after putting in 401k percent to hit your max employer match.

Google it, and then find some calculators that give you an idea if that’s where your money should go next.

Evan Pheneger wrote:

Good points, I can’t believe no one has mentioned an HSA (the other tax advantaged) investment option. It requires an employer to have high deductible health plan and offer an HSA. But depending on your financial situation (and the expense ratio of the investment plans within that HSA) it can be the next best option after putting in 401k percent to hit your max employer match.

Google it, and then find some calculators that give you an idea if that’s where your money should go next.

You can use a HSA for investment? I thought it was just a savings account you can use to pay medical bills with…

BigWerm wrote:

You can use a HSA for investment? I thought it was just a savings account you can use to pay medical bills with…

I think you need $1000 minimum usually (always?) and then amounts over that can be invested. When you retire withdrawing for health expenses is tax-free or you can withdraw for anything like it was an IRA.

BigWerm wrote:

You can use a HSA for investment? I thought it was just a savings account you can use to pay medical bills with…

Sort of, think of it this way. You save in a 401k, IRA, etc for retirement expenses. You know, bait, boats, Ice Castles, vacations, etc.

Since the money in an HSA is yours without expiration you “save” that for qualified medical expenses later in life. There is an assumption there will be plenty of medical bills waiting to gobble this up.

Couple advantages by paying out of pocket now and saving in HSA for later. If you know what medical emergency hits the fan there’s always a tax free nest egg waiting. Assuming you save in this until retirement you have tax free medical money waiting. When you withdraw for medical expenses this will also not impact your taxable income in retirement. That could mean a lower tax bracket or no reduction in Social Security.

Should this be the first place you put retirement savings, no. However it is another tool available that has a time and place depending on your situation. The tax benefits are higher with HSA than anything else with the trade off of restrictions on where it can be spent. No payroll tax, income tax, and tax free growth on returns.

My personal thought if you choose this route. Keep a health chunk basically liquid cash before investing in stocks/bonds. Say $10k-$15k should be liquid. That way if you need to tap into it pre-retirement for a medical emergency and it’s a down stock market you don’t take a bath.

BigWerm wrote:

You can use a HSA for investment? I thought it was just a savings account you can use to pay medical bills with…

Yes you can, but then that money can only be used for medical in the future, but its better than using your play money or retirement money.

And yes what PatK says is right. 1000 min in liquid then on top can be invested but its a good idea to keep whatever amount more in there incase of pre-retirement medical issue when market is down…Good talk all!

Interesting, thanks for the info!

For guys reading this–especially you younger guys in your 20s and 30s, I just hope you SERIOUSLY look into the advantages of the Roth and understand what this is and the advantages versus the 401k.

As I said earlier, this is my one big investment regret. I wish we had put more into the Roth much earlier in my career.

There are income limits to the Roth such that beyond a certain gross income you can’t contribute to a Roth (conditions apply). What happened is that both Mrs. Grouse and I is that we were both with companies that offered generous matches to their 401k plans. So for almost 20 years, we went all-in on maxing our 401k plans and did not contribute to a Roth. Then we passed the income limits and found out that we can’t contribute to a Roth unless we wanted to leave behind all the 401k matching money, which obviously makes no sense to do at this point because we’d lose the matching PLUS we’d lose the gross income reduction effect of 401k contributions.

Now, this is firmly in the camp of “complaining about first world problems”, but just so you understand why I’m saying get into the Roth if you can.

We have all our eggs in the 401k basket, so while we are going to be fine in retirement, when we hit MMD (mandator minimum distribution age) we are going to get socked for taxes big time on all that tax-deferred 401k money. That would not have happened to such a great degree had we done more Roth IRA earlier, we’d be getting much more money out tax-free.

We also have a bit of a ticking time bomb in terms of what will the tax rates be in 10 years? It won’t be bad if taxes stay similar to what they are now, but if they jack up the top brackets severely, a LOT of 401k holders that are in MMD territory are going to feel the tax bite big time.

We are currently in a strategy to convert money to Roth, but that is in no way as good of a deal as it would have been to simply sock away a lot in a Roth back 10-20 years ago and watch it grow, knowing all that was going to be tax free.

Also, some companies offer a “Roth inside the 401k” plan. Ask your plan administrator and if you don’t understand what this is and how it works, get some professional advice because using this option could also be a huge advantage.

Evan Pheneger wrote:

Good points, I can’t believe no one has mentioned an HSA (the other tax advantaged) investment option.

And YES to this as well! Mrs. Grouse and I have started putting money in an HSA because we KNOW the expenses are coming. Remember this is NOT use-it-or-lose-it. HSA money sits there until you need it.

We plan to use HSA money to pay for healthcare when we retire (before Medicare eligibility kicks in) and then to pay all the supplements. In the meantime, we’re on a high deduct plan so our healthcare spending so far has gone way down, but we could use the HSA if we suddenly got hit with a big deductible.

If all this stuff makes your head spin, get a CFP! Best money I spend every year is with our CFP.

BigWerm wrote:

<div class=”d4p-bbt-quote-title”>Evan Pheneger wrote:</div>
Good points, I can’t believe no one has mentioned an HSA (the other tax advantaged) investment option. It requires an employer to have high deductible health plan and offer an HSA. But depending on your financial situation (and the expense ratio of the investment plans within that HSA) it can be the next best option after putting in 401k percent to hit your max employer match.

Google it, and then find some calculators that give you an idea if that’s where your money should go next.

You can use a HSA for investment? I thought it was just a savings account you can use to pay medical bills with…

yes totally. tax free in, tax free growth, tax free out. its pretty amazing. many encourage at least a year of deductible in cash and then invest the rest. I do a simple allocation fund that matches my overall porfolio allocation.

Dan wrote:

I just set up a Roth IRA and was about to move some money around to deposit the first funds into it. It asked me if I wanted to submit it for 2020 or 2021…what does that mean? Do they still take contributions for 2020? If that’s the case I could see an argument being made for contributing toward last year because I can still then hit the limit of maxing our for this year, but in my first year here I’m not sure I’ll end up maxing it out. Anyone have any thoughts on this?

yeah make it a 2020 contribution. you can do that up to 6k by april. and then continue on until april of 2022 for 2021.

we got a gift in march of 2016. That was when i first got my crap together and opened roths for my wife and i. and was able to almost max out my wife and I’s separate roths with it for 2015.

Another plus for the HSA that many folks don’t know about is that you can use those pre-tax HSA dollars to pay for Medicare ‘Insurance’ i.e. a Medicare Supplement or Medicare Advantage plan. So once you hit the Medicare milestone it is another plus for having pre-tax HSA dollars available to pay for the insurance plan you opt for (if you opt for a supplemental plan).
And should you die before using all of your HSA funds for approved medical expenses the balance would pass on to your beneficiaries in the same manner as an IRA would.

The taxed money you put into your Roth you can pull out at any time with no penalty’s, so if you run into a job loss or other problems and need money you can pull out what you put in just like a savings account because you already paid tax on that money and they can not double tax it.

HSA is a no brainer. Once you hit age 65, you don’t have to use the money for qualified health expenses anymore. It’s basically a traditional IRA with an age 65 withdrawal age instead of 59.5, but you can pay health expenses tax free before or after age 65. If you withdraw the money for non-qualified (non health-related) expenses before age 65 you pay a 20% penalty plus taxes. If you withdraw the money for non-qualified expenses after age 65, you only page taxes (same as a traditional HRA).

The HSA contribution limit is low relative to retirement options, but as a supplemental account it’s just a great idea.

I fall in to the “young” category and taking full advantage of HSA’s, Roth’s etc.

HSA’s have been pretty well covered, the “triple tax free” part is great. Just to add on a few points.. If you pay out of pocket for medical expenses currently, you can still save receipts and submit them years down the road if you need some cash. Probably not worth saving the small expenses, and you have to keep tract of the receipts but it can be useful as a back up E fund or something.

If your current HSA provider has high expense ratios, fees, or not great investment options you can transfer the money to a different HSA. EX: people already at Fidelity will open up an HSA with them and make the transfer or roll over from their current provider and then have access to any Fidelity fund. You can’t eliminate your old HSA as that’s where your employer makes contributions, but it can give better options. There are some limitations and most only do this once a year from my understanding.

FYI Make sure you are familier with the “Five Year Rules” that apply to Roth IRAs.
As a retired person who had to start the required minimum distributions (RMD), I wish I had done more with Roths prior to retirement and wish I had converted some last year when RMDs were waived. Once you start your RMDs any conversions can only be made over and above your RMD amount.My wife and I have enough in Roths to make a nice emergency fund but it would have been nice to have enough to fund vacations or special purchases without the tax burden.

Wow so much good info. I hadn’t even considered an HSA as an investment tool and didn’t know that after 65 you can withdraw that money and use it for non medical things. I assume that any funds in an HSA will go to your primary beneficiaries if you die before you use it?

Right now Mrs Crappie and I both contribute around 8% to our 401k. The company match is 5%. I think I’m gonna scale back our contribution to the company match and take that extra we had been putting in there into a Roth.

We also invest what extra income we can afford into the market every year using etrade. Thats usually about 3k a year….

Right now I’m 39 and Mrs Crappie is 33. We both have ambitious plans of retiring at 55. My company has a program where if I retire by age 55 from the company I get benefits for life for my spouse and I. It’s a good place to work. I wouldn’t mind lasting another 16 years there and taking advantage of that benefit

Just thinking through this a bit…

With a 401k your money goes in tax free meaning more goes in to grow with investments. With a Roth money goes in already taxed so you have less going in to invest.

So the question really is which would net you more the additional money going in and invested in a 401k or the non taxed money taken out of the Roth in retirement. Not sure I explained that the best

Say you have 20k and you put 10k into a 401k and a taxed 10k in a Roth. So let’s say that means you pit 7500 into the Roth and 10k into the 401k. Let’s say the amount of time each will be invested is 20 years. Will that additional $2500 in the 401k earning over 20 years net you more than the taxes that will be applied on the backend….

Correct me if I’m thinking about it wrong or missing something. I feel like I have my thoughts slightly mixed up

Remember, your 2021 individual max contribution to a 401k is $19,500, Roth IRA is $6,000. You and Mrs. Crappie together can put away $39,000 in the 401k and $12.000 in Roth IRAs. Company match does not enter in to the 401k calculation.

In your situation, relatively young, desired retirement age of 55 with extended benefits upon retirement, I’d recommend maxing your Roth and putting in at least enough to get the full match in your 401k. There is is a 10% early withdrawal penalty for tapping your 401k before age 59 1/2 plus you pay income tax on withdrawals, having more cash in the Roth will insulate you from that penalty.

Brad Dimond wrote:

Remember, your 2021 individual max contribution to a 401k is $19,500, Roth IRA is $6,000. You and Mrs. Crappie together can put away $39,000 in the 401k and $12.000 in Roth IRAs.

There is a big * to this, however. Your MAGI must be less than $206,000 if married/filing jointly, or you are not eligible for a Roth contribution at all.

That’s why I said, for younger people, consider the Roth earlier, because you may not be eligible down the road.

crappie55369 wrote:

The company match is 5%. I think I’m gonna scale back our contribution to the company match and take that extra we had been putting in there into a Roth.

We also invest what extra income we can afford into the market every year using etrade. Thats usually about 3k a year….

Right now I’m 39 and Mrs Crappie is 33. We both have ambitious plans of retiring at 55. My company has a program where if I retire by age 55 from the company I get benefits for life for my spouse and I. It’s a good place to work. I wouldn’t mind lasting another 16 years there and taking advantage of that benefit

Crappie, I can speak from some experience here. The years FLY by once your 40. I believe I was 40 sometime last week and now I just turned 50.

Serious question for you. How much would it really hurt just to up your contributions to Roth or 401k and put that extra $3k away every year, no ifs/ands/buts?

See for yourself. Go to one of the online investment calculators and just plug in $3k a year and see what that extra does for you by the time your 55. Yeah.

You can make money, you can make do, but you can’t make time. Getting that extra money in NOW gives you the most valuable thing–time to watch it grow.

Also, just a word on employer-provided post-retirement benefits: Don’t count on it. Just be aware that unless these are in a union contract or other very binding agreement, they can be changed or scrapped at any time. IMO, you are way better off planning as if these benefits did not exist because a lot of people have been burned believing that these benefits would be there, only to have the company discontinue them.

Grouse

Grouse – Good point on Adjusted Gross Income limits. We all hope to make that threshold and if you do need to factor it in to your planning.

Brad Dimond wrote:

IMO, you are way better off planning as if these benefits did not exist because a lot of people have been burned believing that these benefits would be there, only to have the company discontinue them.

Bingo!
Not worth the piece of paper they may or may not be written on.

Here is my question to people smarter than I.
My wife and I both max out our 401K (split evenly between before and after tax). We both max out our HSA. And we both max out our IRA (we can not do a Roth because of income levels). Is there anywhere else we can put retirement money?

Brewery builder, have you looked into a back door roth? Other than that, i believe you’ve tapped your tax advantaged options.

I’ll have to look into that…thanks.

brewerybuilder wrote:

Here is my question to people smarter than I.
My wife and I both max out our 401K (split evenly between before and after-tax). We both max out our HSA. And we both max out our IRA (we can not do a Roth because of income levels). Is there anywhere else we can put retirement money?

Mrs Grouse and I are in the same situation.

Tax-advantaged options beyond what you mention are limited, but…

If you have kids and want to save for post HS education, then the 529 plans are your next tax-advantaged go-to.

Beyond that, it gets complicated and IMO this is the place to bring in professional advice.

Personally, the thing that concerned me most about retirement was encountering a situation where the market was in a prolonged recession just about the time we want to retire. I know a lot of people got caught in the Great Recession and they had to postpone retirement for years waiting for the market to come back. I know two very good people who got burned by getting caught too close to retirement with too much money in the market that then took a dump. One good friend had to delay retirement for almost 5 years, costing him some of the best years of his and his wife’s retirment.

The solution that was proposed to us was a type of annuity that pays a fixed, tax-free return as well as providing life and LTC insurance benefits (which we were buying separately anyway). We set up the annuity such that it will pay us our projected monthly living expenses at retirement plus some extra “fun” money.

I totally understand that annuities are not for everyone and some annuities are just plain bad deals, so as always understand before you invest. In our case, we were willing to trade the potential cost of an annuity (vs just taking the money and investing it in funds etc, which would most likely have a significantly higher return) for the security of having an income source that is fixed, will last our lifetimes, and will be available when we want it.

Investments in real estate can have significant tax advantages. This gets into some pretty complex territory. IMO, this is where you want your own CFP and CPA to both agree that the strategy going in is right for you and your goals and your risk tolerance.