Roth accounts and Boglehead Asset Allocation

[boiler717]

I’ve been doing a ton of research myself before our free Vanguard advisory meeting so I can use that as a check on developing our own plan without paying an advisor! I’d love your opinions.
I decided the Boglehead 3-fund portfolio would be best for us. I would prefer 4-fund but because of wanting to keep bonds in 401k we don’t have a good international bond fund. Asset allocation would be 15% US bonds, 25.5% international stocks, 59.5% US stocks. All funds are low expense ratio.
My big decision is to decide if we want to do some backdoor Roths and contribute to backdoor Roths in the future. We will likely have lower income in retirement but same bracket. Maybe 22% instead of 24% marginal at most, Right now everything is in traditional accounts.
We are 37 / 35 and have 3x current salary in retirement accounts. We have the following backdoor Roth options:
- DH current traditional IRA $13k and pay taxes this year
- DH old 401k $33k (would have to do the year after first one) and pay taxes next year
- I could immediately start doing backdoor Roths
- DH could do backdoor Roths after first 2 are done
I’m also trying to decide if we need to keep maxing out 401ks or if we should drop down to match amounts, especially if we do backdoor Roths. The calculators I was using kept telling me I was behind, but when I look at a retirement fund of 25x annual expenses (instead of 80% of income) we are on track to have that in less than 10-12 years (depending on if our mortgage is paid off or not). We don’t really have any early retirement goals (both are very fortunate with flexible jobs). I think an early retirement for us would still be 20+ years away. But I’m also wondering if we should consider doing some taxable accounts so we have the option to use if we did end up wanting to retire before 59.
Right now we are saving 18.8% for retirement including employer contributions. If we dropped down to just match we would be at 13.3% for this year and 15.4% once DH could do Roths. If we did max 401ks plus Roths it would be 23%. Decreasing contributions would be split between a basement reno savings and charitable giving. Any thoughts on this?

[sometimesrunner]

Is the "old 401k" still in a 401k plan, or did you roll it over to an IRA and you're still referring to it as a 401k? If it's truly still in a 401k plan, I'd just leave it in the plan to avoid the taxes.
What *I* would do is make a traditional, non-deductible contribution for your H for 2020 (so he now has 19k in his account), roll over $12k to the roth in 2021 so you'll pay tax on roughly $7,800 of his trad ira in 2021. Next year repeat the process with the remaining funds in his IRA. This way you spread out the tax without losing the years of contributions. For you I would do the backdoor immediately. I personally love seeing my retirement numbers get higher, so I wouldn't decrease your work contributions, but you're in a good place and $12k extra is a lot to come out of a budget each year.

[boiler717]

Feb 19, 2021 18:28:04 GMT -5 sometimesrunner said:

Is the "old 401k" still in a 401k plan, or did you roll it over to an IRA and you're still referring to it as a 401k? If it's truly still in a 401k plan, I'd just leave it in the plan to avoid the taxes.
What *I* would do is make a traditional, non-deductible contribution for your H for 2020 (so he now has 19k in his account), roll over $12k to the roth in 2021 so you'll pay tax on roughly $7,800 of his trad ira in 2021. Next year repeat the process with the remaining funds in his IRA. This way you spread out the tax without losing the years of contributions. For you I would do the backdoor immediately. I personally love seeing my retirement numbers get higher, so I wouldn't decrease your work contributions, but you're in a good place and $12k extra is a lot to come out of a budget each year.

They are in old 401ks. We can also rollover to current 401ks. Good idea about spreading out the roll over that way.

[tcu2003]

If you can max your 401ks and the backdoor Roths, I would do that. You can always remove what you have contributed to the Roths before retirement age, so that gives you some added flexibility if you retire early.

And, as you get raises, you can then also contribute to a taxable account if you’re not in a position to do so now.

[Poppy]

You should start doing backdoor roth immediately since you're paying taxes on that money one way or another (the contributions are post tax). If you leave the old 401(k) (or roll it into his new one if the plan allows and the fund options are equivalent/better), then that doesn't factor into his backdoor roth.

If it were me, I would probably just go ahead and roll over his ira immediately to simplify the accounting/tax reporting (unless that income will push you over some tax break phaseout, which I doubt if you don't qualify for direct Roth contributions). That way also any earnings you make in the meantime will not result in additional taxes.

Otherwise I think the plan sounds good!

ETA actually, you could check if his 401k plan would accept roll in of the traditional IRA. At my previous employer we had a Fidelity 401k and they accepted roll in for current enrollees (unfortunately, I waited to look into this until I changed employers and at that time they would not accept the roll in). I will try to find you a reference.

[Poppy]

thefinancebuff.com/the-backdoor-roth-ira-a-complete-how-to.html

See step 1.

[boiler717]

I think right now we can’t swing $12k to Roths AND maxing out 401ks. So I think the question is more should we reduce 401k to have Roth contributions? This post makes me think we should prioritizing maxing out 401ks, but I am worried our RMDs will put us in a higher bracket in retirement than what I’m expecting to withdraw.

www.madfientist.com/how-to-access-retirement-funds-early/

[Poppy]

Ah, sorry, I didn't quite get what you were asking.

Fundamentally, I don't think we can answer how you prioritize retirement vs basement remodel and charitable giving. That is something you need to weigh. For me, retirement calculators are only so helpful because there is so much room for fudging the numbers (assumptions on return, inflation, tax rates, retirement money needs...). It's a good place to start but you can't get absolute clarity.

However, once you decide how much to save, then the decisions get a little easier.

There are several ways that you can start accessing retirement funds early if you get to retire early. You can withdraw Roth contributions. You can start taking 401k distributions at 55. SEPPs. So I personally don't worry too much about that aspect.

One strategy you haven't mentioned is that you could possibly do some Roth conversions after you retire early, assuming your income is lower then.

But in general, unless you are maxing out 401k or have terrible investment options, I find (non-Roth) 401k to make the most sense at your income level.

thefinancebuff.com/case-against-roth-401k.html

[winemaker06]

For the Backdoor Roth eligibility and taxes - if you're happy enough with 401k investment options, just wanted to make sure you're aware that you can usually roll a Traditional IRA into an existing 401k.
We did this several years ago to make it possible to do Backdoor Roths in future years. We haven't regretted it one bit!

[gt7301b]

It seems to me like there are two questions in this post..1) What is the right % to be saving for retirement and 2) What investment vehicle should you be using?

My view on saving for retirement is that it is a balance between being able to do things now and preparing for the future, but not knowing what the future will hold. Keeping that in mind I wouldn't increase your retirement at the expense of a basement reno and charitable giving, 18.8% is still a great savings rate.

I like having Roth options for the future because I suspect that tax rates will go up and I like both the flexibility that Roths provide for me and as an inherited asset. I think is is a good investment strategy to have a mix of taxed and nontaxed retirement vehicles. I would see if your husband's employer lets you roll the existing traditional into your existing 401k so you don't have to worry about the taxes associated with the Backdoor roth.

[tcu2003]

Feb 20, 2021 9:34:00 GMT -5 boiler717 said:

I think right now we can’t swing $12k to Roths AND maxing out 401ks. So I think the question is more should we reduce 401k to have Roth contributions? This post makes me think we should prioritizing maxing out 401ks, but I am worried our RMDs will put us in a higher bracket in retirement than what I’m expecting to withdraw.

www.madfientist.com/how-to-access-retirement-funds-early/

Do you have a Roth 401k option?

[boiler717]

Feb 22, 2021 11:21:42 GMT -5 tcu2003 said:

Feb 20, 2021 9:34:00 GMT -5 boiler717 said:

I think right now we can’t swing $12k to Roths AND maxing out 401ks. So I think the question is more should we reduce 401k to have Roth contributions? This post makes me think we should prioritizing maxing out 401ks, but I am worried our RMDs will put us in a higher bracket in retirement than what I’m expecting to withdraw.

www.madfientist.com/how-to-access-retirement-funds-early/

Do you have a Roth 401k option?

Yes

[awkwardpenguin]

Where does your concern about taxes on the RMDs come from?

Realistically there are only two possible scenarios:
1. You’re living off the RMD money, in which case you’d have to pay taxes anyway.
2. You have to take a larger RMD than you “need”, in which case you can afford the taxes.

What is the most optimal strategy depends on your tax rates during your working years vs. retirement. If they are roughly the same it’s a wash.

Remember that a $6000 Roth contribution is roughly equivalent to an $8000 traditional contribution if you’re in the 24% bracket. So the ability to invest more now offsets the need to pay taxes later.

[boiler717]

Feb 22, 2021 22:48:04 GMT -5 awkwardpenguin said:

Where does your concern about taxes on the RMDs come from?

Realistically there are only two possible scenarios:
1. You’re living off the RMD money, in which case you’d have to pay taxes anyway.
2. You have to take a larger RMD than you “need”, in which case you can afford the taxes.

What is the most optimal strategy depends on your tax rates during your working years vs. retirement. If they are roughly the same it’s a wash.

Remember that a $6000 Roth contribution is roughly equivalent to an $8000 traditional contribution if you’re in the 24% bracket. So the ability to invest more now offsets the need to pay taxes later.

Thanks! My concern was number 2 — from the numbers it looks like our RMD will be a higher tax bracket than what I was expecting based on spend. Good point about that means we can afford it! I didn’t think of it like that.
I still need to think about it more, but I am leaning towards not worrying about Roth accounts unless we feel like we can do it AFTER maxing out 401ks and our other goals. It doesn’t seem worth sacrificing our current lifestyle when our current retirement savings plan meets both our retirement goals and our current lifestyle. I am going to try to do a budget challenge to address some lifestyle creep we’ve had and put the savings into a “maybe Roth” bucket.

[gt7301b]

Feb 23, 2021 19:29:17 GMT -5 boiler717 said:

Feb 22, 2021 22:48:04 GMT -5 awkwardpenguin said:

Where does your concern about taxes on the RMDs come from?

Realistically there are only two possible scenarios:
1. You’re living off the RMD money, in which case you’d have to pay taxes anyway.
2. You have to take a larger RMD than you “need”, in which case you can afford the taxes.

What is the most optimal strategy depends on your tax rates during your working years vs. retirement. If they are roughly the same it’s a wash.

Remember that a $6000 Roth contribution is roughly equivalent to an $8000 traditional contribution if you’re in the 24% bracket. So the ability to invest more now offsets the need to pay taxes later.

Thanks! My concern was number 2 — from the numbers it looks like our RMD will be a higher tax bracket than what I was expecting based on spend. Good point about that means we can afford it! I didn’t think of it like that.
I still need to think about it more, but I am leaning towards not worrying about Roth accounts unless we feel like we can do it AFTER maxing out 401ks and our other goals. It doesn’t seem worth sacrificing our current lifestyle when our current retirement savings plan meets both our retirement goals and our current lifestyle. I am going to try to do a budget challenge to address some lifestyle creep we’ve had and put the savings into a “maybe Roth” bucket.

If you switch some of your 401k to a Roth 401k you will have some money in the non-taxed bucket, won't have to do a backdoor Roth, and will effectively saving more overall than if you only had a non-Roth 401k.