I have told my wife that when its time for us to get a financial advisor we have to go with you guys. You guys have completely changed the way I view finances and I will always be grateful
It's hard to get in. Just because you want a financial advisor, doesn't mean you'll get one. Even with the assets to put under management. That's why these guys are doing us a big favor. LIke everything else, doctors, airline pilots etc, there seems to be a shortage. Getting this advice means a lot.
I contacted two financial advisors and told them what I was doing. I asked if they had any recommendations. They gave me some quick tips and recommendations. I didn't have to pay for anything. It's not a bad idea to talk to them. They didn't sell me anything. They only told me to do research into different accounts and strategies.
My growth of 401k is 2.74% in the past year. In this environment does investing under a brokerage with a custodian outperform a 401k? should I seek a pro to grow my funds on brokerage acct or still hold? I have 5 years to retirement. Happy to discuss.
Be careful not to be lured into the market too soon, this current situation has really opened my eyes to the importance of a good mentor on TH-cam or elsewhere knowing what he/she is doing .
the size of your retirement portfolio will overwhelmingly be a function of the performance of the stock and bond markets between now and when you start withdrawing from it.
The things that set the Money Guy Show apart from all the others on podcasts and TH-cam: 1. Relatability 2. Humor 3. Consistency 4. Authenticity 5. Generosity 6. Passion and energy
My 401k plan offers the after tax contribution and last year was my first year in which I could have opted into doing the mega back door option based on my income and didn’t because I didn’t understand if I truly could or not. So far in 2022, I’ve contributed close to $11k and hit my company’s $5k maximum match and once I hit the 2022 pre-tax max, I’ll add to the after tax option. This video is the best explanation I’ve seen online to describe it. Thank you!
We used to be full bore Roth 401k/403b and maxed it out. After recent income jumps, our financial advisor suggested we consider going to pre tax for considerable tax savings. We are maxing pre tax now. Still max out both Roth IRAs and have prior funds from past Roth 401k/403b that will be a nice diversified basis for future times to grow.
I am using traditional as I don’t make enough to max out both the 401k & 457 with catch up. If and when I get over the amount to allow me to max both out.. That would be the time to go with a Roth as of now I am using my federal income and state income tax savings to invest. Between the combination it allows around 20% plus additional to invest. 👍
My employer's plan at Fidelity has a Mega Backdoor Roth and it is very difficult to both maximize (i.e. reach the $61,000 limit) and not squeeze out employer contributions. The problem is that the plan allows contributions only in whole number percentages. For example putting in 10% might cause you to only reach $60,000, but putting in 11% might allow you to reach the limit, but squeeze out $1,000 of employer match. The ideal number would be something like 10.63%, but they don't allow it. They also don't have any guarantee about when changing your contribution rate will become effective, so increasing/reducing the percentage at a specific time is impossible. In practice, changes can take effect on the very next pay period, or the one that follows, or even the one after that. That's not even considering the complications from bonuses or other kinds of irregular pay. It's frustrating.
Love the Clark and Eddy example. :) Awesome reference. Your show has pushed me to get my savings rate up to 20% (not including employer match). Still got a long ways to go--but man, unlike the lottery "just imagine" -- I know I won't need to imagine. I just need to wait. The odds are simply that much better.
We cashed out a 401K back in 1991 to use as a down payment on a house. The gross disbursement was $33,000. Had we left it invested in an S&P 500 index fund, it would now be worth over $600,000. Costliest mistake we ever made.
@@GrantStinnett We sold it in 2001 for $100K. Zillow currently has it appraised at $179K. So yes, it was a costly mistake. And, actually I'm surprised it's even appraised that high considering it's now considered the bad part of town.
@@geodude7116 I would humbly disagree. In 90-91 our rent was $300 a month. Adjusted for inflation that's around $660 today and we could have lived there, at that rent price, without any rent increase for 6 or 7 more years until we needed more room when kids came along. Being financial ignorant at the time, we were told that a 401K loan or the IRA cash out would be a great option to help lower the mortgage payments and we listened even though we could have afforded the higher mortgage. We were also stupid when buying, as we bought during a sellers market. Had we waited another 8 months, we could have purchased the house about $10K cheaper. If we were still living there, our equity would only be $110,000 as we purchased the house for $69K. So in the end, I'd rather have the $600K in my IRA versus $110K of home equity. Ironically we made several of the same mistakes when we purchased out current home, except the IRA withdraw. In the end, we could have afforded the house without the larger down payment and had another $600K for retirement.
Saving and earning enough money so you can eventually do what you want is an interesting concept. My company allowed you to "buy" up to 2 additional weeks of vacation. I used to joke that I wished I could buy 52 weeks of vacation. I retired at 55, so in a sense I did.
Wow cool option Chief, that is super sweet. Im using a 4 pronged attack on mine with Traditional 401k, Roth 401k, HSA , and than a distant 4th would be a 529 college fund because I have a 3 year old boy.
You can also do Mega backdoor Roth contributions if your plan supports Roth In-Plan Conversions of After-Tax dollars. Rolling the funds out to a Roth IRA might be an unnecessary step. My previous employer even permitted automatic Roth In-Plan Conversion of After-Tax contributions making these seamless and without a tax impact.
I love that my work offers Roth 401k. Getting an extra 19.5k into Roth every year is sweet. Dislike the poor selection of funds. When I quit/retire I'll roll it into my personal Roth IRA so I can get it in better, cheaper funds.
So how does that work because I’m 28 wanting to start maxing my Roth 401K out on top of my 16% in my 401K. As far as I know Meryl Lynch invests into something named “American Funds” or something of that sort. Would my Roth 401K be invested in same stocks or would it go a different route? Don’t like to mess with what I’m investing in, I let Meryl Lynch take care of that but I would like to also know what the Roth 401k is invested in as well. Thanks!
@@tr3slech3s i'm not giving specific advice, but you will need to check to see if your company has a selection between ROTH 401k or Traditional "Pre-Tax" 401k. Usually you can split your "payroll contributions" in some manner between pre-tax and Roth. As for which funds you are looking at, you will need to a total list of funds from your 401k custodial company that are allowed for your specific 401k. Check everything, what expenses they charge, if there is anything front loaded, and also check the 10-15 year returns. if you can max out your Roth 401k every year and that brings you to save ~25% of your gross income, BRAVO! you are on your way to financial Mutant-hood!
It's a little tricky, but Maryland will allow a portion of 401k (defined contribution pension) withdraws in retirement to be excluded from the 7.75% or higher state and local income tax. Does not apply to IRA withdraws. A reason to leave some money in a 401k after retirement.
I have a bit of color to add on the backdoor 401K. So if your employer has "Roth In Plan Conversion" or something similar but termed differently, take advantage of that. My employer does. So I max out my $20K in pre-tax and Roth. Then I contribute to the After Tax 401K and then they automatically converts it to Roth but you MUST enable that In Plan Conversion feature. There is NO LIMIT to this as long as the overall total of Pre-Tax, Roth, Roth In Plan Conversion AND your employer match do not exceed $58K (last I check). This is AMAZING because you can save tens of thousands in ROTH! Go get it!!!
Lived this episode! I do have a few questions though: You explained the mega backdoor ROTH strategy can only be done in a regular/traditional 401k, up above and beyond the pre-tax limit. Just to clarify then, for a ROTH 401k, can you contribute only up to the max of 22,500 for 2023? Next, I just found a strategy on the ChooseFI podcast about the ROTH conversion ladder. Their "FOO" prioritizes pre-tax contributions into a 401k and IRA before a ROTH IRA because if you retire early, your "earned income/MGI" is $0 (assuming no real estate income and after-tax brokerage income as capital gains and not income). This would allow you to lower your taxable income in the year you contribute AND have a lower tax rate in a ROTH converstion on your 401k (with the standard deduction and assuming you take only what you need to spend). What do you think of this strategy?
I have a SAR SEP that has been around for more than 23 years from a previous employer thru T. Rowe Price. In current years we have created a traditional IRA with the same company. I was thinking about rolling over the SAR SEP, but then saw a video that mentioned some special protections that may not be a part of my Traditional IRA. Is this something to be holding to, or is there not enough there to keep me from rolling the SAR SEP?
My friend is 51 and her whole working life she has had a 401k loan. She counts down the days until it’s paid off so she can take out another one. It’s for vacations, fancy cars, etc.
Could the Mega Backdoor 401K still be advisable if in-service distributions are not allowed IF someone is planning on leaving their organization in the next couple of years?
Possibly, just plan on potentially getting hit with a tax bill down the road, as you would owe taxes on any of the growth. The point of the in-service distributions is that you can roll it over quickly before it grows, thereby avoiding any taxes on said growth. Also keep in mind that closing the mega Roth loophole has been proposed, so it's not impossible that the option could be closed eventually.
Are RMDs based on the total amount that I have in all non-ROTH accounts, or is the RMDs a percentage of each fund separately? It would seem if it is across the total of those accounts, then an investor could choose which fund(s) to draw upon based upon how they are performing that year.
Lost IRA. My bank has been sold 3 times and the new bank can't find my IRA. I have the certificate. How can I locate it? I've checked the missing money website for my state.
Technically, not "after 55" to get the 401k money. You can take it out in the year you turn 55. So, you could take it out on January 1 of the year you turn 55. You could be as young as 54 and 364 years old if your birthday is December 31st.
So true! That's Bo s coin phrase. Love the money guys. They are the best source of financial news on the internet, yes even better than Dave Ramsey that I feel focuses more on behavior rather than realities.
While there are few if any real protections for IRAs at the federal level, most states have enacted laws protecting IRA assets from creditors. However, it varies. The only federal law really protecting IRAs is the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 which will protect your IRA from bankruptcy proceedings up to $1 million (the amount is linked to inflation and goes up every year, I believe it's over $1.3 million now). Your 401(k) on the other hand enjoys far superior legal protections under ERISA. Essentially, the only people who can take your 401(k) money aside from you are your wife, kids or Uncle Sam. However, this protection needs to be weighed against other factors such as the investments available in your 401(k) plan and its fees. IRA investments are often far cheaper than investments in your 401(k), but it ultimately depends on what you have available in your 401(k) plan. If you are worried about your IRA and other assets being vulnerable due to legal issues, look into Umbrella insurance. Umbrella insurance will go over and above the maximum amounts offered by your auto, homeowners, and other insurance. Umbrella insurance can protect your assets from property damage, some lawsuits, injuries, and other situations where you may be on the hook for costs. (btw, this is not financial or legal advice, entertainment only, yada, yada, yada)
If your investment loses money, you’ll be in worse shape than they described. Investing on margin amplifiers both gains and losses. Personally I think it’s playing with fire.
FYI-Check state laws before you move your 401k to an ira. I believe legal protections exist for 401k almost everywhere, but roth ira's are a different story.
Yes. My state protects IRAs too thankfully. As soon as I learned they were off limits to people suing, or the government if we somehow commit a crime, I started maxing my contributions.
@@htimsrecneps I think these guys are more honest than most of them. If they make it too complicated no one would follow the channel. Just look at people like Graham Stephan. Not a lot of content. Constant plugs. Being paid to give recommendations. 3 million subscribers. People like the vapid almost non existent advice. These guys do give a lot of actual real information, even if they can't include everything. I don't mind the plugs for their advisory service in exchange. At least they aren't out here plugging coinbase for money and asking for ten likes during their 10 minute videos. I'm sure they've turned down a lot of influencer money. I am 100% certain that sort of thing is not in line with their values. I appreciate these guys. 100%.
on the 401k loans, isn’t also true you pay yourself back in after tax money? This would mean for tradition 401k you get taxed upfront and when you withdraw in retirement on the money you pay back.
question on the mega backdoor roth conversion: if you find out you do qualify, is there any reason not to do it? same question for the normal backdoor roth conversion strategy. Assuming that the only IRA funds you have are your non-deductible contributions made in the current year, it seems like you can either choose to get tax deferred returns or tax free returns, and tax free always wins right? Is there something I'm missing there?
Tax free doesn't always win. Every year you get a standard deduction, right now it's $25,900 for married people. If you could live on that $25,900, you could have invested in a traditional account, not pay taxes when the money went into the account and not pay taxes pulling it out.
There's also the example of relocation in retirement. Say you work in a high tax state like California. You could save in traditional accounts to avoid income tax, then move to a state like Florida that doesn't tax retirement withdrawals.
In this instance, tax-free does always win, because the comparison is to after-tax, not traditional. Going above the current $20,500 401k limit can only be done with after-tax money, meaning no tax-deduction, and said money would be withdrawn at income tax rates (just like traditional). It's not a Roth vs. traditional discussion, it's a Roth vs. after-tax discussion, and Roth is ALWAYS better than after-tax as long as you can abide by the age restrictions. So yes, for anything above the $20,500 limit, backdoor conversion to Roth ALWAYS makes sense.
@@Alan-jk1yi same with the regular backdoor roth then right? Because at the point when you are doing a backdoor roth your contributions are already non deductible so again it's after tax dollars so why not have tax free growth on those dollars instead of tax deferred as long as it is still allowed
@@DJHesterman Yes. If you can take a tax deduction for the traditional IRA, then whether or not to do a Roth conversion is your standard traditional vs. Roth debate, and you'd have to plug in your individual circumstances to figure out which is better. If however, you can't claim the deduction for traditional IRA contributions, then it becomes an after-tax vs. Roth comparison, and Roth ALWAYS wins that fight (again, as long as you can abide by the age restrictions).
I am 40 years old. I have $175,000 in a traditional 401K and $10,600.00 in a Roth 401k. I plan to retire at 70. I am confident that my traditional 401K will be worth over 2 million. Can they take the taxes that I will have to pay from the total value of my traditional 401K account? I am asking because my tax bill will probably be at least $400,000. Thanks
It probably keeps you tied to that employer though. The risky part is that if there’s a separation with them, you can be compelled to pay the loan back immediately.
@@chemquests true but I really don't plan on going anywhere any time soon. The opportunities my current employer is giving me outweigh what the current market has to offer in terms of advancement and learning opportunities and autonomy.
@@GeonQuuin it may not be up to you. That’s not a statement about your work or your employer’s feelings. Economic conditions may one day force their hand & you end up hosed. Not saying it’s likely, but it is the risk & it has some probability of happening. Your gambling it’s low & I wouldn’t personally roll the dice like that. Good luck!
Assuming the stars align and you're able to execute the Backdoor strategy...how does that strategy compare to a regular old Brokerage account? Where would this sit within the FOO?
Depends on your savings rate and goals. If you aren't hitting 25% without the mega backdoor Roth, I'd say the mega backdoor comes before a brokerage, as there is no point in using a taxable-brokerage for long term investing when you still have the option of a tax-free account for long-term savings. It's a choice between paying taxes in a standard brokerage, or not paying them with a mega Roth conversion, the math is very straightforward there; don't pay the taxes. If it's possible and it aligns with your goals, maxing the mega backdoor Roth before moving on to a taxable brokerage is the objectively right choice. The catch to that is if you will need the money before age 59.5. If you plan to retire early or for some reason will need the money earlier than that, then the flexibility that a taxable brokerage gives you may outweigh the objectively more tax efficient but age restricted Roth benefits of Roth. Basically, if you can be sure you won't need the money before 59.5, dump it into mega backdoor Roth. Any money you think you'll need before then, taxable brokerage.
Is this a good strategy? My company does not do an employer match but does offer a Roth 401k. I am 52 years old and can contribute $27K a year with catch up contributions. Plan would be to roll the Roth 401k into my Roth IRA when I retire. I know I am not getting any match and paying the taxes now but I really like I idea of being able to roll a large sum into Roth IRA. I invest in low cost index funds offered by Fidelity.
Another downside to a 401(k) loan is that it is pretax money that you pay back with after-tax money. Then it goes back into a pretax account that you will have to pay taxes on in the future. So you get double taxed.
@@Alan-jk1yi I have a 401(K) loan. I set it up through my employers 401K provider. My employer takes a payment weekly in addition to my regular contributions. The full amount, of the principle and interest shows up as "after tax deductions". I have seen many posts say that the principle payment is a pretax payment but it is not. This is spelled out by my 401(k) provider as well as others like Fidelity, Ameriprise and Equitable. So just say I have $100k pretax and borrow $50k and pay it back with after tax money then I have $100k pretax money again. When I take the $100k as a distribution, I pay income tax on the $100k. $50k of which I am paying ordinary income tax on for the 2nd time. This example doesn't even include interest on the loan, for simplification. Also current "after tax deductions" include Medicare, SS, state and local taxes. Most of which you will not be paying in retirement.
@@markwilhelm168 I don't think you're doing your math right, 401k loans aren't double taxed. First, you still pay FICA taxes on traditional 401k contributions; there's no escaping those with traditional, Roth, or after tax, so we can leave that out of the equation. Second, 401k loans aren't taxable, which means, you get a tax deduction on contributions, pay no taxes on the loan withdrawal, but then pay taxes to pay it back, canceling out the tax-free withdrawal potion, leaving you right back where you started, there's no double taxation there, that's how almost all loans work, this loan just happens to be taken from a pre-tax account. The only double taxation that occurs is on the interest.
@@Alan-jk1yi You don't pay FICA taxes on traditional 401k contributions until you make a withdrawal. Then it is taxed as ordinary income. You don't get a tax deduction when you contribute. The tax is deferred until you make the withdrawal. A loan is not taxed because it is not income. Therefore a loan is not a withdrawal. If you pay it back with after tax income then you have to pay tax on it, in the future, when you do withdraw it, as income, then you are paying tax, on the same money twice.
@@markwilhelm168 I'm sorry, but literally everything you just said is wrong. 401k contributions ARE NOT exempt from FICA taxes, you DON'T pay FICA taxes on withdrawals (you pay income taxes, which DOES NOT include FICA), and you DO get a tax deduction on traditional contributions (a deduction from your income taxes, not your FICA taxes). It is literally the opposite of everything you just said. Yes, the loan is not taxed, which is precisely why there is no double taxation. If you payed the income taxes on the loan, then payed it back with after-tax money, THAT would be double taxation, but that isn't the way it works. It's exactly the same as a regular loan (which isn't double taxed), it just happens to be coming out of a pre-tax bucket.
From what I remember researching, even if your 401k plan doesn't allow in-service distributions/conversions, if you're planning on leaving your employer soon, it should still be possible to do the mega backdoor Roth but it'll be a little less tax efficient and more work. Just follow the same steps and then rollover the aftertax amounts to your Roth IRA when you quit instead of doing it within the plan. Warning if you do this - any earnings on the aftertax contributions will be taxed as income (effectively the earnings are double taxed), so you will need to do some tax efficiency planning around this - sell low risk/return assets like bonds in trad 401k, rebuy those assets with the aftertax contributions (I think wash rules aren't relevant here since it's all within a tax advantaged account, but I would double check), then buy higher risk/return assets in the trad 401k. Effectively you're rebalancing your 401k but keeping the lower risk part of your portfolio in aftertax contributions to minimize earnings. Alternatively, fund the aftertax portion as late as possible and rollover ASAP after you leave your job so you minimize earnings.
I think I'm in the same place as @mickylord21 - I recently switched employers. Both have a pension option - the employer I left stopped contributing to the pension and I have less than 20k in that account. Doesn't seem worth it to let it sit for 25(ish) years and not earn much beyond minimal interest, given it would pay out about $60/month annuity at today's dollars. Seems like there's tons of options and each one suggests working with an FA to make the right decision for me. Its time!
I have told my wife that when its time for us to get a financial advisor we have to go with you guys. You guys have completely changed the way I view finances and I will always be grateful
It's hard to get in. Just because you want a financial advisor, doesn't mean you'll get one. Even with the assets to put under management. That's why these guys are doing us a big favor. LIke everything else, doctors, airline pilots etc, there seems to be a shortage. Getting this advice means a lot.
I contacted two financial advisors and told them what I was doing. I asked if they had any recommendations. They gave me some quick tips and recommendations. I didn't have to pay for anything. It's not a bad idea to talk to them. They didn't sell me anything. They only told me to do research into different accounts and strategies.
My growth of 401k is 2.74% in the past year. In this environment does investing under a brokerage with a custodian outperform a 401k? should I seek a pro to grow my funds on brokerage acct or still hold? I have 5 years to retirement. Happy to discuss.
Mine was 8.16%, I used to dca into etfs but I reconsidered the strategy since I am still way behind after the massive downturn since Jan last year
Be careful not to be lured into the market too soon, this current situation has really opened my eyes to the importance of a good mentor on TH-cam or elsewhere knowing what he/she is doing .
the size of your retirement portfolio will overwhelmingly be a function of the performance of the stock and bond markets between now and when you start withdrawing from it.
The things that set the Money Guy Show apart from all the others on podcasts and TH-cam:
1. Relatability
2. Humor
3. Consistency
4. Authenticity
5. Generosity
6. Passion and energy
Also variety
Also not pushing selling something or links to kickbacks from app ads
I just started putting my 401k contributions to Roth. I didn’t know we had that option until this year.
My 401k plan offers the after tax contribution and last year was my first year in which I could have opted into doing the mega back door option based on my income and didn’t because I didn’t understand if I truly could or not. So far in 2022, I’ve contributed close to $11k and hit my company’s $5k maximum match and once I hit the 2022 pre-tax max, I’ll add to the after tax option. This video is the best explanation I’ve seen online to describe it. Thank you!
Strange. As far as I know, the 401k contribution limit applies to cumulative total of pre tax and post tax contributions
We used to be full bore Roth 401k/403b and maxed it out. After recent income jumps, our financial advisor suggested we consider going to pre tax for considerable tax savings. We are maxing pre tax now. Still max out both Roth IRAs and have prior funds from past Roth 401k/403b that will be a nice diversified basis for future times to grow.
I prefer to max out ROTH 401k so that way i can save so much more money because everything in it is already mines. Also got ROTH IRA.
I am using traditional as I don’t make enough to max out both the 401k & 457 with catch up. If and when I get over the amount to allow me to max both out.. That would be the time to go with a Roth as of now I am using my federal income and state income tax savings to invest. Between the combination it allows around 20% plus additional to invest. 👍
This is good content. Keep this type of content up and the "reaction" style content limited. Just my two cents. I like you guys and all of your tips!
I have a feeling the reach of the reaction videos has been positive. Having said that, I agree with you.
@@michaelswami agreed it must be positive and very lucrative for them, but not what the true “financial mutants” come here for!
I agree 100% that real solid consistent content will win every time
This is right on time for me. I have a 401k meeting tomorrow. Hopefully I can get answers to all the questions y'all made me think of.
My employer's plan at Fidelity has a Mega Backdoor Roth and it is very difficult to both maximize (i.e. reach the $61,000 limit) and not squeeze out employer contributions. The problem is that the plan allows contributions only in whole number percentages. For example putting in 10% might cause you to only reach $60,000, but putting in 11% might allow you to reach the limit, but squeeze out $1,000 of employer match. The ideal number would be something like 10.63%, but they don't allow it. They also don't have any guarantee about when changing your contribution rate will become effective, so increasing/reducing the percentage at a specific time is impossible. In practice, changes can take effect on the very next pay period, or the one that follows, or even the one after that. That's not even considering the complications from bonuses or other kinds of irregular pay. It's frustrating.
Love the Clark and Eddy example. :) Awesome reference.
Your show has pushed me to get my savings rate up to 20% (not including employer match). Still got a long ways to go--but man, unlike the lottery "just imagine" -- I know I won't need to imagine. I just need to wait. The odds are simply that much better.
We've heard all this before, but I understand it can't all be brand spanking new. Still appreciate the effort.
We cashed out a 401K back in 1991 to use as a down payment on a house. The gross disbursement was $33,000. Had we left it invested in an S&P 500 index fund, it would now be worth over $600,000. Costliest mistake we ever made.
How much is the house worth now? Maybe that wasn’t as costly a mistake as you thought with real estate doing what it’s done recently.
@@GrantStinnett We sold it in 2001 for $100K. Zillow currently has it appraised at $179K. So yes, it was a costly mistake. And, actually I'm surprised it's even appraised that high considering it's now considered the bad part of town.
Good experience share, thanks!
But you had a house, so was it a mistake? Would you have spent more continuing to rent? I don't think it was a mistake if you consider all factors.
@@geodude7116 I would humbly disagree. In 90-91 our rent was $300 a month. Adjusted for inflation that's around $660 today and we could have lived there, at that rent price, without any rent increase for 6 or 7 more years until we needed more room when kids came along. Being financial ignorant at the time, we were told that a 401K loan or the IRA cash out would be a great option to help lower the mortgage payments and we listened even though we could have afforded the higher mortgage. We were also stupid when buying, as we bought during a sellers market. Had we waited another 8 months, we could have purchased the house about $10K cheaper. If we were still living there, our equity would only be $110,000 as we purchased the house for $69K. So in the end, I'd rather have the $600K in my IRA versus $110K of home equity. Ironically we made several of the same mistakes when we purchased out current home, except the IRA withdraw. In the end, we could have afforded the house without the larger down payment and had another $600K for retirement.
Saving and earning enough money so you can eventually do what you want is an interesting concept. My company allowed you to "buy" up to 2 additional weeks of vacation. I used to joke that I wished I could buy 52 weeks of vacation. I retired at 55, so in a sense I did.
If I planned on retiring when I’m 50, while maxing out investments what would I do once I get to 50 until 59? As far as supporting myself?
Wow cool option Chief, that is super sweet. Im using a 4 pronged attack on mine with Traditional 401k, Roth 401k, HSA , and than a distant 4th would be a 529 college fund because I have a 3 year old boy.
@@tr3slech3sTaxable account, contribution withdrawals from Roth Ira.
You can also do Mega backdoor Roth contributions if your plan supports Roth In-Plan Conversions of After-Tax dollars. Rolling the funds out to a Roth IRA might be an unnecessary step. My previous employer even permitted automatic Roth In-Plan Conversion of After-Tax contributions making these seamless and without a tax impact.
I love that my work offers Roth 401k. Getting an extra 19.5k into Roth every year is sweet. Dislike the poor selection of funds. When I quit/retire I'll roll it into my personal Roth IRA so I can get it in better, cheaper funds.
If you mentioning the limit, remember it's higher for 2022, at 20.5k.
@@vulpixelful oh awesome. Thanks ☺
yeah you are going to have to cause the ROTH 401k have RMDs! bump that junk! take control after you retire and roll that over.
So how does that work because I’m 28 wanting to start maxing my Roth 401K out on top of my 16% in my 401K. As far as I know Meryl Lynch invests into something named “American Funds” or something of that sort. Would my Roth 401K be invested in same stocks or would it go a different route? Don’t like to mess with what I’m investing in, I let Meryl Lynch take care of that but I would like to also know what the Roth 401k is invested in as well. Thanks!
@@tr3slech3s i'm not giving specific advice, but you will need to check to see if your company has a selection between ROTH 401k or Traditional "Pre-Tax" 401k. Usually you can split your "payroll contributions" in some manner between pre-tax and Roth.
As for which funds you are looking at, you will need to a total list of funds from your 401k custodial company that are allowed for your specific 401k. Check everything, what expenses they charge, if there is anything front loaded, and also check the 10-15 year returns.
if you can max out your Roth 401k every year and that brings you to save ~25% of your gross income, BRAVO! you are on your way to financial Mutant-hood!
When are we getting a dedicated money guy barbecue series? Give the people what they want!
It's a little tricky, but Maryland will allow a portion of 401k (defined contribution pension) withdraws in retirement to be excluded from the 7.75% or higher state and local income tax. Does not apply to IRA withdraws. A reason to leave some money in a 401k after retirement.
That Clark and Eddie example was well done! Bravo 👏🏾
I have a bit of color to add on the backdoor 401K. So if your employer has "Roth In Plan Conversion" or something similar but termed differently, take advantage of that. My employer does. So I max out my $20K in pre-tax and Roth. Then I contribute to the After Tax 401K and then they automatically converts it to Roth but you MUST enable that In Plan Conversion feature. There is NO LIMIT to this as long as the overall total of Pre-Tax, Roth, Roth In Plan Conversion AND your employer match do not exceed $58K (last I check). This is AMAZING because you can save tens of thousands in ROTH! Go get it!!!
Lived this episode! I do have a few questions though:
You explained the mega backdoor ROTH strategy can only be done in a regular/traditional 401k, up above and beyond the pre-tax limit. Just to clarify then, for a ROTH 401k, can you contribute only up to the max of 22,500 for 2023?
Next, I just found a strategy on the ChooseFI podcast about the ROTH conversion ladder. Their "FOO" prioritizes pre-tax contributions into a 401k and IRA before a ROTH IRA because if you retire early, your "earned income/MGI" is $0 (assuming no real estate income and after-tax brokerage income as capital gains and not income). This would allow you to lower your taxable income in the year you contribute AND have a lower tax rate in a ROTH converstion on your 401k (with the standard deduction and assuming you take only what you need to spend). What do you think of this strategy?
I have a SAR SEP that has been around for more than 23 years from a previous employer thru T. Rowe Price. In current years we have created a traditional IRA with the same company. I was thinking about rolling over the SAR SEP, but then saw a video that mentioned some special protections that may not be a part of my Traditional IRA. Is this something to be holding to, or is there not enough there to keep me from rolling the SAR SEP?
Another great! Thank you for putting this together and sharing with us!
My friend is 51 and her whole working life she has had a 401k loan. She counts down the days until it’s paid off so she can take out another one. It’s for vacations, fancy cars, etc.
Could the Mega Backdoor 401K still be advisable if in-service distributions are not allowed IF someone is planning on leaving their organization in the next couple of years?
Possibly, just plan on potentially getting hit with a tax bill down the road, as you would owe taxes on any of the growth. The point of the in-service distributions is that you can roll it over quickly before it grows, thereby avoiding any taxes on said growth. Also keep in mind that closing the mega Roth loophole has been proposed, so it's not impossible that the option could be closed eventually.
Does anyone else think it sounds funny when they say "taking the relationships to the next level?" 😆 Love it
Are RMDs based on the total amount that I have in all non-ROTH accounts, or is the RMDs a percentage of each fund separately? It would seem if it is across the total of those accounts, then an investor could choose which fund(s) to draw upon based upon how they are performing that year.
I thought Clark was a reference to Clark Howard, your recent guest and I kept screaming at the screen, “Clark would never make such a decision.”
Lost IRA. My bank has been sold 3 times and the new bank can't find my IRA. I have the certificate. How can I locate it? I've checked the missing money website for my state.
Technically, not "after 55" to get the 401k money. You can take it out in the year you turn 55. So, you could take it out on January 1 of the year you turn 55. You could be as young as 54 and 364 years old if your birthday is December 31st.
You mean 54 years and 1 day??
Thoughts on rolling over 401k/TSP into a Roth IRA and withdrawing only contributions using the 4% rule if I plan on retiring early?
Just once I want to hear Bo say, “Brian, I am NOT excited about todays show”
I bet he says it when their discussing possible shows to do so he doesn’t have to say it when filming.
So true! That's Bo s coin phrase. Love the money guys. They are the best source of financial news on the internet, yes even better than Dave Ramsey that I feel focuses more on behavior rather than realities.
What are your thoughts on using a 401k loan as a bridge to buy a new house not contingent on sale of a current home?
If it doesnt work out you could face an insane penalty. its like a 50 K risk. just sell contingent..
I miss the old set. It felt more warm.
What role should the loss of ERSIA protections when rolling to an IRA play in decision making?
While there are few if any real protections for IRAs at the federal level, most states have enacted laws protecting IRA assets from creditors. However, it varies. The only federal law really protecting IRAs is the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 which will protect your IRA from bankruptcy proceedings up to $1 million (the amount is linked to inflation and goes up every year, I believe it's over $1.3 million now). Your 401(k) on the other hand enjoys far superior legal protections under ERISA. Essentially, the only people who can take your 401(k) money aside from you are your wife, kids or Uncle Sam. However, this protection needs to be weighed against other factors such as the investments available in your 401(k) plan and its fees. IRA investments are often far cheaper than investments in your 401(k), but it ultimately depends on what you have available in your 401(k) plan. If you are worried about your IRA and other assets being vulnerable due to legal issues, look into Umbrella insurance. Umbrella insurance will go over and above the maximum amounts offered by your auto, homeowners, and other insurance. Umbrella insurance can protect your assets from property damage, some lawsuits, injuries, and other situations where you may be on the hook for costs. (btw, this is not financial or legal advice, entertainment only, yada, yada, yada)
Clark and Eddie!!!!! Great movie!!!
What is the data on how many people actually use a mega option? How can i get my employer to allow in service distributions?
The Rule of 55 is actually the Rule of 50 for some public servants, such as police officers and fire fighters.
Is it ok to do a 401k loan if you plan on investing it? Maybe on a rental property down payment, or to help build your brokerage portfolio?
If your investment loses money, you’ll be in worse shape than they described. Investing on margin amplifiers both gains and losses. Personally I think it’s playing with fire.
@@chemquests I would agree
I have one very secret: start invest at you first job, even better when you are young. Then see the snowballs in 20 years!
Clark and Eddie... haha I see what you did there
When I go to retire am I able to transfer my Roth 401k dollars tax free to a Roth IRA?
FYI-Check state laws before you move your 401k to an ira. I believe legal protections exist for 401k almost everywhere, but roth ira's are a different story.
Financial advisors like IRAs because they can manage it and charge AUM. One of the worst conflict of interests of an AUM fee model.
Yes. My state protects IRAs too thankfully. As soon as I learned they were off limits to people suing, or the government if we somehow commit a crime, I started maxing my contributions.
Most states are pretty good about it, but yeah it’s definitely equal to or lesser than an ERISA protected account.
@@harrychufan California protects one and not the other. It really varies state to state. People need to know this before they roll over.
@@htimsrecneps I think these guys are more honest than most of them. If they make it too complicated no one would follow the channel. Just look at people like Graham Stephan. Not a lot of content. Constant plugs. Being paid to give recommendations. 3 million subscribers. People like the vapid almost non existent advice. These guys do give a lot of actual real information, even if they can't include everything. I don't mind the plugs for their advisory service in exchange. At least they aren't out here plugging coinbase for money and asking for ten likes during their 10 minute videos. I'm sure they've turned down a lot of influencer money. I am 100% certain that sort of thing is not in line with their values. I appreciate these guys. 100%.
My company has a crap 401k (matches a percentage of your contributions) so I end up prioritizing my roth ira before anything else
I have an old 401k but its doing quite well so I don't want to touch it.
on the 401k loans, isn’t also true you pay yourself back in after tax money? This would mean for tradition 401k you get taxed upfront and when you withdraw in retirement on the money you pay back.
question on the mega backdoor roth conversion: if you find out you do qualify, is there any reason not to do it? same question for the normal backdoor roth conversion strategy. Assuming that the only IRA funds you have are your non-deductible contributions made in the current year, it seems like you can either choose to get tax deferred returns or tax free returns, and tax free always wins right? Is there something I'm missing there?
Tax free doesn't always win. Every year you get a standard deduction, right now it's $25,900 for married people. If you could live on that $25,900, you could have invested in a traditional account, not pay taxes when the money went into the account and not pay taxes pulling it out.
There's also the example of relocation in retirement. Say you work in a high tax state like California. You could save in traditional accounts to avoid income tax, then move to a state like Florida that doesn't tax retirement withdrawals.
In this instance, tax-free does always win, because the comparison is to after-tax, not traditional. Going above the current $20,500 401k limit can only be done with after-tax money, meaning no tax-deduction, and said money would be withdrawn at income tax rates (just like traditional). It's not a Roth vs. traditional discussion, it's a Roth vs. after-tax discussion, and Roth is ALWAYS better than after-tax as long as you can abide by the age restrictions.
So yes, for anything above the $20,500 limit, backdoor conversion to Roth ALWAYS makes sense.
@@Alan-jk1yi same with the regular backdoor roth then right? Because at the point when you are doing a backdoor roth your contributions are already non deductible so again it's after tax dollars so why not have tax free growth on those dollars instead of tax deferred as long as it is still allowed
@@DJHesterman Yes. If you can take a tax deduction for the traditional IRA, then whether or not to do a Roth conversion is your standard traditional vs. Roth debate, and you'd have to plug in your individual circumstances to figure out which is better. If however, you can't claim the deduction for traditional IRA contributions, then it becomes an after-tax vs. Roth comparison, and Roth ALWAYS wins that fight (again, as long as you can abide by the age restrictions).
I now have a 301(k)!
Conversion ladder?
Can we talk about how crazy the Charles Schwab website appears to be? Way to know your customer… could the font be any smaller?
I am 40 years old. I have $175,000 in a traditional 401K and $10,600.00 in a Roth 401k. I plan to retire at 70. I am confident that my traditional 401K will be worth over 2 million. Can they take the taxes that I will have to pay from the total value of my traditional 401K account? I am asking because my tax bill will probably be at least $400,000. Thanks
I took out a 401K loan and my work's plan didn't stop me from making a contribution or my employer match. The plan is with fidelity.
It probably keeps you tied to that employer though. The risky part is that if there’s a separation with them, you can be compelled to pay the loan back immediately.
@@chemquests true but I really don't plan on going anywhere any time soon. The opportunities my current employer is giving me outweigh what the current market has to offer in terms of advancement and learning opportunities and autonomy.
@@GeonQuuin it may not be up to you. That’s not a statement about your work or your employer’s feelings. Economic conditions may one day force their hand & you end up hosed. Not saying it’s likely, but it is the risk & it has some probability of happening. Your gambling it’s low & I wouldn’t personally roll the dice like that. Good luck!
Essentially what you can do is take out an annuitized amount from highest gross investment account and not be penalized that 10% penalty??
Assuming the stars align and you're able to execute the Backdoor strategy...how does that strategy compare to a regular old Brokerage account? Where would this sit within the FOO?
Depends on your savings rate and goals. If you aren't hitting 25% without the mega backdoor Roth, I'd say the mega backdoor comes before a brokerage, as there is no point in using a taxable-brokerage for long term investing when you still have the option of a tax-free account for long-term savings. It's a choice between paying taxes in a standard brokerage, or not paying them with a mega Roth conversion, the math is very straightforward there; don't pay the taxes. If it's possible and it aligns with your goals, maxing the mega backdoor Roth before moving on to a taxable brokerage is the objectively right choice.
The catch to that is if you will need the money before age 59.5. If you plan to retire early or for some reason will need the money earlier than that, then the flexibility that a taxable brokerage gives you may outweigh the objectively more tax efficient but age restricted Roth benefits of Roth. Basically, if you can be sure you won't need the money before 59.5, dump it into mega backdoor Roth. Any money you think you'll need before then, taxable brokerage.
Is this a good strategy? My company does not do an employer match but does offer a Roth 401k. I am 52 years old and can contribute $27K a year with catch up contributions. Plan would be to roll the Roth 401k into my Roth IRA when I retire. I know I am not getting any match and paying the taxes now but I really like I idea of being able to roll a large sum into Roth IRA. I invest in low cost index funds offered by Fidelity.
Yes since you can pull the money tax free. Alternative is you invest in a taxable account and will need to pay taxes on gains
Boeing matches 10%
No mention of solo 401k
Yea my 401k down 80k....
Omg 20 into the video and haven't got into the point
❤❤❤
Another downside to a 401(k) loan is that it is pretax money that you pay back with after-tax money. Then it goes back into a pretax account that you will have to pay taxes on in the future. So you get double taxed.
How are you paying it back with after-tax money? The contributions made to pay it back would still be pre-tax.
@@Alan-jk1yi I have a 401(K) loan. I set it up through my employers 401K provider. My employer takes a payment weekly in addition to my regular contributions. The full amount, of the principle and interest shows up as "after tax deductions". I have seen many posts say that the principle payment is a pretax payment but it is not. This is spelled out by my 401(k) provider as well as others like Fidelity, Ameriprise and Equitable. So just say I have $100k pretax and borrow $50k and pay it back with after tax money then I have $100k pretax money again. When I take the $100k as a distribution, I pay income tax on the $100k. $50k of which I am paying ordinary income tax on for the 2nd time. This example doesn't even include interest on the loan, for simplification. Also current "after tax deductions" include Medicare, SS, state and local taxes. Most of which you will not be paying in retirement.
@@markwilhelm168 I don't think you're doing your math right, 401k loans aren't double taxed. First, you still pay FICA taxes on traditional 401k contributions; there's no escaping those with traditional, Roth, or after tax, so we can leave that out of the equation. Second, 401k loans aren't taxable, which means, you get a tax deduction on contributions, pay no taxes on the loan withdrawal, but then pay taxes to pay it back, canceling out the tax-free withdrawal potion, leaving you right back where you started, there's no double taxation there, that's how almost all loans work, this loan just happens to be taken from a pre-tax account. The only double taxation that occurs is on the interest.
@@Alan-jk1yi You don't pay FICA taxes on traditional 401k contributions until you make a withdrawal. Then it is taxed as ordinary income. You don't get a tax deduction when you contribute. The tax is deferred until you make the withdrawal. A loan is not taxed because it is not income. Therefore a loan is not a withdrawal. If you pay it back with after tax income then you have to pay tax on it, in the future, when you do withdraw it, as income, then you are paying tax, on the same money twice.
@@markwilhelm168 I'm sorry, but literally everything you just said is wrong.
401k contributions ARE NOT exempt from FICA taxes, you DON'T pay FICA taxes on withdrawals (you pay income taxes, which DOES NOT include FICA), and you DO get a tax deduction on traditional contributions (a deduction from your income taxes, not your FICA taxes). It is literally the opposite of everything you just said.
Yes, the loan is not taxed, which is precisely why there is no double taxation. If you payed the income taxes on the loan, then payed it back with after-tax money, THAT would be double taxation, but that isn't the way it works. It's exactly the same as a regular loan (which isn't double taxed), it just happens to be coming out of a pre-tax bucket.
From what I remember researching, even if your 401k plan doesn't allow in-service distributions/conversions, if you're planning on leaving your employer soon, it should still be possible to do the mega backdoor Roth but it'll be a little less tax efficient and more work.
Just follow the same steps and then rollover the aftertax amounts to your Roth IRA when you quit instead of doing it within the plan.
Warning if you do this - any earnings on the aftertax contributions will be taxed as income (effectively the earnings are double taxed), so you will need to do some tax efficiency planning around this - sell low risk/return assets like bonds in trad 401k, rebuy those assets with the aftertax contributions (I think wash rules aren't relevant here since it's all within a tax advantaged account, but I would double check), then buy higher risk/return assets in the trad 401k. Effectively you're rebalancing your 401k but keeping the lower risk part of your portfolio in aftertax contributions to minimize earnings. Alternatively, fund the aftertax portion as late as possible and rollover ASAP after you leave your job so you minimize earnings.
I think I'm in the same place as @mickylord21 - I recently switched employers. Both have a pension option - the employer I left stopped contributing to the pension and I have less than 20k in that account. Doesn't seem worth it to let it sit for 25(ish) years and not earn much beyond minimal interest, given it would pay out about $60/month annuity at today's dollars. Seems like there's tons of options and each one suggests working with an FA to make the right decision for me.
Its time!