Skip to main content
Message Font: Serif | Sans-Serif
 
No. of Recommendations: 0
Unclear exactly what your intended 'end game' might be - but you might consider the following scenario:

1) Before retirement I experienced a similar situation in that I never had access to a Roth 401K plan, was not eligible for a HSA account, was not eligible for a Roth IRA, plus I could not take a deduction for Traditional IRA because of income limits. IMO 401K plans are more valuable to the employee than is an IRA because of their higher contribution limits - which also implies higher tax deductions. In effect, the maximum size portfolio one can amass inside a 401K account is at least 3X-4X as as high as one can amass with an IRA account - simply because of contribution limits.

Do not understand your comment about 'additional after tax 401K savings'. Assuming your employer has a Traditional 401K plan, you can contribute pre-tax dollars up to limits set by the IRS - additional contributions would result in tax penalties. If your employer has a Roth 401K, there are still contribution limits which you cannot exceed. If you are talking about after-tax contributions to a Traditional IRA (up to $6000/yr would be allowed), then suggest you not do that because you have just subjected yourself to double taxation. If you have extra dollars to invest, then suggest you consider investing them in a taxable account at your brokerage. If you want to minimize taxes inside your taxable brokerage account, then stick with funds or stocks which do not pay dividends - dividends would be considered taxable income.

2) I am a believer in maximizing contributions to one's 401K (and 403B) account up until the day you actually retire and become an ex-employee. Have never met anyone who claimed to have too much money so that should not become an issue. Incidentally, I was fortunate in that I could contribute maximum amount to my 401K account for last two decades of my working career.

3) Beginning at age 59.5, I would perform an institution-to-institution rollover from my Traditional 401K balance to my Traditional Rollover IRA account which I had opened at one (or better would be two for risk mitigation reasons) widely-known brokerage(s). In my case, I did a rollover about every 3 months after age 59.5 for next 7 years - and completed final rollover shortly after retiring in 2013. Each rollover took about 5 minutes and several were performed online.
Note: I have a bias here as well. I would never leave my 401K funds 'behind' once I became an ex-employee. To me the only reasonable action is to perform a rollover to my Rollover IRA account which I maintain with a well-known brokerage. Once there, I can invest those funds in a manner which best suits my needs.

4) Under this scenario, you would have accumulated all of your Traditional 401K funds into one (or two) Traditional Rollover IRA accounts by shortly after quitting your 'day job'. Your wife should likely consider a similar arrangement for her 403B account - unless her 403B plan is specifically intended to provide her a pension. As for investment, inexperienced investors should stick with S&P Index Fund with expectation of long-term CAGR of about 8% - more demanding investors will likely need to invest in individual growth stocks.

From this point, you as a retiree have two choices with your Traditional Rollover IRA:

a) Choice #1: (My preference) Begin distributing (i.e., sell stock and declare income for tax purposes) 4% of your total Traditional IRA portfolio value as income each year. Current IRS rules on RMDs require that you start taking distributions by age 72. Your income tax from those distributions will amount to about 1% of total portfolio value - remaining deferred taxes remain deferred and help fuel growth of your portfolio. For example, RMDs for a $1M Traditional IRA will be about $40K annually of which about $10K would be paid in income tax. The brokerage can provide help if you are not familiar with this process. My personal preference is to continue trying to grow my portfolo during retirement years so long as I am physically and mentally capable of doing so.

b) Choice #2: You can perform a 'backdoor conversion' by converting all (or some) of your Traditional Rollover IRA funds to a Roth Rollover IRA - and pay income tax 'this year' for total amount you converted. From that point on, you should not have to take RMDs from your Roth IRA account nor should you have to pay income tax on any funds you 'distribute' from your Roth account. Downside with this approach is that you paid a significant percentage of your portfolio in income tax.

Final comment: I see a lot of tax-related arguments about such 'backdoor conversions' and why they are a good idea. Personally, I believe such conversions are a terrible idea. I cannot visualize a scenario in which such a conversion provides a positive benefit to the IRA owner. Further, I have a personal bias when it comes to investing - namely, my bias is to maximize contributions 'this year' while minimizing (or deferring taxes)and I plan to repeat this strategy each year (including retirement years) so long as I remain physically and mentally capable of doing so. Remember that those deferred taxes which remain deferred help fuel long-term compounded growth in value of one's portfolio. Suggest there is no reason that you cannot continue growing your portfolio value during retirement years - even after 'distributing' RMDs.
Print the post  

Announcements

What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.