Retirement savings options for high-income earner

[slackbox]

Let's say I make about $200,000 annually (married w/ kids). I have a $600K house on which I owe about $350K, and I have no other debt. I'm very thankful that I'm in a pretty good position right now, and I want to make smart retirement plans.

I max out my employeer-sponsored Roth 401K each year, but I'd like to save another $20K each year. I have about 30 years until retirement. My question is: where should I save an extra $20K each year?

Some of my random thoughts on the topic:
- I want my investing to be simple and "automatic" (ala David Bach)
- I want the investment(s) to be simple; hopefully just check on it once/twice a year.
- I make too much for a Roth IRA; I could do a traditional IRA then convert to Roth, but not sure if I should
- I can have a traditional IRA, but I can't deduct the contributions and I'm not sure if I get any benefit from it
- Should I just put all $20K each year into a Target 2040 retirement fund? Will I owe taxes each year on this?
- Should I just pay off my house quicker?

Where should a "high-income earner" put their money?

Thanks in advance.

[KTP]

- I make too much for a Roth IRA; I could do a traditional IRA then convert to Roth, but not sure if I should


Correction, you only have $15,000 now. The Roth backdoor is top priority for you.

[slackbox]

Thanks for the reply. So you're saying that I should put $5k for me (and I assume $5k for my wife) into a traditional IRA, then convert them to Roth IRAs. Is that correct?

Any suggestion for the remaining $10k that I need to put somewhere?

[KTP]

Thanks for the reply. So you're saying that I should put $5k for me (and I assume $5k for my wife) into a traditional IRA, then convert them to Roth IRAs. Is that correct?

Any suggestion for the remaining $10k that I need to put somewhere?

Oh, you have a wife. You now have a perfect solution for the $20K. Contribute $5,000 right now for you and your wife ($10,000 total) to a non deductable IRA. Contribute $5000 again at the beginning of January for each of you, then the next day, convert it to a Roth. Presto, both of you have $10,000 Roths, one of the BEST investment decisions you will have made for 2011.

[slackbox]

OK, I see that Roths for my wife and me is important. But I'm not looking for a one-time investment of $20K. Rather I'm wondering how I should invest $20K every year. I see that $10K can go into Roth IRAs (via the traditional IRA conversion for each of us). But what about the remaining $10K?

[jpg7n16]

I max out my employeer-sponsored Roth 401K each year, but I'd like to save another $20K each year.

If your income is super high, why do you use a Roth 401k instead of the traditional version?

[KTP]

OK, I see that Roths for my wife and me is important. But I'm not looking for a one-time investment of $20K. Rather I'm wondering how I should invest $20K every year. I see that $10K can go into Roth IRAs (via the traditional IRA conversion for each of us). But what about the remaining $10K?

Ah ok. You do realize that if you can keep up that type of income and saving rate, you can retire much sooner than 30 years in all liklihood? We are saving just a little more than you (about 50K/yr in addition to the 20K in 401K and 10K in backdoor Roths) and plan to retire in 6 years. We do not have kids though, so that is in our favor (although you do get tax credits that we do not).

I would recommend opening a Vanguard account and sticking the 10K money in a tax managed fund, which will somewhat limit the amount of tax you have to pay on your investements each year. Hopefully with even marginal returns you could have $250K in there in 15 years, maybe 1 million in your 401K and 300K in your Roths.

[slackbox]

If your income is super high, why do you use a Roth 401k instead of the traditional version?

I switched from the traditional 401K to the Roth a year or so ago because I wanted to take part in some "Roth" investments but I wasn't eligible for the Roth IRA. Now that I can do the IRA conversion to Roth, would it be wise to switch my 401K back to the traditional, non-Roth variant?

[Scanner]

Municipal bonds are preferred vehicles for high income earners.

They aren't tax deductible but all interest on bonds purchased in teh state you reside earn interest tax free (state and federal).

I have no idea what going yields are (probably about 2-3%) but you can use that for the conservative part of your portfolio and then go aggressive on your Roth IRA.

[jIM_Ohio]

I would look into 5k going to traditional IRA for you and spouse (10k total).
I would wait to convert this to Roth until tax bracket dropped.

I would look to add 5k-10k to muni bonds or use 10k per year to pay down mortgage or 5k to each. The return (right now) is probably higher on the mortgage.

[slackbox]

I would look into 5k going to traditional IRA for you and spouse (10k total).
I would wait to convert this to Roth until tax bracket dropped.

I would look to add 5k-10k to muni bonds or use 10k per year to pay down mortgage or 5k to each. The return (right now) is probably higher on the mortgage.

Thanks for the reply. Why would you wait to convert to a Roth? I wasn't expecting that I'd have to pay tax at conversion time since my Traditional IRA contributions will be taxed (and not deducted) to begin with. Will I need to pay more tax when converting to the Roth?

Also, can I convert an Traditional IRA to a Roth at any time? I mean, there's no limit on what I can convert per year, right?

Thanks.

[jIM_Ohio]

Thanks for the reply. Why would you wait to convert to a Roth? I wasn't expecting that I'd have to pay tax at conversion time since my Traditional IRA contributions will be taxed (and not deducted) to begin with. Will I need to pay more tax when converting to the Roth?

Also, can I convert an Traditional IRA to a Roth at any time? I mean, there's no limit on what I can convert per year, right?

Thanks.

There is an income limit on conversions- many years ago I tried converting, and with an Agi ABOVE 100K, that prevented me from converting. That limit changes yearly.

When coverting, if your $5000 deposit has grown to $6000, you would pay INCOME tax on the $1000 difference. Federal, state and local income taxes would apply.


Look into using taxable accounts. Look into muni bonds, look into investments which have low turnover (lower phantom income), and low dividend payout.

Meaning in Roth 401k, put bonds and dividend tax payments in those accounts.

In taxable accounts focus on small caps, muni bonds, and similar investments which have low tax events (low turnover and low distributions).

More than one way to do this... if you own a mutual fund in a taxable account, you will see phantom income which increases your taxes. If you owned the same stocks in a taxable account, you would not see same phantom income (from capital gains).

[jpg7n16]

would it be wise to switch my 401K back to the traditional, non-Roth variant?

In my opinion, given your income - yes it would. (unless you are in some AMT situation I don't know about)

You would be saving around $5k on taxes this year from your highest bracket, and whenever that is withdrawn - you'd get to begin withdrawals at the lowest bracket, and work back up. (assuming you're not still earning a huge salary during retirement)

There is an income limit on conversions- many years ago I tried converting, and with an Agi ABOVE 100K, that prevented me from converting. That limit changes yearly.

True and I know there wasn't an income limit last year, so I think there's no limit this year either.

By why everyone is so eager to accelerate their income into their highest bracket is beyond me.

I can understand it for a 15% taxpayer and sometimes a 25% one, but once there are high income earners, I don't understand the urge to pay the huge taxes now to convert.

[slackbox]

In my opinion, given your income - yes it would. (unless you are in some AMT situation I don't know about)

I currently live in Washington, which has no state income tax. I don't know where I'll be living when I retire. Part of the reason I was doing a Roth 401K now is to avoid a state income tax on the money. Would this change your opinion at all?

[jIM_Ohio]

I currently live in Washington, which has no state income tax. I don't know where I'll be living when I retire. Part of the reason I was doing a Roth 401K now is to avoid a state income tax on the money. Would this change your opinion at all?

It's hit and miss, IMO

I was not going to question Roth 401k in my reply because that was not your question
however, I would suggest making sure AFTER TAX RETURN is among 3 highest priorities on any financial planning and investment planning decisions.

Me paying more taxes or less taxes is something which might cost me or save me $2500/year. You are in a position where those same decisions might be $10,000 to $25,000 year.

Saving on state taxes means your line of thought is "it is better to pay 33% federal now, than to pay 25% federal and 8% state later. You are also not subject to minimum withdraws, and you also can afford to pay those taxes now, so I do not see a problem with the decision, but that decision is without a full analysis of "highest after tax return".