I just discovered something really cool.
Did you know that you can contribute up to $53K to your 401K every year, $35K of which can be transferred to your ROTH IRA? The $5.5K limit doesn't necessarily have to apply after all! Here's how it works:
1) You contribute up to $18K to your 401K (pre tax money)
2) Your employer kicks in the company match (pre tax money)
3) Depending on your employer, you can then contribute a certain percentage of your annual salary to your 401K after tax money bucket. Once a year, (if your employer allows), you then do an in-service withdrawal by transferring your 401K after tax money to your ROTH IRA. You may not receive a tax break with Roth IRAs (since contributions are made with after tax money), but earnings and withdrawals are generally tax-free.
This is called the Mega Backdoor ROTH IRA. The College Investor has a more detailed explanation.
FYI, this is different from the Backdoor ROTH IRA, which allows you to contribute $5.5K to your ROTH IRA even if you earn above the income limit. I'll let you know if I ever learn of a MEGA STUPENDOUS SUPER TOTALLY AWESOME BACKDOOR ROTH IRA.
Apparently, only 10% of US companies allow employees to do both steps in #3 so this isn't something that everyone can do. But you should check!
My investment accounts now look like the following:
1) Managed investment account with a robo-advisor
2) ROTH IRA account with a robo-advisor - this should look turbocharged from now on!
3) 401K account (with both pre tax and post tax money)
4) Health Savings Account ($3,400 max now but if the new Republican American Health Care Act passes, this could be increased to at least $6,550 for individuals).
Being financially responsible feels pretty great. And if anything happens, I'll just remember that there's always money in the banana stand!
What is this?
An anthropological look at how people think about money. Created and edited by Star Li.