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What to Do After Maxing Out Your 401(k) Plan | Exencial Wealth Advisors - YouTube
Channel: Exencial Wealth Advisors
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[Inaudible].
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Hi there. Jared Snyder here
with Exencial Wealth Advisors.
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I thought it would be interesting today
to talk about where to be saving and
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investing money,
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especially for those of you that
max out your 401k contribution.
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So if you're one of the fortunate
people that have a sufficient financial
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resources,
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to be able to max out your
401k contribution and then have
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additional dollars to be saving
and investing on an annual basis,
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where's the best place to do that. Let's
talk about it. So first and foremost,
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congratulations,
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you know that that's fantastic if you're
in that camp and you're maxing out your
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401k contribution, man, that's a great
place to start. And I would, I would say,
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you know, kudos to you for doing that.
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Something to consider as that next
source of saving and investing
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is something called a Roth IRA or Roth.
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IRA is a type of retirement account
and you're able to make a Roth
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IRA contribution on an after-tax basis.
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Meaning you're using dollars
that you'd get taxed on now.
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So there's no upfront tax benefit
to making that Roth contribution.
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You're limited, limited to
$6,000 a year in contribution.
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And you can do that for
yourself. And then, you know,
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if you have a spouse you're able to
make a contribution for your spouse,
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even if your spouse isn't
working, as long as you both are,
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as long as you as the worker, you know,
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you have the earned income of at least
the amount of those contributions,
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which I think it's a given you would,
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if you've already maxed
out your 401k contribution,
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you can make those contributions on
a Roth basis for you and your spouse,
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the dollars go in after tax. So
there's no upfront tax benefit,
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but all of the investment growth on
those dollars is actually tax-free
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when you withdraw those dollars one
day in retirement at age 59 and a half
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or older.
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So that's a really great tool to be
using for that long-term saving and
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investing, especially once you've
maxed out your 401k contribution.
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Something to keep in mind is the income
limits on being able to make a Roth
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contribution. So whenever you look at
your modified, adjusted gross income,
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if you're single, you can
make a Roth contribution.
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As long as your modified
adjusted gross income for 2021 is
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between 125,000 and
$140,000 as long as, as,
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as long as you're not over that range.
If you're under it, you're totally fine.
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If you're in that range,
the IRS will start.
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Prorating the amount of
contribution that you can make.
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If you're at $140,000 or more,
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you can't make a Roth
contribution in that normal sense.
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We'll talk about a little trick though,
to potentially be able to do it,
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even if you're over that hundred
and $40,000 level married jointly,
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um, if you're making up to
$198,000 married, filing jointly,
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you can make a Roth contribution.
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If you're between 198,000 and $208,000
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in modified adjusted gross income,
then you can make a contribution,
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but it is prorated down and you can make
less and less and less until you hit
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that $208,000 magic number. And
that's where the IRS says no more.
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You can't make any more Roth contribution.
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There is a way of getting
dollars into a Roth
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contribution, right? It's called a back
door rock. You may have heard of it.
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You know, if you Google
that term backdoor Roth,
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there are a lot of different
resources out there available to,
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to learn more about backdoor
Roths. We'll talk about it here.
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So you already have the information.
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If you are sitting there
and you have your 401k, um,
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and you've, you've made those contracts.
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If you don't have an IRA account that is
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separate from your 401k,
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if you've kept all your pre-tax
it's dollars inside company
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sponsored 401k style plans. Yeah.
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Then using a backdoor Roth can
actually, you make a lot of sense.
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If you have those IRA accounts,
you know, outside of a 401k plan,
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I'm not getting going to
get into the weeds of why,
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but it doesn't make a lot of tax
sense for you to use a backdoor
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Roth, long story short. You've
got it. You've got to do this.
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What I'm about to describe
as a, on a pro rata basis.
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And it wouldn't make tax sense
to do it if you have IRA dollars.
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But if everything that you've contributed
into your retirement plans is in that
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401k plan, then you can do, what's
called a backdoor Roth contribution.
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So step one is, as you make
that $6,000 contribution,
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if you're 50 or over, you can add a
thousand dollars to that. So a $7,000,
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uh, I RA contribution.
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So you make it as a non deductible IRA
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contribution. You don't get a tax
benefit for that because you've,
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you've made too much money to be able
to, to deduct that on your taxes.
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That's okay.
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That's actually exactly what we want
to have happen because that's step one,
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make that non-deductible IRA
contribution. Step two is,
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is to establish that Roth
account open or Roth account.
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It's not going to have
any money in it yet.
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That's what we're about
to do in step three.
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Step three is to convert
that original contribution,
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that six or $7,000 attribution
that you made into your
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IRA.
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You convert that from IRA into ROC
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dollars.
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And so the money moves from the
IRA over to the Roth account.
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You've already paid taxes really on
those dollars because you did not
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get a deduction on your IRA contribution.
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So it's a way of getting
dollars into a Roth bucket,
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kind of through a little bit of a
loophole in the tax code that Congress has
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never closed. Congress knows it's
there. It's, uh, it's, you know,
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very well known that people
do this, uh, strategy.
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Congress has never closed the
loophole. As long as it's there,
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it's something that's available
for you to consider. Now,
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keep in mind whenever you
make your IRA contribution,
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if you do decide to invest
those dollars in the IRA and
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they, and you see some growth
and then you go to college Burt,
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that IRA contribution,
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and you go to convert
the Roth, or excuse me,
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to convert the growth on that IRA
contribution over to the Roth,
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you will pay tax on the growth
that you experienced on that IRA.
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So that's why I generally recommend
just keeping that IRA that six or $7,000
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contribution, keep it in cash
until you get your ride opened,
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and then you do the conversion. So maybe
that's that felt a little long-winded,
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but it's a powerful tool,
because think about it.
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If you're saving 19 $20,000, or then
you get the catch up at 50 and beyond,
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you're saving 25,
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20 $6,000 into your 401k.
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Perhaps you're doing that for your spouse.
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And then you're getting
another 12 to $14,000 a year in
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retirement savings. And
you're doing that on, uh,
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really tax-favored basis.
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Meaning you're getting that tax-free
growth on those Roth dollars.
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That's really powerful.
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The one other way I would think
about saving if for whatever reason,
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a Roth doesn't make sense, maybe a
backdoor Roth doesn't make sense.
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Maybe you're fortunate enough to
be able to do a maximum 401k and
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fund Roth,
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and then still have $5 to be saving and
investing then use a taxable account.
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Okay. Taxable account is
just an account that, uh,
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is set up that you have
access to any time. You know,
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there aren't any limitations like
there are on a retirement accounts. Um,
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so the dollars go into that account and
then they're invested in however you
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want to have those dollars invested
those dollars grow over time.
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You can access them for any purpose.
Anytime, not just for retirement,
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you can withdraw them anytime when
it, when you need the liquidity,
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you pay taxes on the dividends
income that those investments produce
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in the year that they're produced. Um,
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I don't pay capital gains taxes on
those investments until such time as you
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realize the gain.
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So if you have a $10,000 stock
position that grows to $20,000,
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you've got a $10,000 gain. You don't
pay tax on that gain until you sell it.
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So that's a really great, you know,
other way of saving and investing.
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Whenever you've exhausted,
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the 401k you've considered
the Roth or the backdoor Roth,
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and maybe you've used it.
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Maybe you haven't looked at that
taxable account as another way of
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saving and investing for the long
haul. Hopefully that's helpful for you.
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Hope you have some good ideas
from our, our conversation today.
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I know when we're thinking about
things like backdoor, Roths,
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that can kind of seem complex.
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So if you have questions on that
or if you're wondering, man,
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does that make sense to me? Should
I incorporate that into my plan?
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Reach out to us, give us a call, shoot
us an email. Let us know how we can help.
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We'd be glad to be a sounding
board for you anytime. Thanks.
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Hope you have a great day.
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[Inaudible].
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