I have a young female co-worker (stop, I'm happily married) that I'm helping roll over her current high fee American Funds IRA into a Vanguard IRA. While talking about this she told me she had another 25-35k in savings she'd like to get into an investment account as well. What's the best way to do this from a tax perspective? Any ideas before we just ask Vanguard help folks? Thanks in advance.

A backdoor Roth is only necessary if she exceeds the income limits for a regular Roth. For 2019, the contribution starts to phase out for singles at an MAGI of $122k and fully phases out at $137k.

If her MAGI exceeds $122k, then she can open a traditional IRA, fund it, and then roll that money over to an existing Roth before it earns any gains. I did this last year, and it's just as stupid easy as it sounds. The tax reporting isn't so straight-forward, but I even managed to figure that out. If done correctly, backdoor Roth contributions do not affect your taxes because that money has already been taxed.

The max contribution to a Roth for 2019 is $6k. If she did not put any money in an IRA last year, she can contribute to the Roth for 2018 and 2019, if she does so by April 15.

The rest of the money, I'd put in a "high interest" money market or CD with someone like Capital One. Their money market account is 2%, and a one year CD was at 2.7%, last I checked.

yeah, she's maxing out contributions as she's definitely under that MAGI threshold. I was just wondering about getting that extra money in there in the most tax advantageous way.

aggiefan2002 said:

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yeah, she's maxing out contributions as she's definitely under that MAGI threshold. I was just wondering about getting that extra money in there in the most tax advantageous way.

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If that $25-$35k is in savings, she's already paid taxes on it, and all Roth contributions are post-tax. The IRS doesn't even expect you to report a Roth contribution when you file. It's advantageous to keep up with contributions, though, because you can withdraw them at any time with no penalty (the penalty only applies if you withdraw earnings).

The most she could contribute this year would be $11.5k, and that's only if she didn't contribute last year (I'm assuming from your first post that she already has a Roth IRA).

Sorry, I don't think I was clear. This is extra money. She's already maxing out her Roth with month to month savings. So I'm trying to help her get it into a tax vehicle that will keep her from paying taxes on the money twice (she's already paid once; ROTH would allow her to pull out tax free at retirement).

aggiefan2002 said:

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Sorry, I don't think I was clear. This is extra money. She's already maxing out her Roth with month to month savings. So I'm trying to help her get it into a tax vehicle that will keep her from paying taxes on the money twice (she's already paid once; ROTH would allow her to pull out tax free at retirement).

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Any other investment vehicle (money market fund, CD, etc), she will only pay taxes on the earnings. Her initial investment won't be taxed again.

The only other thing I can think of that would be completely tax free (both contributions and earnings) would be an HSA, but she has to be on a high deductible health insurance plan for that. I'm not aware of anything else that functions like a Roth.

Just FYI assuming she may have A share American funds she's likely already paid the upfront cost. Ongoing expenses alongside several of their funds performance can handedly keep up with vanguard. For new money if she chooses a different route fine, but I would do some in depth research first. Popcorn ready...

I'm confused. She has already maxed out her Roth IRA and is looking for more ways to save? I don't think she can get more money into an IRA at that point - back door Roth or otherwise.

I'm sure there's an insurance salesman who would love to talk with her.

SquareOne07 said:

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I don't mean to be a D, but do you feel qualified to be giving her investment, much less planning, advice?

I see a LOT of people make either poor or just not strategic decisions based on the recommendations of their coworkers or family members...who are oftentimes giving advice purely from their perspective and without full insight and consideration of who they're giving advice to.

Refer her to somebody...a lot of planners and advisors would be more than happy to visit with her and not try to "sell" her.

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TxTransplant, I was talking to the OP, not you. Sorry I just saw that I had replied to you!

I always appreciate reading your posts and insight, didn't mean to offend.

SquareOne07 said:

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TxTransplant, I was talking to the OP, not you. Sorry I just saw that I had replied to you!

I always appreciate reading your posts and insight, didn't mean to offend.

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Haha! No worries...I'll edit my reply!

The best advice here is to sit down with a planner.

Getting more into a Roth could be done by converting it from her Traditional IRA, but her age and the length of time until retirement need to be considered.

If there is a possible gap in employment, then she would want to wait to convert until that time since she would likely have a lower tax rate on the conversion from lower income.

Most firms have planning software that will show you a change in value by converting based upon a constant rate of return, which would be a good way to do it considering the investment would be the same and only the account registration would change.

If shes already maxing out her ROTH, then theres not much else she can do with that extra money besides invest it in a taxable account, or put it in a high yield savings account ( barclays, ally etc). If it were me, I would put that money in a Vanguard 3 fund portfolio.

What's her emergency fund situation?
What's her risk mitigation plan?
What kind of short terms goals and concerns does she have?
Is generating max return appropriate given her situation as a whole?

Huell Babineaux said:

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Nothing like telling someone you're gonna help them bc you know what you're doing and then coming to an Internet forum to ask strangers for advice.

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<3 <3 <3

ea1060 said:

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If shes already maxing out her ROTH, then theres not much else she can do with that extra money besides invest it in a taxable account, or put it in a high yield savings account ( barclays, ally etc). If it were me, I would put that money in a Vanguard 3 fund portfolio.

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Sorry I'm new to investing, so probably a stupid question, but is the VTIVX | Target Retirement 2045 Fund an example of a 3 fund portfolio?

Drifter. said:

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ea1060 said:

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If shes already maxing out her ROTH, then theres not much else she can do with that extra money besides invest it in a taxable account, or put it in a high yield savings account ( barclays, ally etc). If it were me, I would put that money in a Vanguard 3 fund portfolio.

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Sorry I'm new to investing, so probably a stupid question, but is the VTIVX | Target Retirement 2045 Fund an example of a 3 fund portfolio?

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Negative. VTIVX is a four fund and you lose a bit of control doing it that way. I'm assuming this link is the philosophy they were referring to.

https://www.bogleheads.org/wiki/Three-fund_portfolio

For DIY'ers, it's set up so that the investor won't make a big mistake...protection against ignorance but useless to those who know what they're doing, as buffet would say.