I'm several years into my career now and need to start getting more serious about investing. Until now I've only really relied on employee-managed 401k accounts. My remaining money went towards paying down student loans, saving up to buy out my auto lease, and growing my emergency fund to $50,000. Well, I've done those three things now. Where do I go from here? I understand this is a very popular question but I am confused and have tried reading and this is not the first time I've started this process and just gave up. I'm 27 and my salary is $170,000 as a software engineer. Before 12/1 my salary was $125,000. However, this year I have qualified for about $25,000 in bonuses as well. I have three 401k accounts, none of which I have ever done anything with but log into periodically to check their balances. I haven't noticed tremendous growth in some of the other ones and they, frankly, don't really have much money in them to begin with. * The first account is through PAI and has a value of $2,466.37. This account is from my first employer and has sat stagnant since I left them in early 2017. Looking at some statements, I believe the account has grown from around $1,200 in that time. * The second account is through Capital Group/American Funds and has a value of $10,131.85. This account was automatically rolled over into an IRA from a 401k about one year ago. Presumably because the company I used to work for was acquired and they dissolved (?) the 401k plan. Since that date, it looks like the value has only appreciated about $50. Presumably because I'm not actively managing the IRA. * The third account is through John Hancock and has a value of $52,014.87. This account is actively managed by my current employer and I configured my contributions to max it out for the first time this year. It looks like there has been around a 14% rate of return since its inception. So, knowing all of this, what should I do with the first and second accounts? I've been reading today and I understand a Roth IRA probably makes the most sense since I'm already maxing my 401k. However, my YTD gross pay this year is $165,783.72. I think my MAGI is the same based on [this](https://www.omnicalculator.com/finance/magi) calculator. I do not have any foreign cashflow, am not self employed, have not made any IRA contributions, etc. So I think this means I do not qualify to contribute to a Roth IRA? Does this mean the best course of action would be to roll the first and second account both into a single IRA managed by, say, Vanguard? I understand there are loopholes to them convert this amount into a Roth IRA? I'm still fuzzy on the merits of Roth vs Traditional IRAs. Lastly, are there any last minute things I should do before 2020 ends today? For example, deposit $6,000 into a traditional Vanguard IRA? What is the next logical step for high-earners after maxing out their 401k and IRAs each year? #investments #401k #ira #roth #rothira #retirement #fire #vanguard #fidelity #personalfinance #money
Regarding Roth vs traditional accounts, this is a less important choice than the decision to start investing in one, either one, but one is usually slightly better for you based on your personal situation. Roth accounts take in after-tax money and have no tax on capital gains or withdrawals. There are both Roth IRAs and Roth 401ks. Roth accounts are ideal if you think you'll be in a higher effective tax bracket when you retire than today, since you're paying tax up front and getting tax free growth. Traditional IRAs and 401ks are before-tax (you deduct the contributions from your income), capital gains are tax-free, while you pay income tax on all withdrawals. Traditional accounts are ideal when you think you'll be in a *lower* tax bracket when you retire compared to now, since you're deferring all tax until retirement. If you think your effective tax rate will be the same as today, then they're basically equivalent. Note that you can only have before-tax money in one of the traditional 401k vs the traditional IRA, so most people will have a 401k of some sort + a Roth IRA. The $19.5k 401k annual contribution limit applies to the sum of contributions across all traditional + Roth 401k accounts you own. Similarly, the $6k IRA annual contribution limit applies to the sum of contributions across all traditional + Roth IRA account you own. The mega backdoor 401k mentioned in an earlier comment allows you to contribute additional non-deductible money to 401ks, slightly more complex and only available via some employers, and limits depend on the employer, so you'll have to do a bit more digging on whether that's appropriate for you. Basics that apply to most people with access to a 401k plan with decent available investments are maxing out 401k + backdoor Roth IRA + HSA if applicable + investing in a taxable brokerage account after that.
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You might be over the limit for a Roth IRA, you can look up the backdoor Roth IRA but it's probably too late for 2020. No biggie. Consolidating accounts and making sure they're in something with decent long term growth potential is good to do. If you have a medium risk tolerance where you're looking for an average long term growth rate of ~8-10% without needing to manage it actively, something simple like a total US stock index ETF (eg. VTI) is low fee (0.03% MER) and zero-touch until retirement. More important though is increasing the amount being invested once you're clear of debt. Great job on paying off your loans! At this tax bracket you can: * Max out your 401k, $19.5k annual contribution limit for singles * Max out your HSA if available, since that's tax-deductible as well as tax-free for capital gains and withdrawals, $3550 annual contribution limit for singles * Max out a backdoor Roth IRA, $6k annual contribution limit for singles * Invest in a taxable brokerage account as much as you're able Most people who save/invest a significant portion of their income will end up with far more in their taxable account than in retirement accounts. For some people, employer 401k plans also have a mega backdoor 401k which can allow you to invest much more after-tax money in a 401k. You'd need to check if your employer's plan supports that, not all do. For all the above accounts, it's ideal to invest the funds in something with long term growth potential, eg. stock index funds or stocks. Make sure the amounts aren't just sitting in cash, otherwise you're missing out on the main benefit. I'm mostly in VTI (Vanguard total US stock index ETF) and VXUS (Vanguard total international stock index ETF) or their equivalents in the available plans. Besides that, it depends on your goals for the future, whether you want to save up for a house, etc.