Optimizing 403b contributions and taxable accounts

Investing
#1

Hi friends,

Just finished the PFC course and feel much more comfortable with all these topics! That said, I do have a couple questions that I’d like guidance on.

Details: 40 years old, 300k/year gross income, paid off primary residence, no personal debt, 403b maxed out at $20.5k per year, HSA maxed out at $3650 per year (and invested in a Vanguard TDF), ineligible for roth IRA (but contributions to that when I was eligible are sitting in a Vanguard IRA target date fund), and contributing an additional 2k/month in taxable account.

  1. after I hit the pretax limit of 20.5k for my 403b, those contributions stop and the brokerage (Fidelity) that my 403b is with starts pulling aftertax contributions up to my employer match. My question is, is this totally fine? Or am I better served by lowering my contribution per pay period to spread the 20.5k out over the entire year (with my current contribution rate, I hit the max in July)?

I guess where I am confused is I don’t know if it’s optimal just to spread 20.5k out over 1 year with match…the after tax contributions including employer match would functionally be the same as if I invested in a taxable account TDF right? So it’s 6 one way, half a dozen the other? Or am I missing something? Very confused on this issue!

  1. What should I invest in for my taxable account? I started my taxable account before I even heard about PFC…so I was even more ignorant than I am today. So far 100% of my contributions are in VTSAX. Would it be a bad idea to just dump everything in my taxable account in another TDF versus reallocating into a 3 fund portfolio? I guess my question is, I’m kind of lazy and ignorant about the finance world, so I’m looking for information on if going all in on TDFs would expose me to a significantly larger tax bill than 3 fund portfolio.

  2. backdoor roth IRA…is this worth it?

In closing, I’d like to thank the PFC team for creating such a great educational tool. Nobody teaches this to us in school, which I think is crazy now that I’ve taken your course. And thanks for your time considering my questions.

Cheers!

#2

Hi @penguiNET

Thank you for those kind words! We are very glad that you liked the course and got a lot out of it! That’s excellent to hear!! It sounds like you are doing all the right things with your personal finances!

  1. It doesn’t matter too much if you max out your 403(b) early or spread out the contributions. The one thing to watch out for is that sometimes if you max it out early in the year, assuming your employer provides a match, the benefit administrator might not give you any matching until the end of the year. I think it’s worth calling the benefit administrator and asking how this is done, since this is done differently for each plan.

  2. We like either a target date fund or a three fund portfolio in the brokerage account. Some people will say a target date fund isn’t tax efficient enough for a taxable account, but it really doesn’t make too much of a difference. Jeremy made a great YouTube video on this topic. Please see below.

  1. I think a backdoor Roth IRA is worth doing! (assuming you have no traditional IRA assets or anything that will trigger the pro-rata rule). If you did a Backdoor Roth IRA every year for the next decade or so, your future self will be very grateful to have a huge account that is completely tax free!!

I hope this helps! Please let us know if there are any other questions!

Shane

#3

Thank you for your advice Shane! This gives me a lot more confidence!

I have 140k in a traditional IRA…would this make backdoor roth inadvisable due to the pro-rata rule then?

And one last question: rebalancing. Is this just to make sure I’m appropriately diversified? My taxable account as mentioned is currently 100% VTSAX. I have just made a purchase of VTIAX and my plan was make monthly purchases of VTIAX until it’s around 36% (with my current VTSAX holdings as “54%”)…then purchase VBTLX until that’s 10%…then after that, switch monthly contributions to each pool to maintain that distribution?

That is, I don’t strictly need to rebalancing my VTSAX holdings immediately by selling some and buying the other 2 funds?

Thanks again for all your help! I deeply appreciate it!

#4

Yes, your traditional IRA would likely trigger the pro-rata rule, making a backdoor Roth IRA be less attractive. If your current 403(b) plan is good, you may be able to roll the traditional IRA into the 403(b) plan. This would help you avoid the pro rata rule. You would need to work directly with the 403(b) administrator to see if this is possible. Depending on the funds available in the 403(b) this may or may not even be worth pursuing.

I agree with what you said about rebalancing. Rebalancing is done to maintain your target weight. For example, if someone wants a 60% stock and 40% bond portfolio, if the stock market goes way up, the person will end up with too high a percentage of stocks and have more risk than they were intending. Rebalancing helps fix this.

I hope this helps! Keep us posted with anything else!