Beginner's personal finance for the OE W2 employee
I've been doing a lot of reading about personal finance since starting OE. I'm by no means an expert, but thought I might be able to help out others who have recently increased their tax bracket and want to make sure they're setting themselves up for future wealth by making their money work for them. I know I was very confused by things like backdoor roths and mega backdoor roths when I started researching.
This is in order of priority. Complete each step before going on to the next.
1. Build up an emergency fund of at least 3 months of expenses. Store it in a high yield savings account (HYSA).
2. Pay off high interest debt (credit cards, mostly).
3. Contribute to 401k up to company match. This is high priority because it's an instant 50-100% return on your investments, which you won't see anywhere else. Put this, and all investment accounts, into index funds or target retirement date funds with low expense ratios. Google Bogleheads for more investing advice.
4. Increase emergency fund to at least 6 months of expenses.
5. Pay off moderate interest debt (student loans, possibly car loan, etc).
6. If you have access to a high deductible health plan (HDHP) that supports a health savings account (HSA), contribute the max to the HSA ($3750 single, $7700 family in 2023). This can be used to pay for medical expenses tax-free, but if you're smart, you can invest this money instead. It's an even better tax-advantaged account then 401k.
7. Contribute to your 401k to the max ($22,500 in 2023). This limit is applied across employers, so if you have a company match at multiple companies, you'll want to be strategic with how much you contribute to each 401k.
8. Contribute to a Traditional IRA to the max ($6500 in 2023). Contact your brokerage to convert it into a Roth IRA. This gets around the income limit on Roth IRAs legally. It's called a backdoor Roth.
Continued in the replies...
47 Replies
deep-jade•11mo ago
Continued...
9. If your employer offers an after-tax 401k, you can contribute another large sum ($43,500 minus 401k company match). The money can be converted into a Roth 401k or Roth IRA. This is called a mega backdoor Roth (MBDR).
10. At this point, you've maxed out your standard tax advantaged accounts. You can invest additional savings in a taxable brokerage account. If you have a house with a mortgage rate over 5 or 6%, you might consider putting some of the money toward paying off the house, but that really comes down to personal preference.
That's all for now. Drop any questions, suggestions, or corrections in the replies.
absent-sapphire•11mo ago
I’d add that it’s ok to not hit all of these milestones at once after steps 1-5. Be aggressive such that it supports your life’s goals and well-being
From step 6 onward, I recommend allocating a minimum of 25% of your income to long-term savings goals.
conscious-sapphire•11mo ago
For OE specifics, the post on Isaac's website has some good tips for when it comes to tax time and how to with hold the proper amount to avoid fees.
deep-jade•11mo ago
I agree. I debated putting that as a step after number 4 or so, but figured I'd stick to just the wealth building topics
deep-jade•11mo ago
Are you talking about this post? https://overemployed.com/taxes-with-multiple-jobs-top-5-surprises/
There's definitely some stuff I didn't know in that article! I'll be finding out about it all when I do my first OE taxes soon.
Overemployed ®
Top Five Tax Surprises with Multiple Jobs - Overemployed ®
Love it or hate it, taxes is part of life. However, taxes with multiple jobs is tricky, especially with high-paying jobs over $500K involving equity compensation.
ratty-blush•9mo ago
Question about Ira account conversion should we create new Ira account each year to convert them to Roth IRA ?
conscious-sapphire•9mo ago
No you can reuse the same account for the conversions each year.
ratty-blush•9mo ago
Thanks
ratty-blush•9mo ago
Just want to say that this post is sweet - thank you for posting it.
One thing to add is if 2+ of your Js offer mega backdoor roth, you can additionally contribute up to an extra 46k (in 2024, with 401k + 401k match + mega backdoor roth being no more than 69k total) per employer, which is HUGE for investing gains longer term (and having them be tax free)
extended-salmon•8mo ago
This 69k limit is not per employer. Once you reach 69k from w-2 jobs, you're done.
you can't do MBDR at both for 69k x 2 = 138k total
extended-salmon•8mo ago
extended-salmon•8mo ago
this is my plan for 2024
Tax-deferred being preferable because I’m in the 35-37% marginal bracket
deep-jade•8mo ago
How sure are you on that? According to Isaac's article, you can contribute after-tax dollars up to $69k (minus your pre-tax contributions and employer match) for every employer that supports after-tax contributions. That's what I've heard elsewhere also.
https://overemployed.com/becoming-a-mega-backdoor-roth-millionaire/
Overemployed ®
Becoming A Mega Backdoor Roth Millionaire - Overemployed ®
Are you a high income earner looking to save on taxes? Learn the wealth secret of the mega backdoor Roth and be a tax-free millionaire soon.
deep-jade•8mo ago
Unfortunately, most jobs' 401k plans don't support after-tax contributions for MBDR (this is a different concept from Roth 401k, which is subject to the $23k individual limit across all jobs), but supposedly you can MBDR all the ones that do support it.
extended-salmon•8mo ago
I’m gonna ask my finance guy about this
I have 2 jobs that do MBDR
This could be another 120k a year if true
deep-jade•8mo ago
Nice. Let us know what you find out!
conscious-sapphire•8mo ago
It's true. We already discussed this previously. The 69k limit is per J. The only shared limit is the 23ish number that needs to be managed across J's.
If you think about it from the IRS perspective. They aren't thinking about the mbdr conversion, all they see is that the 23k limit is maintained and you've already paid taxes on the rest of it so who cares.
They haven't caught up yet with how ppl can rollover into Roth and not pay capital gains in the future.
extended-salmon•8mo ago
That’s not all they care about. The 69k limit is still there for a reason
But yeah I’m going to ask about this specifically because mbdr 2 full time jobs is not exactly a common scenario
conscious-sapphire•8mo ago
Yeah OE are a small niche group so not really an urgent issue for IRS to care about.
extended-salmon•8mo ago
question
one of my Js has after-tax matched of up to 7%
not roth
previously i had to skip the match at this job completely because i was at the 23k limit already from others
so i could do 7% after-tax match, then the full after-tax supplemental to the 69k limit at this one job?
That would be tits if I could snag the match here
On top of another like 78k in Roth
extended-salmon•8mo ago
extended-salmon•8mo ago
these are my options
so i could do 7% after tax matched and 43% after-tax supplemental for 50% total for an effective 53.5% contribution at this job (which is still under 69k)?
and obviously rollover all into roth
shit and that means at my other job that i can do it at, instead of just 14k i can toss in like...62k
yes please i'll take another 120k this year in roth
then when i leave this company I can roll that over into my own personal roth IRA and still withdraw the principal prior to 59.5 if I retire early (which is the plan)
extended-salmon•8mo ago
extended-salmon•8mo ago
chatgpt understands this differently
deep-jade•8mo ago
If only we could trust it to quote tax code to us lol
extended-salmon•8mo ago
agreed
conscious-sapphire•8mo ago
yeah that's not correct. Don't rely on chapgpt for specialist advice.
Scan this post. He goes over everything in detail. https://www.whitecoatinvestor.com/multiple-401k-rules/
conscious-sapphire•8mo ago
Key part of that article is this:
conscious-sapphire•8mo ago
Retirement topics: 401(k) and profit-sharing plan contribution limi...
Two annual limits apply to contributions: A limit on employee elective salary deferrals. Salary deferrals are contributions an employee makes, in lieu of salary, to certain retirement plans: 401(k) plans 403(b) plans SARSEP IRA plans (Salary Reduction Simplified Employee Pension Plans) SIMPLE IRA plans (Savings Incentive Match Plans for Employees)
conscious-sapphire•8mo ago
The way the IRS operates is that they have the tax law, then the IRS provides articles that provide their interpretation of those laws.
Lastly, and it would take too much work for me to dig through it, is to study actual court cases where this has come up and see how the it was decided.
conscious-sapphire•8mo ago
If you have unrelated employers then this section of that IRS article doesn't apply
conscious-sapphire•8mo ago
The tax code doesn't have the example of two unrelated employers and the 69k limit because it happens so infrequently. Instead, you can infer the rule by seeing how specific they are about the related and unrelated employer distinction and how each employer + related employer count as 1 account. You can infer that each unrelated employer also each count as one account.
Lastly, if you have a question on this topic specifically, call up fidelity or whoever is your servicer and ask
extended-salmon•8mo ago
i wouldn't trust some rando at fidelity to answer this
conscious-sapphire•8mo ago
meh, at the end of the day, it's about personal risk tolerance
extended-salmon•8mo ago
so..i can contribute the difference of 69k - ( my contribution + match ) to each job
for each one that supports after-tax contributions
conscious-sapphire•8mo ago
Yes.
extended-salmon•8mo ago
i mean realistically it's low risk. if the IRS says fuck you that's not how it works, that money was already post-tax
i would just owe on the gains in the mean time
conscious-sapphire•8mo ago
However, be careful not to over contribute due to 1. one of your J's errors and 2. Going over the deferral of 23k limit across all accounts.
extended-salmon•8mo ago
yeah i'm super careful about the 23k part
conscious-sapphire•8mo ago
I ran into that in 2023 because one of my J's didn't follow my instructions correctly.
extended-salmon•8mo ago
i have a spreadsheet i update after every paycheck
conscious-sapphire•8mo ago
Yep. Also prudent to leave like $100 or so on the table just to provide a little bit of buffer for peace of mind. You don't want to be forced to do additional paperwork for rounding errors.
extended-salmon•8mo ago
yeah i have like $500 on mine extra right now
i can tweak 1-2% here or there towards the end of the year if needed
i have one job that withholds 401k from my bonus and i forget which one it is
conscious-sapphire•8mo ago
Yep, but be aware of delays in processing requests and if they miss a paycheck cycle.
I think that's what happened to me
extended-salmon•8mo ago
total pain
fair-rose•8mo ago
Fwiw I've done this for two tax years already without an issue
Maybe I'll get audited or maybe it's valid lol
So far the irs literature my CPA and I read shows it's per employer
Since the plan limit is per plan for the 69k
extended-salmon•8mo ago
Yeah
The unrelated employer thing should mean it’s valid