Two years ago I became the antagonists of all retirement accounts. I had contributed the standard 8% to my company’s 401(k) plan for the last several years to get the company match, but over time I grew more and more frustrated with the confusing mutual fund options that never really told you what the hell you were investing in or what types of fees were associated with the account.
In 2015 I began day trading and swing trading and eventually learned that I could transition up to 80% of my retirement account into a self-directed account. I thought, “FUCK THESE MYSTERIOUS INVESTMENTS! I WANT CONTROL OVER MY INVESTING!” The next day I called my retirement plan and as much money as I could into a self-directed account through TD Ameritrade.
TD Ameritrade charged its standard $9.99 per trade, but for retirement accounts, they would only charge you this fee once per day per stock ticker. So if I bought and sold the same stock five times in a day I would only be charged once for that series of trades.
Over the next year I hired I took several classes and hired a mentor to help me refine my skills. I would wake up at 4:30 in the morning, research the markets for two hours, trade from 6:30 to 7:30, go to work for ten hours, come home and research the market for another two to three hours before bed. Over the next 10 months, I made over $30,000 and I thought hot diggity damn! Who needs mutual funds and financial advisors when you can actively participate in the market and make a killing for yourself!
Then I looked at my total account value and I was only about $600 above where I started. Whoa! What happened to all of the profits from my winning trades? Well, it turned out that I had racked up $29,400 in trading fees because I was jumping in and out of stocks all day every day and had executed thousands of trades.
Although over the decades that market has always gone up, but that’s not to say it goes up every day/month or year, and you have to build up grit to withstand the heavy down days. During the first week of January 2016 I got body slammed. I was at a conference in Las Vegas and I knew my internet reception was going to be bad, so I set stop limits for four stocks I was holding. I was up $1,300 that morning and figured I would let it ride. My total risk exposure was around $900 and I was confident that each of these stocks had potential to climb higher. I went to the conference, met with my customers and had a great time. When I got home that night and looked at my account I had LOST $2,400! It turned out that my phone did not have good enough reception when I had set my stops that morning so none of them were submitted into the system. “Ok ok okay stay calm,” I told myself, “wait it out for a day or two and it will come back around these are the most popular companies right now the probability off all four tanking indefinitely is unlikely!” Over the next four days my stocks dropped hard before the markets even opened, and within two weeks I was down $6,000. I gave up and sold off my shares not willing to risk anymore money. “It’s better to live to trade another day than run your account into the ground!” If I had not sold off those shares and held them through to today, I would have made over $30,000.
It took me about two months to recover emotionally from that hit, but I returned to the trading desk and changed my strategy to focus on swing trades for a week to several months rather than a few minutes to a day. Over the next eight months I clawed my way back out of the hole and finally got my account back to where I started two years prior, but during that journey, I had lost more money and at one time had lost up to $9,000.
For 2017 I’m focusing on long term swing trades with several weeks to several months long holds. My account is back into profitable territory and I’m currently averaging a 10.59% profit, but damn that was a lot of work with way too much stress to get here, and I can’t guarantee that I won’t have another big loss.
I spent too much time and energy studying the markets every day for two years, reading a ton of books and participating in weekly three-hour one-on-one sessions with a private mentor. Yes, I learned a lot about the stock market, developed a ton of new skills and built up a tolerance for huge financial losses, but I wished there was an easier way that wasn’t such a time suck.
In August of 2016, I stumbled across the blogs of the FinancialSamurai and JLCollins. I began to learn about 401(k) mutual fund fees, Vanguard and an ETF called VTSAX. These two blogs changed my perception about retirement accounts, not just 401(k)’s but also IRA’s and ROTH IRAs.
I learned about VTSAX, Vanguard’s total stock market index fund from JLCollins. A total stock market index fund literally holds shares of every single publically traded stock on the U.S. Stock Exchange. By holding this index fund in your investment portfolio, you will technically own a piece of every publically traded company in the U.S. The theory behind a total stock market index fund is that the long-term trend of the U.S. stock market will continue to go up. Although recessions will come and market crashes are inevitable, the bull market years heavily outweigh the bear market years and new high-performing companies will continue to join the exchange while underperforming companies will be dropped. Hence the fund is “self-cleaning” and there is no need to worry about rebalancing your investments every year.
Vanguard’s VTSAX has a 0.05% expense ratio which is lower than 95% of competitive mutual funds with similar holdings. Most mutual funds have expense ratios ranging from 0.20% to 0.80%. I found a Morningstar study that said mutual fund expenses generated over $88 billion in revenue for 2014.That is ludicrous especially when you consider only 32% of Americans are utilizing 401(k) plans!
VTSAX also goes by VTSMX and VTI. The difference is that VTSAX requires a minimum investment of $10,000, for a 0.05% expense ratio, VTSMX requires a minimum of $3,000 with a .17% expense ratio and VTI is traded over the stock market as an ETF with a 0.05% expense ratio. If your retirement fund does not offer any of these, look for a similar “Total Stock Market Index Fund” and pay attention to the expense ratio.
Second, I learned that there were tons of people maxing out their 401(k) contributions to $18,000 every year at all income levels. This is the first I had ever heard of anyone doing this. I had never met anyone who ever suggested contributing more than what the company will match.
I then went on to learn that it is possible to withdraw your 401(k) funds early without a 10% penalty. This was really eye-opening and became a huge game changer for me. To pull this off you have to utilize a tactic called a ROTH IRA Conversion Ladder to extract funds over a 5 year period. The way it works is like this: you roll over parts of your 401(k) into a ROTH IRA and pay income taxes on the amount you move because you are moving funds from a tax-deferred account to a taxable account. You re-invest the money in the ROTH IRA account and the funds will continue to grow tax-free for the rest of time. After 5 years, you are allowed to withdraw the principal early, but not the profits made.
You do not have to wait until you leave your company to roll funds over to an IRA from your 401(k) or other retirement plans. There is an option called an in-service distribution that is not well known. It allows you to roll over assets from your current employer’s qualified retirement plan to an IRA while you are still working for that employer. Typically, transferring your entire balance is not permitted, but depending on your plan’s rules, you may be able to roll over a significant percentage of the vested balance of the retirement plan to an IRA. I found out that my employer’s plan allows me to make four in-service distributions a year up to 80% of my account value.
The final game-changing lesson I learned was the Mega Roth IRA Backdoor loophole that allows you to protect your after-tax investments from future taxes. This strategy builds off of the ROTH IRA Conversion Ladder and in-service distribution strategies talked about earlier. Many 401(k) retirement accounts allow you to contribute after-tax dollars to your 401(k) up to a total of $53,000 a year. This means if you could contribute the maximum $18,000 tax-deferred contribution and your employer provided a company match of $6,000, you can make an after-tax contribution of up to $29,000.
You might be thinking “Wait doesn’t that tie up my after-tax investments until retirement age?” Yes and no; as we learned earlier we can use the ROTH IRA conversion ladder to convert 401(k) funds over to an IRA. I called my employer’s 401(k) provider and found out that I am allowed execute up to four in-service rollovers a year. So I could contribute after-tax funds to my 401(k) and every quarter rollover those after-tax investments to a ROTH IRA. Since I am already paying taxes on this money, I will not have to pay any additional taxes. The money can then grow in my ROTH IRA tax-free and if I wanted to withdraw some of the principle funds after five years, I am more than welcome to do so without penalty or taxes. The in-service distribution rules are different for each retirement account, so make sure to call your retirement plan representative to find out what the rules are for your account. You can find a very detailed analysis of the Mega Roth Backdoor strategy on the Mad Fientist’s blog.
Since ROTH IRA rollovers do not count towards your IRA contribution limits, you can still contribute up to $5,500 a year into your Traditional IRA as well!
With the above knowledge, I now feel in control of my retirement account for the first time ever. I am now sold on retirement accounts and feel that the fast-track path to financial freedom and early retirement lies in utilizing 401(k)’s, Traditional IRA’s and ROTH IRA’s to their full tax saving potential. My new goals are to max out my 401(k) to $18,000 and Traditional IRA to $5,500 utilizing VTSAX as my only investment tool.
If you have not already signed up with Personal Capital I highly recommend doing so. Their free Retirement Planning calculator and 401(k) Fee Analyzer tool are very insightful. I learned that I was paying an average of 0.80% in expenses across my retirement accounts and I was on track to give away over $426,692 through mutual fund management fees over the next 30 years. Now that I have switched to VTSAX I am estimated to spend only $106,673 over the same period.
Please keep in mind that I am not a professional tax advisor and everyone’s financial situation is unique. Please seek advice from your retirement plan representative or a professional tax advisor before attempting the ROTH IRA conversion ladder and Mega ROTH Backdoor strategy.
