Should I Slow Down Saving to Buy a Car?

"My 23 YO daughter got married this weekend. She has no debt outside her home, has emergency fund, but needs a newer car. Should she reduce 401K down to company match to save for car faster or ​​maintain higher 401k contribution amount?" We'll walk you through that question and more in today's Q&A episode! Jump start your journey with our FREE financial resources Reach your goals faster with our products Take the relationship to the next level: become a client Subscribe on YouTube for early access and go beyond the podcast Connect with us on social media for more content Bring confidence to your wealth building with simplified strategies from The Money Guy. Learn how to apply financial tactics that go beyond common sense and help you reach your money goals faster. Make your assets do the heavy lifting so you can quit worrying and start living a more fulfilled life. Learn more about your ad choices. Visit megaphone.fm/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:07Speaker 00

  All right, we've got Andrew B. He says, "My employer has started to allow in-plan Roth conversions. How does one decide how much traditional or the match to convert to Roth? Is this an example or a reason to take it to the next level?"

• 0:21Speaker 01

  I'll enter the second part first. Yes. It is a time when it might make sense to take it to the next level because this gets incredibly nuanced and incredibly complicated. When you're starting to do mega backdoor Roth, and let me, can I lay out what a mega backdoor Roth is?

• 0:36Brian Preston?

  Yeah, well, you definitely need to because I think Andrew, he's asking, he sees that somebody has made Roth conversions, in-plan conversions available. That tells me whoever designed your employer's plan, they were designing to add additional features. And Bo's about to go over that. But you didn't even ask Andrew what this kind of, you're asking how do you, you know, should I take advantage of this? Let Bo blow your mind with this cool planning opportunity of mega backdoor Roth contributions.

• 1:02Speaker 01

  Yeah, so in-plan conversion is one piece of that. What it's basically saying is that you have some assets inside of your 401K that can be converted to Roth inside of the plan. Now, what most people think of when they think of Roth conversions is I take some pre-tax dollars and I convert them to Roth dollars, and that becomes a taxable event. A lot of folks will do that with their employer match. Maybe I'm maxing out my Roth pre-tax, my Roth salary deferral, and my employer match goes in pre-tax, and I want to convert that. Those are all taxable events. But most often, when we see in-plan Roth conversions inside of a plan, it's because there happen to be after-tax contributions available inside of that plan. Now, what most people don't realize is when it comes to 401Ks, we often think of two ways to put money in there.

• 1:46Speaker 01

  We can either do pre-tax deferrals or we can do Roth deferrals. Well, in some plans, there's actually a third option to put money in, and it's called after-tax deferrals. And it is not limited to the same $23,000 in 2024, $23,500 next year. It's not limited to the same salary deferral limit. So you can actually put in all the way up to the Section 415 limit, which caps at $70,000. $70,000 in 2025 of after-tax contributions. Well, one of the beautiful things is if you're putting after-tax money into your 401k and it allows for in-plan conversions, you can convert those after-tax 401k contributions that you put in to Roth and it is a completely tax-free event.

• 2:30Speaker 01

  It allows you essentially to do a mega backdoor Roth contribution. So, a lot of folks out there who have access to this are able to do 20, 30, $35,000 Roth contributions inside of their 401k by this planning opportunity. So, the question that Andrew had is, okay, I've got this going on and I have this availability. How do I know, should I do after-tax first? Should I do conversions first? Should I do pre-tax? Most often, when folks were able to save at this level, and you're talking about potentially putting $70,000 of your compensation, or maybe $50,000 or $60,000 of your compensation into a 401k, you're likely a higher income earner.

• 3:13Speaker 01

  Well, if you're a higher income earner, the pre-tax contributions that you can put into your 401k are incredibly valuable. That tax rate, if you're in the 30% or above marginal tax bracket, is so, so valuable. So, it's not uncommon for someone to completely max out their pre-tax 401k contributions, all the way up to the $23,000 this year, $23,500 next year, and then start doing the after-tax contributions. Would you agree with that as opposed to doing it before?

• 3:41Brian Preston?

  Yes, this is definitely somebody who's got a big shovel and has a really good income. I will tell you, Bo said that this is one of those things where this is part of that complexity, is that once you're doing backdoor, mega backdoor Roth conversions, it's somewhat complicated because there's a lot of contributing factors. And here's one of them. I'm going to share some tidbits of some cautionary things to look out for. When he gave those 415 limits of $70,000, and then remember, if you're 50 and over, you even get catch-up contributions on top of that. You have to be careful that you don't crowd out your employer's contributions. So that I'm talking matching dollars with with your contributions. I'm talking about profit sharing contributions.

• 4:25Brian Preston?

  All of that fits into that $70,000. So if you get too funding gung ho and you've loaded up with all $70,000 and then your employer wants to put in $12,000, that it's just tough. You know, they're like, no, you hit the 415 limit already. Even though your employer puts in the profit sharing contribution by October of the next year, assuming they extended their tax return, you went ahead and pre-funded too much money. So they just get to keep their money and you, you know, you miss out on it. So that's why it's kind of a very graceful dance you have to do. Measure twice, cut once. And the fact that you're trying to make sure that you leave just enough room, kind of like

• 5:09Brian Preston?

  that cup of coffee, you know, they ask you, do you want creamer? You know, or do you want to fill it up to the top? And you're like, no, I gotta make sure I leave enough room in the cup for my employer to put in the full amount of money they want to put in. But then I'm also trying to get just as much and maximize that planning opportunity as much as you possibly can.

• 5:27Speaker 01

  Now, the other question, now, maybe you're not asking about after tax, Andrew. You said, hey, how does one decide how much traditional, how much match to convert to Roth? Well, it's one of those things, if you're already doing all Roth contributions, you have a lot of money going into Roth. The question you have to ask yourself is if I'm going to start converting some of my traditional balance or converting some of my employer match balance, is it worth it for me to pay the taxes now? Meaning, do I believe that I'm in a much lower tax situation now than I think I will be in retirement or later on? And so one of the things you can look at is, all right, if I convert $5,000, is it going to bump me into the next tax bracket? Is it going to cause me to miss out on some tax credits that I might have otherwise been that I would have otherwise been eligible for?

• 6:12Speaker 01

  So you want to make sure you think through those things. Again, this is so nuanced. This is a great example of one of those times it might make sense to take the relationship to the next level because some of these decisions, while not overly complicated, they are complex and they do require doing the transaction correctly so that when you get to tax time, you don't have just a big booger to unwind. Awesome. Alright. I don't know. That's the weirdest expression I've ever said.

• 6:39Brian Preston?

  Yeah, I don't know. That one's probably not catching traction.

• 6:42Speaker 01

  I don't know where that came from.

• 6:43Brian Preston?

  What type of stuff do you have going on in your nose?

• 6:48Speaker 00

  Alright, Andrew, well hopefully that gives you a lot to think about. It sounds like a great opportunity for you, though. If you would like a Tumblr, you can email [email protected].

• 6:57Brian Preston?

  Hey, Megan, before you do the next question, why don't you let our audience know how soon before you got the tap to come up to the majors?

• 7:04Speaker 00

  About 30 minutes.

• 7:05Brian Preston?

  Yeah, that's typical Money Guy fashion right there. You'd think we'd give you like a week's notice or something like, nah.

• 7:12Speaker 00

  No, no, we don't plan on this show.

• 7:14Brian Preston?

  30 minutes, that's good enough.

• 7:14Speaker 01

  Nah, you're up.

• 7:15Speaker 00

  We do everything by the seat of our pants.

• 7:17Speaker 01

  That's right.

• 7:17Brian Preston?

  Shh, shh, it's a secret.

• 7:19Speaker 01

  You know what, I'm gonna ruin this line, because I tell this line whenever we do studio tours. But I say, man, it's so crazy, we see what we have now. It used to just all be duct tape and bubble gum. Now we just get to buy name brand duct tape and name brand bubble gum. Same process, just different stickers.

• 7:33Brian Preston?

  Or we send Nick to Party City.

• 7:34Speaker 01

  Or we send Nick to Party City.

• 7:36Speaker 00

  Brian, it was like a whole content team outing to Party City.

• 7:38Brian Preston?

  The whole team?

• 7:41Brian Preston?

  Wow, I feel honored. And y'all all thought Brian would like to just well on Mickey Mouse.

• 7:46Speaker 00

  Honestly, I didn't think about it being offensive to Mickey Mouse. I just saw how much fun you had with Matt's pinata. I just wanted to get you one.

• 7:53Speaker 01

  Those comments are blowing up about how kind hearted you are and how much you love Mickey that you would never hit a pinata with Mickey on it. So now we gotta figure out something to do with a pinata that's not beating it. I'm sure we'll come up with something.

• 8:04Speaker 00

  We might have to go back to Party City and get you another pinata.

• 8:06Speaker 01

  There we go.

• 8:07Brian Preston?

  There we go. One of the villains.

• 8:09Speaker 01

  Darth Vader. Darth Vader, would you hit Darth Vader?

• 8:12Brian Preston?

  Yeah, because then we could even put one of Bo's little faces on top of Darth Vader. And we could just go to town all day long.

• 8:20Speaker 01

  Awesome, alright.

• 8:24Speaker 00

  Let's pay back for the mustache gift.

• 8:25Speaker 01

  Yeah, no kidding.

• 8:27Speaker 00

  Alright, next up, we...

• 8:31Speaker 00

  Next up, we got a question from Skinning Potato. He says, "I'm 26 on step seven. What should I do with my monthly vested RSUs? The total vested amount is about 60% of my after-tax portfolio. Should I diversify them? And if so, how should I go about doing that?"

• 8:49Speaker 01

  So, okay, so again, let me do a quick education for those of you who don't know. A lot of folks, not only is their compensation received in terms of their salary, their monthly paycheck, but a lot of workers, especially if you work for like a publicly traded company, some portion of your compensation might come from employer incentives like restricted stock units, which means they grant you some stock ownership that then vests over a certain time period, or you might have access to options, whether that be incentive stock options or non-qualified stock options, or you might even have like an employer stock purchase plan where you can buy your employer stock at a discount. All of these are wonderful benefits that are worth taking advantage of, but there are nuances because they are all a little unique.

• 9:31Speaker 01

  Specifically with RSUs, the question is, hey, every month I vest, and when I vest, it's taxable on that day. So that amount that vests shows up in my W-2 at the end of the year when I go to file taxes. How do I manage that? And Brian, with Skinning Potato having 60% of their after-tax money in their employer stock, is that okay? Or is that potentially a risky situation that doesn't realize?

• 9:58Brian Preston?

  You know the answer, and that's why I think you're pushing it over to me is because I've dealt with executives back in Atlanta for a big tech company, Lucent Technologies, that they all were worth a fortune on paper. I mean, I could also have called out WorldCom or some of the other big success stories of the past that I watched just blow up in spectacular fashion. And you thought these things were going to be around forever. And so that's why you always need to be very aware that you have two things tied up when you have all your eggs in that employer basket, is that you've got your human capital, meaning that's your time that you're trading for, you know, you're giving your time for the wages and all the other things they're paying you for.

• 10:40Brian Preston?

  But then you've also got your investment capital and we'd like to see some separation in those two things. So that you actually, if one goes down, the other one is there to pick it up. And that's what, you know, because even entrepreneurs, I'm always telling them, hey, make sure you're building assets and resources outside of your ventures. So you actually have the money to do what you want, when you want, how you want. That's where financial independence is built. Now, it's hard. I get it because a lot of you guys work for these big Fortune 500 companies that are high flyers. And you're making even better sometimes than the S and P 500 is historically. And you're like, well, this is, why would I ever want to get out of this? But I'm telling you, there is a point, you have to balance that, thinking about the human capital,

• 11:23Brian Preston?

  thinking about the investment capital, thinking about where the market is going. So that you do create a strategic plan to divest out of those things in a strategic way. What I love about doing it in a strategic way is it takes the emotions out of the process. Now you don't have to get emotionally attached to this stock. You can actually say, hey, I'm going to create a system to where every year as these, you know, RSUs vest, and I have to pay the compensation, some of these older ones, now I'm going to liquidate them. So I can turn them into diversified holdings that now will create financial independence for me. And that also, you know, protects you from some of the political issues at work and so forth. Because nobody can get mad at you for having a systematic process to build financial security

• 12:07Brian Preston?

  for you and your family outside of the company you work for.

• 12:10Speaker 01

  And one thing that we remind people of is you thinking in terms of the vested RSUs, you also have to keep in mind the unvested RSUs that you still have exposure to. Because most folks, at least in our experience, are on what we call the incentive treadmill. That every month or every quarter or every year, those shares are being replaced through time. So even if you're selling some off as they vest, it's likely you're being granted more on the backside. So you are, yes, taking some of the chips off the table, but those chips are also being replenished. So if you do work for a company, you believe in what the company is doing, and you think the company is going to do incredible things, you still have exposure to the equity in that company through your unvested or future granted incentives, even if you're selling them off now. So be careful.

• 12:56Speaker 01

  We know that when it comes to investing, when it comes to allocation, when it comes to concentration, pigs get fat, but hogs get slaughtered.

• 13:06Speaker 00

  All right, well, thank you, Skinning Potato, for your question. If you would like a Money Guy Tumblr, you can email [email protected].

• 13:12Speaker 01

  Skinning potato. I thought it was scanning potato. I didn't understand it when it was scanning potato. Skinning potato, I get.

• 13:18Brian Preston?

  You thought it was scanning potato?

• 13:19Speaker 01

  I did. I couldn't make it make sense in my head, but now I know.

• 13:23Speaker 00

  Makes a lot more sense when you hear it right. All right, next one is...

• 13:27Brian Preston?

  I don't think you can even scan a potato.

• 13:28Speaker 01

  That's what I was saying. Honestly, I was thinking whenever I do potato, because you... Yep, you can't.

• 13:34Speaker 00

  All right, next up is JDR610. He has a question about his daughter. He says, "My 23-year-old daughter just got married this weekend."

• 13:42Speaker 01

  Oh, congratulations!

• 13:44Speaker 00

  "She has no debt outside her home, has an emergency fund, but she needs a newer car. Should she reduce her 401(k) investments down to company match to save for a car faster or maintain a higher 401(k) contribution?" What do y'all think?

• 13:59Speaker 01

  Man, this is a really hard question. Let me lay out both sides of the equation, then you give the advice. How about that? One thing, JD, if your daughter has not done this, I would encourage her to go to moneyguy.com/resources and play with a wealth multiplier. Because at 23 years old, every dollar that she can save, every dollar that she can build for the future has the potential to turn into tons of money down the road. It's why we have these koozies that say, "This $1 beer cost me $88." Because we know that $1 today, 40 years in the future, 45 years in the future, can be worth $88. So with your daughter, every dollar she can save, every dollar she put away, has the ability to be incredibly valuable over the long term.

• 14:43Speaker 01

  Now, on the other side of the equation, she's driving a car that's maybe old, not reliable, and her single greatest wealth creator right now is her J O B, the thing that she shows up to every day that allows her to create a paycheck and create an income and pay for the bills. And so having reliable transportation isn't likely so much a want as much as it is a need. And so these two tensions exist, especially for young people. So when it comes to his daughter, Brian, what advice would you give? How should she think about it?

• 15:14Brian Preston?

  Well, I love... You set up the first half of it is go out to moneyguy.com/resources, play with the Wealth Multiplier tool so you can see how valuable for a 23-year-old. But then you need to know the other side of the boundary because that's going to be the upside so that you want to save every dollar. But then you're like, but where is, if I did take temporarily my savings down, where's the place I'd say, man, that's too much. I've cut into the bone. And I would encourage you also to go to moneyguy.com/resources and look at that we, and I always mistitle it, but what 25% can do for you. We really should rename it. But it's basically a chart that has age and it, find out how much you need to save. They just put it up on there, how much you should save. And you'll notice for, because your daughter is so young and starting this journey out,

• 15:58Brian Preston?

  for a 23-year-old, it's going to, she can still have tremendous success even below 25%. It's probably somewhere between 15 to 20%. So you could use that as the temporary boundary to say, hey, that job is so important to me. And that lets you transition to step two is don't forget 23. There you go. Because I do want to make sure, there's so many people out there pushing you to stretch on your car purchases and they've gotten really smart. They even ask you, what can your, what monthly payment can you afford? And that is a trap because you can make anything affordable for a few hundred dollars a month. All you have to do is expand out the amortization schedule. Instead of doing three years that we have done, why did we choose three years?

• 16:43Brian Preston?

  It's to keep you honest with where your wages and what you can afford are versus if you go out to six years, seven years, like car dealerships are now allowing you to do, you'll be like, man, I can easily afford that. That seems like that, that payment is doable for me. But yet you never own the car. And that's why the majority of Americans now are driving around with negative equity, meaning they owe more than the car is actually worth. And that is an extremely dangerous place to be. So here's the way you keep yourself safe. You put down at least 20%. You don't finance for longer than three years and you make sure that payment doesn't exceed 8% of your income. And remember, we have two caveats. This doesn't apply to luxury cars and this

• 17:25Brian Preston?

  Also, you cannot have your monthly car payment exceeding your monthly investments. Because if you've got more money going to a car payment than you have going to your Roth IRA, I think you really are shortchanging yourself for the future.

• 17:37Speaker 01

  So it's likely what she could do is if she does have to reduce her savings and she does have to pull back to just getting the match to save up, she might not even save up for the whole value of the car. She seems to save up for that 20% and potentially buy the car 23.8 so that she can get back to saving.

• 17:51Brian Preston?

  Put boundaries. Put boundaries on yourself because when you get to the dealership, they're going to tell you how much you can afford and that's just not... It's more important that you minimize the car purchase. Still get reliable transportation. Think Corolla, not Land Cruiser. But then get yourself back to saving and investing as much as possible, as early as possible, so you just own your time that much sooner.

• 18:15Speaker 01

  JD, tell her that we said, "Congratulations on the recent marriage." Hey, you know what a great gift for a brand-new newlywed is? A copy of Millionaire Mission for them to read together and work through together. Maybe they want to work through the course at learn.moneyguy.com. Both wonderful post-wedding presents.

• 18:32Speaker 00

  Agreed. You can find Millionaire Mission at moneyguy.com/millionairemission. JD, congrats to your daughter. And if you would like a Money Guy Tumblr, you can get one. Just email [email protected].

• 18:45Speaker 03

  The Money Guy Show is hosted by Brian Preston. Abound Wealth Management is a registered investment advisory firm regulated by the Securities and Exchange Commission in accordance and compliance with the securities laws and regulations. Abound Wealth Management does not render or offer to render personalized investment or tax advice through the Money Guy Show. The information provided is for informational purposes only and does not constitute financial, tax, investment, or legal advice.