Is it not a good idea to put more than your company's match into 401k?

[overst33r]

How are people on ATOT putting money into ROTH IRA? Isn't it cut off at $130K?

http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

 

[Blanky]

Embedded for importance

From a practical perspective correct, from a psychological one not always.

That chart is like a chart indicating the proper foods we should eat and the excercise we should get. Superb in concept but won't be excecuted for most people. The majority if people do not have much savings and if they get much the savings will be likely burned up on who knows what. The numbers don't lie: MOST Americans are terrible savers. On the other hand, even though most are also terrible with their 401k, at least with that you are throwing away money if you skip the match. Also, at least personally I find it much easier to watch my 401k get big and ignore it than I do savings.

Also that 3-6 months is so arbitrary and some people need less some more.

 

[s0me0nesmind1]

Anyone saying to max out your IRA as if it's a priority is a fool.

There are a million reasons why a 401k is better and more secure than an IRA. Plenty of employer 401ks offer a ROTH based 401k as well. It used to be a reason to max out your IRA under the principle that your 401k didn't offer the flexibility of a post-tax account, that however, isn't the case any longer.

 

[edro]

Why would you be in a higher tax bracket in retirement?
You will likely have no income other than disbursements from 401k, Roth, SS, etc.

I have never understood this.
I always thought you should want to max your pre-tax dollars now.

Tax brackets increase with inflation, so we can ignore that.

 

[s0me0nesmind1]

Why would you be in a higher tax bracket in retirement?
You will likely have no income other than disbursements from 401k, Roth, SS, etc.

I have never understood this.
I always thought you should want to max your pre-tax dollars now.

Tax brackets increase with inflation, so we can ignore that.

The whole ROTH fad right now is laughable. We even have a president promoting it with his whole "MyRA" ridiculousness.

Anyone that isn't diversifying and putting all their eggs in one basket is going to be sorry. There are a million situations I can come up with in which the tax brackets could be substantially lowered in the coming years going towards retirement. Income taxes aren't the only way to pay the government, ever heard of VAT? The rest of the world is using it, it's a matter of time before we start.

 

[DaveSimmons]

http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

Loophole! Woohoo!

Caution

If you have any other (non-Roth) IRAs, the taxable portion of any conversion you make is prorated over all your IRAs; you cannot convert just the non-deductible amount.[3] In order to benefit from the backdoor, you must either convert your other IRAs as well (which may not be a good idea, as you are usually in a high tax bracket if you need to use the backdoor), or else transfer your deductible IRA contributions to an employer plan such as a 401(k) (which may cost you if the 401(k) has poor investment options).

D'OH!



No Roth goodness for me. But I can't whine too much about "making too much money to qualify for a Roth."

 

[fleshconsumed]

Sorry for being obtuse....

Let's say company match is $4000. I typically max out my 401k every year [17.5k]. Going forward:

1. Open up a ROTH IRA now.
2. Reduce my 401k contribution to 0% as I've already maxed out the company match
3. Divert what I had been putting into 401k into the ROTH IRA to play catch up for this calendar year. It won't be much...but every little bit helps right?

Next year going forward:

1. Put ~$211 per paycheck into Roth IRA which equates to ~$5500 at the end of the year
2. Increase 401k as much as I can afford it [~$12.5k per year with company match].

Most companies do some sort of percentage match up to a certain amount/percentage. My company for example matches 1.5% of my salary if I contribute 6% or more. That means that if I want to get that 1.5% match every quarter, then every quarter I need to put 6% of my salary into 401K. Since you said your company match is $4000 it sounds like your company just does lump sum, but I just wanted to make sure you do not need to keep making contributions to get that company match.

As far as Roth IRA goes you can contribute as much as you like at any time of year as you like as long as it's under $5500 (less if your income is in 6 figures and you hit contribution limits). So if you have the money you can put full $5500 at the end of the year. Not only that, but with Roth IRA you can put full $5500 for the year 2014 up until tax day next year. So basically you sort of have additional 3 months to do catch up contributions for 2014.

http://www.rothira.com/roth-ira-rules

Whether or not you decide to actually divert some of your funds from 401K to Roth IRA is up to you. As I've written before, if you're in the 25% tax bracket, which you most likely are, it's a coin toss whether you want to contribute as much as you can into 401K to remove yourself from the 25% tax bracket or contribute to Roth IRA for some tax free income for when you retire.

 

[MongGrel]

I always dumped all I could into my 401K when I had one, the one I had is still producing very well atm.

Have an older SEP I should move, but the wife works at a good financial firm and am looking into it.

The place I'm at now doesn't even have one, but after a few rough years even finding a solid job again was rough awhile.

I'm too lazy along those lines I'm sure myself.

 

[nexus5rocks]

The game that everyone is trying to play is to a) maximize your income, or in this case your employer matching your 401K contributions - free money you'll be able to use when you retire even if you do not see a penny right now and b) minimizing your taxes, right now, and in your retirement. Achieving a) is very easy - just contribute enough to maximize your employer match. Achieving b) is not so easy, actually very difficult, because everybody's living situation is different and because nobody knows what tax rules are going to be there in the future. There is a big jump in federal tax rate from 15% to 25% once you cross the ~$35K taxable income threshold. This is also just about where median income falls for a lot of young professionals beginning their careers, numbers will be different based on your occupation and location and whatnot, but it's a pretty good number for someone starting out their career with a college degree. Ideally you would want to stay out of that 25% tax bracket if possible both while you're working, and when you're retired. Which is also why people recommend Roth IRA because Roth IRA distributions do not count as taxable income as long as you do not draw them early. Say someone wants to retire this year, their mortgage is paid off, loans are paid off, and he has 401K, social security, and Roth IRA. If that someone wants to pay as little in taxes as possible, he will only be able to draw up to about 45K from 401K and social security. That 45K will put him right at 35K taxable income after standard deduction and personal exemption, thus that person will only pay up to 15% to the feds. $45K a year if you have your mortgage paid off is a solid retirement income as long as you do not live in a high cost area, but if you are, you can start drawing income from Roth IRA and because Roth IRA is post tax, you won't have to pay any more taxes in retirement on Roth IRA income so it won't bump you into 25% tax bracket.

Basically it's all a game of minimizing your taxes. To be honest, the current rules are already too complex (keep in mind we still haven't talked about Roth IRA contribution limits, the way the Social Security gets taxed, and Required Minimum Distributions that can all affect your retirement plans), and there is no way anybody can predict the future, so I don't think you can find one perfect answer. That's just not possible. I would advise you to stop worrying about it and do the standard route - put enough in 401K to get full employer match -> maximize Roth IRA -> maximize 401K. That is the best you can do, pretty much everyone else in this thread has been telling you this. Worrying about doing better than this is just going to get you a heart attack. You're obviously new to retirement planning, so just follow the advice above and if you're still interested in the math/logic behind this, then hit up fool.com and http://www.bogleheads.org/ especially the forum section. Take it slow and steady. There is a lot to learn, but once you get it, it's pretty simple. In the meantime, once again, put away as much as you can towards retirement while following the above allocation advice.

Solid advice thanks.
Especially the part about 45k becoming 35k after deductions putting one in the 15% bracket. Never thought about that

Ok, now how does one go about opening up a Roth IRA?

 

[Printer Bandit]

i make too much to be able to contribute to a roth ira. #firstworldproblem.

 

[Gunslinger08]

Solid advice thanks.
Especially the part about 45k becoming 35k after deductions putting one in the 15% bracket. Never thought about that

Ok, now how does one go about opening up a Roth IRA?

https://investor.vanguard.com/ira/how-to-open-an-ira

 

[MarkXIX]

So, what about people like my wife and I? We make over the married contribution limit for Roth IRA effective this year. However, we are close enough to the limit(s) that we MIGHT be able to dump enough into 401k to reduce our AGI and get under the limit for Roth IRA contributions. Should we consider doing that or should we start to seek out other investment opportunities?

 

[nexus5rocks]

So, what about people like my wife and I? We make over the married contribution limit for Roth IRA effective this year. However, we are close enough to the limit(s) that we MIGHT be able to dump enough into 401k to reduce our AGI and get under the limit for Roth IRA contributions. Should we consider doing that or should we start to seek out other investment opportunities?

Wait, what? There's an income limit for IRA?
What, the government doesn't want rich people to be able to retire rich?

 

[fleshconsumed]

Wait, what? There's an income limit for IRA?
What, the government doesn't want rich people to be able to retire rich?

Yes, there are contribution limits to both Roth IRA and Conventional IRA. If your AGI exceeds certain level you cannot contribute to Roth/Conventional IRA. The Conventional IRA limits are low, somewhat around 60K for an individual, Roth IRA starts phasing out around 115K for an individual I think.

So, what about people like my wife and I? We make over the married contribution limit for Roth IRA effective this year. However, we are close enough to the limit(s) that we MIGHT be able to dump enough into 401k to reduce our AGI and get under the limit for Roth IRA contributions. Should we consider doing that or should we start to seek out other investment opportunities?

I have never been able to find a clear definition of MAGI (Modified Adjusted Gross Income) for the purpose of Roth IRA income limit. However, to the best of my knowledge contributing to your 401K will lower your MAGI which can put you under the MAGI limit. Since you say you're close to the MAGI threshold, it means you and your wife combined make >181K. That puts you solidly in the 28% fed tax bracket, IMO, it's a no brainer that you should both max out your 401K - you'll be putting 35K into your retirement funds, but after taxes your net yearly income will only go down by 20K. Keep in mind, that 17.5K limit (18K in 2015) is for employer contribution only, it does not take into account employer match. Meaning you as an employee can put full 17.5K into 401K and then your employer can still put its match on top of 17.5K. If that doesn't put your below the MAGI limits, you may be able to use the "backdoor roth IRA" method as posted by someone in this thread already, but since I'm not anywhere close to MAGI I have no idea how that works.

 

[DaveSimmons]

If that doesn't put your below the MAGI limits, you may be able to use the "backdoor roth IRA" method as posted by someone in this thread already, but since I'm not anywhere close to MAGI I have no idea how that works.

From the linked article it only works if you don't have any existing traditional IRAs with a decent amount of money in them

#firstworldproblems

 

[maddogchen]

pfff....

List most ATOTers, I can't even get to my company's matching limit without going over the 401k limit. My company matches 4% but 1% of my income already hits the limit.

Thats what the hidden offshore tax free accounts are for. Back to watching HGTV and looking at which island to buy for retirement...

#TheOnePercenterProblems

 

[Jeff7]

No, if you can find a better fund elsewhere you should prod your HR to change companies to get that fund.

And hope that there's not some kind of cozy "old college buddies" arrangement between upper management and the person selling the 401k plan.

Also beware of markups if you ask for a specific fund.
A low-cost fund can end up with a 30x markup by the time it gets to you.


A small cost of 1% or 1.5% might sound tiny, but if your annual long-term return is only 7% to begin with, that cost is now somewhere around 15% of your annual return. That's money that's not in your account anymore, and so it cannot compound. Little costs take away a lot of money over time.

 

[Scarpozzi]

https://investor.vanguard.com/ira/how-to-open-an-ira

Vanguard isn't the only company out there. You can open IRAs through a number of companies including many banks and credit unions. If you already have accounts through companies, they may offer IRAs and you can manage them all through one online interface.

I opened an account with an initial investment of $500 a few years back. After that, I linked my bank account and setup auto deductions. You can also setup automatic investments. Be aware that you can purchase mutual funds, stocks, and ETFs all through a ROTH IRA. In the cases of stocks and ETFs, you often get hit with a transaction charge per trade. In some mutual funds or automatic investments, those fees are waved when you invest in in-house funds. Read the fine print though, many have steep fees that may contradict any savings you make right away.

I have fun with one of my accounts. I'll invest in leveraged funds and do riskier trading practices. My goal is to at least hit 10% gains, but I use it as a means to practice trading and get better at market prediction. I often will make trades and compound 20-30% returns using this account. Those earnings are dispersed though based on my bad decisions when I get stuck holding a stock or ETF longer than I want to for market recoveries...so my gains get pulled back to the market average. It's just something fun that I do aside from my other investments to pass the time.

 

[poopaskoopa]

Where does HSA fit in? My company throws $1k into it so I switched over to that for insurance and it looks like a traditional IRA with some withdrawal perks.

 

[MarkXIX]

Yes, there are contribution limits to both Roth IRA and Conventional IRA. If your AGI exceeds certain level you cannot contribute to Roth/Conventional IRA. The Conventional IRA limits are low, somewhat around 60K for an individual, Roth IRA starts phasing out around 115K for an individual I think.


I have never been able to find a clear definition of MAGI (Modified Adjusted Gross Income) for the purpose of Roth IRA income limit. However, to the best of my knowledge contributing to your 401K will lower your MAGI which can put you under the MAGI limit. Since you say you're close to the MAGI threshold, it means you and your wife combined make >181K. That puts you solidly in the 28% fed tax bracket, IMO, it's a no brainer that you should both max out your 401K - you'll be putting 35K into your retirement funds, but after taxes your net yearly income will only go down by 20K. Keep in mind, that 17.5K limit (18K in 2015) is for employer contribution only, it does not take into account employer match. Meaning you as an employee can put full 17.5K into 401K and then your employer can still put its match on top of 17.5K. If that doesn't put your below the MAGI limits, you may be able to use the "backdoor roth IRA" method as posted by someone in this thread already, but since I'm not anywhere close to MAGI I have no idea how that works.

It would take some significant changes for us to contribute the full $17.5k each every year, but we could do it. We aren't stretched thin, we'd just have to accept some near term concessions for long term gains.

Quick math shows if we both hit our max contributions limit, we'd be under the MAGI for still contributing to Roth IRA, but then we'd be living lean by investing a full $35k + $5.5k annually. We could do it though, but the kids are gonna be eating a lot more sandwiches!

 

[fleshconsumed]

It would take some significant changes for us to contribute the full $17.5k each every year, but we could do it. We aren't stretched thin, we'd just have to accept some near term concessions for long term gains.

Quick math shows if we both hit our max contributions limit, we'd be under the MAGI for still contributing to Roth IRA, but then we'd be living lean by investing a full $35k + $5.5k annually. We could do it though, but the kids are gonna be eating a lot more sandwiches!

The kids will adjust, this is kind of a side track, but IMO it helps if kids see some hardships when they are growing up just so that they can keep perspective later in life. Yes, contributing 35K pretax + 5.5K post tax (or 11K if both you and your wife want to contribute) into retirement funds will require adjustments, but it should be doable at your income range. You will most likely have to forgo some niceties, but IMO it's worth it. The good news is that at 28% fed tax bracket that 35K pretax is going to be more like 23K out of your yearly paycheck depending on how high your state taxes are. And that's assuming you contribute nothing to 401K now, if you're contributing into 401K's already, then maxing them out is going to have less of an impact. I'm trying to contribute as much as I can to 401K and have a little bit in Roth IRA as well. It sucks knowing my paycheck could be so much bigger, but I figure start saving early and often to give compounding as much time as possible to do its magic.

 

[MarkXIX]

We want to each have $1m in retirement funds when the time comes. Like most we started a little later than we would have liked, but we have time and income to make up that lost time.

Thanks for the advice.

 

[WhoBeDaPlaya]

I put 5% into a ROTH 401k, 4% company max match goes into a regular 401k.

 

[nk215]

I would max out the pretax amount first then put whatever left onto the after tax.

Define your goal then stick to it. I didn't invest in my 20s and missed out. I am now 15 years behind and contributing like crazy to make up for the time. Fortunately I can still make up. Many won't be able to

 

[alkemyst]

So this is the part that is fuzzy to me.
You withdraw from your 401k when you retire, which means you've stopped working so you're not earning a paycheck. So these 401k withdrawals essential become your income.
I understand some people may have alternative forms of income from investments, but is that going to be more than your paycheck, to the point where it would bump you into a higher tax bracket?

It depends if you are looking to retire at equal or greater your lifelong earning or struggle by and lower your standard of living.

The problem is you can't put really enough into a ROTH IRA to make it work by itself.

If one EVER gets a rollover option, go with brokerage / 401K fund you can really self-manage.