Retirement Options Question...

[AmpedSilence]

SO, my company doesn't offer a 401(k) until after being with them for a year. It's annoying.

What pre-tax retirement savings options do I have? I am looking at IRAs but they have a limit of $4,000; i need something that i can invest about $7,500 or so in.

TIA

 

[K1052]

Why not just park the non IRA eligible remainder in a normal account (index mutual funds/ETFs)?

 

[AmpedSilence]

No tax discount; i need to get under the magical 60k number so i can take student loan interest deductions; else i can't claim them on my tax return. I have to confirm this; but this from Dad who is an IRS Enrolled Agent, so i tend to believe him.

 

[coaster831]

Put $4k in a traditional and $4k in a Roth IRA (yes, it's not pre-tax, but it's still a good way to diversify your portfolio since you don't get taxed when you withdraw during retirement).

Edit: now I see why you want it pre-tax. Don't really know how to help you there since Roth contributions don't change your AGI.

 

[dullard]

Originally posted by: AmpedSilence
No tax discount; i need to get under the magical 60k number so i can take student loan interest deductions; else i can't claim them on my tax return. I have to confirm this; but this from Dad who is an IRS Enrolled Agent, so i tend to believe him.

It isn't worth it. Student loan interest deduction is slashed near the limit. That means, if you are just barely under the cutoff, you just get a small portion of your student loan deducted.

 

[dullard]

Read page 33. If your AGI is under $65,000 you can get a student loan interest deduction. However, if the AGI is between $50,000 and $65,000 you only get a portion of that deduction (depending on how close you are to $50,000).

Examples in numbers:
[*]Suppose you have $20,000 in student loans at 5% interest. That is <$1000 in interest.
[*]Suppose your AGI is $70,000 without changing things around.
[*]Thus, to get to the cutoff, you'd need $5000 in retirement savings (or other deductions). Lets pretend you really could find a way to get $7,500 into a retirement account.
[*]Your AGI becomes $70,000 - $7,500 = $62,500.
[*]Your student loan deduction is therefore: ($1000)*($65000 - $62500)/($65000 - $50000) = $166.
[*]At that AGI if you are single, you are in the 25% tax bracket.
[*]A $166 deduction thus saves you $166*25% = $41.50. Note: this doesn't count state taxes since I don't know your state income taxes.

You are doing an awful lot of work to save a measly $41.50 in taxes. Not only that, but it'll probably cost you nearly that much just to open an account (often there is a ~$10 opening fee + $10 yearly fee + other fees).

Plus, I don't think you can get around the IRS limits to begin with.

 

[AmpedSilence]

Hmmm... i'll have to look at the numbers that my Dad gave me again. IIRC, his numbers said that i would save 3k in taxes. That makes it worth it.

 

[dullard]

Originally posted by: AmpedSilence
Hmmm... i'll have to look at the numbers that my Dad gave me again. IIRC, his numbers said that i would save 3k in taxes. That makes it worth it.

If you could put $7500 into a retirement account (not allowed), you would save 25%*$7500 = $1875 for having the retirement account. Then if your numers are anywhere like what I posted, you'd save another ~$41 for the student loan deduction. State taxes aren't included, so bump that up.

It is a good idea to save for retirement. And you'll save a lot in taxes now. But those tax savings come from the retirement account, and NOT from the student loan deduction.

Also note, you'll pay close to the $1875 in taxes (adjusted for inflation and growth in stocks) when you retire so really you are just postponing the taxes and not getting lower taxes. Do I need to make a post on the fallacy of IRA tax savings?