Retirment questions: Rorth IRA has limits and other stuff

[KentState]

Even though I have about 30 years left to work, I have been starting to get retirement income anxiety. Was looking for additional places to save for retirement and was shocked that contributing to a Roth IRA had a limit based on income. So beyond maxing out 401k up to the limit, setting cash aside, what other options are there? Is this the point to get a financial adviser? Any recommendations on finding one that isn't going to drain me with fees?

 

[evident]

if you can max your 401k, make the max contribution to the roth ira, you're doing pretty good. you can put money in a 529 college fund if you plan to have kids. otherwise, there's traditional ira, standard investment accounts... not sure what else

 

[KentState]

if you can max your 401k, make the max contribution to the roth ira, you're doing pretty good. you can put money in a 529 college fund if you plan to have kids. otherwise, there's traditional ira, standard investment accounts... not sure what else

Appears that if you go over a certain income level, you can't contribute to a Roth IRA which is what got me thinking. Already started a 529 plan for my daughter. Have another 17 years to go on that one.

 

[brianmanahan]

Appears that if you go over a certain income level, you can't contribute to a Roth IRA which is what got me thinking.

you may be able to use the backdoor roth ira: http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

and possibly even the mega backdoor roth ira: http://whitecoatinvestor.com/the-mega-backdoor-roth-ira/

and the "stealth ira" hsa if you have HDHP: http://whitecoatinvestor.com/retirement-accounts/the-stealth-ira/

there is also spouses 401k/403b/etc if working

and beyond that, you can just invest in taxable accounts with tax-efficient funds: http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

 

[pete6032]

If you're able to save $17,500 per year for retirement, 30 years prior to your retirement date, you're doing pretty good for yourself. Congratulations.

 

[RossMAN]

you may be able to use the backdoor roth ira: http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

and possibly even the mega backdoor roth ira: http://whitecoatinvestor.com/the-mega-backdoor-roth-ira/

:wub:

 

[purbeast0]

wow i had no clue there was a limit on roth ira based on your income until this thread. thankfully my wife and i file jointly and it's also MAGI so i'm good with maxing it out every year.

 

[dullard]

Lets assume you are and will be single, have $0 saved right now, earn 8% returns, have 3.3% inflation, and will retire in 30 years. Assume that the 401k and IRA limits continue to go up with inflation. Assume the age 50+ bonus contributions stay at $5500 for a 401k and $1000 for an IRA.

With all of those assumptions, if you max out the 401k and IRA (or Roth IRA), then you will retire with $5.28 million. Adjusted for inflation that is $2.06 million in today's money. Conservatively, you can withdraw 4% of that a year. Meaning that you'd have a retirement income of $82,490 a year of today's money. In most cases you can withdraw up to 6% a year (albeit with some risk of running out of money) which gives you $123,736 a year of retirement income of today's money.

Then add in social security, add in any savings that you have, add in your employer's contributions, add in your home's value, etc. You are looking at an income in the $150,000 to $175,000 range in retirement. There is NO REASON to have retirement income anxiety if you max out the 401k and IRA/Roth IRA.

 

[dullard]

I did the backdoor IRA to Roth IRA contribution the one year that my income was high enough to disqualify me from the Roth IRA. It was very simple. Just keep track of what you did. Form 8606, non-deductible IRA and conversions to Roth IRA: http://www.irs.gov/pub/irs-pdf/f8606.pdf

The better option, if you happen to be right at the income limit, is to lower your adjusted gross income. Maxing out the 401k helps a lot. The next biggest chunk that you might qualify for is a health savings account (HSA). The idea is to keep your income high, but in forms that don't count as adjusted gross income.

If you are single, then the Roth IRA contributions start to be limited at $116,000 of income. But contribute $18,000 to the 401k and your Roth IRA contributions aren't limited until $134,000 of income. If you also put in $3300 to the HSA, then the Roth IRA contributions aren't limited until $137,300 of income. Beyond that it gets harder to shift income.

 

[dullard]

Finally, after-tax investment has its perks too. Yes, you'll probably have to pay taxes if you make money. But only if you make money. And those taxes are lowered (long term capital gain taxes aren't very high).

The biggest perk is that if you donate after-tax investments instead of donating money, then you get the gains AND don't pay taxes at all. Same goes if you have people inherit the after-tax investments from you: as long as it isn't subject to estate taxes (passing on more than $5.43 million in 2015) then no one ever pays taxes on the gains, neither you nor the people who inherit it.

 

[brianmanahan]

:wub:

it's not what you think!! D:

i am using the mega backdoor roth ira to put 25$k into my roth ira per year, instead of 5.5$k.

 

[brianmanahan]

wow i had no clue there was a limit on roth ira based on your income until this thread. thankfully my wife and i file jointly and it's also MAGI so i'm good with maxing it out every year.

there's really not a limit right now, due to the backdoor ira process. you just can't have any traditional iras when you do it - everything has to be in a 401k or roth ira.

 

[dullard]

there's really not a limit right now, due to the backdoor ira process. you just can't have any traditional iras when you do it - everything has to be in a 401k or roth ira.

You can have traditional IRAs to start with, but they too need to be converted and taxes paid.

 

[brianmanahan]

You can have traditional IRAs to start with, but they too need to be converted and taxes paid.

unless you roll your existing traditional IRA/simple IRA/SEP IRA into a 401k beforehand, in which case you won't have to convert and pay taxes. i think that needs to happen the calendar year before.

 

[TheVrolok]

you may be able to use the backdoor roth ira: http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

and possibly even the mega backdoor roth ira: http://whitecoatinvestor.com/the-mega-backdoor-roth-ira/

and the "stealth ira" hsa if you have HDHP: http://whitecoatinvestor.com/retirement-accounts/the-stealth-ira/

there is also spouses 401k/403b/etc if working

and beyond that, you can just invest in taxable accounts with tax-efficient funds: http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement

Came here to post this. Nail. Head.

 

[jpiniero]

Appears that if you go over a certain income level, you can't contribute to a Roth IRA which is what got me thinking. Already started a 529 plan for my daughter. Have another 17 years to go on that one.

I had to look it up; it's 114k where it starts to get limited for single and 181k for married... and that's the adjusted (post fed taxes?) number. In other words, the amount of people who would have "retirement anxiety" while hitting the limit is like 0.

 

[dr150]

OP,
IF you're already above $114k single/$181k married in income (as it seems since you're complaining about income limits), then you need to do a backdoor transfer (as already mentioned above).

The steps have to be repeated every year for as long as the govt. allows it. Obama is already threatening to close the backdoor, btw.

You have until April 15, 2015 deadline to contribute to your 2014 ROTH IRA. While you're at it, might as well max out the 2015 at the same time if you can afford to.

The way the backdoor works is thusly:
1.) Open a Traditional IRA Account at a brokerage firm (i.e. Ameritrade, Etrade, Vanguard, Fidelity, Schwab, etc).
2.) Open a ROTH IRA Account at the same firm.
3.) FUND the Traditional IRA Account. Max it out now so you don't have to fill out additional future funding paperwork later.
4.) Once the Traditional is hopefully fully funded to the max for the year, fill out a Traditional to ROTH transfer form. The brokerage retirement dept. can hand-hold you how to fill out this simple form.
5.) Once the form is submitted, wait 3-4 business days until that Traditional IRA money is moved over to your ROTH account.
6.) Once the money is in the ROTH invest it as you wish. A solid Warren Buffet recommended S&P 500 index fund like VOO or VTI is a no-brainer as they're cheap (.05% fee) and grow and compound well.
7.) Tell your firm to set the option to reinvest the ETF's dividend to buy more shares. This order must be given manually so that every ETF you buy in the future will have it's dividends automatically reinvested (i.e. Ameritrade). Some firms like Etrade, you have to manually do this for every new product ETF...more of a pain in the ass.
8.) Repeat this entire procedure every year until Obama changes it(?). Put fresh money to next years ROTH around January.

Choosing the correct brokerage is a rather big deal if you're dealing in ETFs. I try to avoid the ~$10 trading fees by choosing a brokerage that has a good menu of Fee Free ETFs. Amertrade has some Vanguard/iShares, etc. Fidelity has some iShares. Schwab has Schwab and Guggenheim. Etrade has some Wisdomtree, etc. Vanguard has Vanguard, of course.

I use Ameritrade as I use their fee free VTI as well as other more market focused products (their menu of FREE ETFs satisfy me). Schwab also has a good offering of ETFs, but their trading platform sucks (security sucks...the password can only be set to 7-8 digits?)....Schwab is always promising they're going to retool their website (they haven't). And Vanguard has all their universe of products (their customer service ain't great like the other brokerages...antiquated).

When investing in a ROTH, be mindful that you're paying the taxes of that's year's amount up-front. When you go to your accountant during tax season, tell him/her you did a ROTH Backdoor Conversion. The accountant will fill out the correct tax forms for this.
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You're doing the right thing to sock away as much as possible into the 401k and ROTH (until the backdoor rule changes). Your 30 years will compound that money really nicely! I wish I would have started this process in my 20's. Missing all those compounding years is a huge kick in the balls!!
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Before opening an IRA, take advantage of some BONUS OFFERS the brokerages always run:
http://www.hustlermoneyblog.com/best-brokerage-bonuses/

 

[Tweak155]

So I just started up a new 401k this year... been thinking about finally doing a Roth IRA... especially since it will cut me some slack on my tax burden this year... but how do I make good judgement on where to open one? Vanguard seems to be pretty popular but I don't know what makes it a good choice. Biggest warning signs I've read about are yearly fees... do I have to worry about per-trade fees if I keep investing into the same stocks?

 

[DaveSimmons]

Past a certain amount and income level, you just start a normal brokerage account account at someone like Schwab, Fidelity or Vanguard (if you just need index funds).

The brokerage account is not tax-sheltered so you pay income tax every year on the distributions, but on the other hand you can get at the money easily if you need to without worrying about 410k or IRA restrictions on withdrawals.

If you do this, one tip is to look at the tax bite for each fund type and put the highest ones into your IRA / 401k with the lowest ones in your regular brokerage account.

For example, you might make the brokerage account 100% S&P 500 index funds or ETFs (or Scwhab's large-cap index equivalent), then put the small-cap and foreign index funds in your 401k and IRA.

Congratulations, saving "too much" is a good place to be in. Combine that with having 0 debt (beyond possibly a mortgage) and you'll get very comfortable financially over time.

 

[DaveSimmons]

So I just started up a new 401k this year... been thinking about finally doing a Roth IRA... especially since it will cut me some slack on my tax burden this year... but how do I make good judgement on where to open one? Vanguard seems to be pretty popular but I don't know what makes it a good choice. Biggest warning signs I've read about are yearly fees... do I have to worry about per-trade fees if I keep investing into the same stocks?

We recommend Vanguard because they offer very good index funds with very low annual expenses. They pretty much invented the low-expense index fund.

If you don't want to worry about picking funds and being "diversified" their Target (year) fund like Target 2050 are a great choice. It is a fund made up 100% from other index funds, mostly stocks but with some bonds. As you get closer to retirement the fund automatically changes its mix to add in more bonds.

That single fund is fully diversified, it includes the US stock market, foreign stocks and bonds.

 

[Tweak155]

We recommend Vanguard because they offer very good index funds with very low annual expenses. They pretty much invented the low-expense index fund.

If you don't want to worry about picking funds and being "diversified" their Target (year) fund like Target 2050 are a great choice. It is a fund made up 100% from other index funds, mostly stocks but with some bonds. As you get closer to retirement the fund automatically changes its mix to add in more bonds.

That single fund is fully diversified, it includes the US stock market, foreign stocks and bonds.

Is that a type of fund you can pick with a Roth IRA? Or is that traditional IRA only? Because that sounds right up my alley lol.

I ask because I thought you didn't pay tax on Roth IRA's because you put in with already-taxed money? Sounds like I'd just have to pay it on dividends?

 

[brianmanahan]

... been thinking about finally doing a Roth IRA... especially since it will cut me some slack on my tax burden this year...

fyi, roth IRA does not lower your taxable income when you make the contribution. it is tax-free when you take the money OUT.

if you want to decrease taxable income with an IRA, you would need a traditional IRA, but that has a lower income limit (i think 70$k for single person).

 

[Tweak155]

fyi, roth IRA does not lower your taxable income when you make the contribution. it is tax-free when you take the money OUT.

if you want to decrease taxable income with an IRA, you would need a traditional IRA, but that has a lower income limit (i think 70$k for single person).

Yeah I realized that after I posted it... Roth IRA seems like the way to go though since I have a 401k through work and so does my wife, both of which offer employer matching, although they're somewhat weak.

Thinking I'll just put $11k towards a Roth IRA for me and $11k towards one for my wife and get last year and this year out of the way.

 

[brianmanahan]

Thinking I'll just put $11k towards a Roth IRA for me and $11k towards one for my wife and get last year and this year out of the way.

:thumbsup: good plan

 

[DaveSimmons]

Is that a type of fund you can pick with a Roth IRA? Or is that traditional IRA only? Because that sounds right up my alley lol.

I ask because I thought you didn't pay tax on Roth IRA's because you put in with already-taxed money? Sounds like I'd just have to pay it on dividends?

Vanguard.com offers both Traditional and Roth IRAs. You can pick one of their Target (year) funds for either account.

Roth is after-tax money. It does not lower your taxes for this year, but all growth is tax free over the years and when you withdraw the money.

Traditional IRA is before-tax money. It lowers your taxes for this year. It is tax-sheltered while it grows, so you do not pay any taxes over the years. You do pay taxes when you take the money out at retirement.