So, I went to H&R block to do my taxes, as I do every year. This year, for the first time since we were married, my wife was unemployed for the entire year. My tax adviser suggested that we should max out a donation to her 401K account, as that’s basically pure upside, assuming we can afford it. (He said the max annual donation is $5500.)
My wife has several 401K accounts from previous jobs, but none of them let her donate now that she’s not employed there any more.
So can we just open up a brand new, empty, 401K account for her and put money in it? Is it any more complicated than it sounds?
thanks! (And any other relevant advice would be welcome as well.)
Either you or your advisor are confused. Only employers can offer 401Ks. Your advisor meant that you should open an IRA. However, I’m curious about the advisor’s reasoning her. A traditional deductible IRA would, as I understand it, offer you no benefit whatsoever because your wife has no income to deduct the contribution against. He may have meant that you should make a contribution to a Roth IRA, which certainly is a good move if you have the money, but isn’t going to make a difference tax-wise this year.
I think the idea is that if we’re filing jointly, then we can deduct some amount of retirement contribution from me (already done through my employer) and some amount for my wife (NOT done this year, a waste of potential), or something like that.
But, while he’s very smart, his English is a bit hard to follow, so I’m not entirely sure what he was saying.
Open a new Traditional IRA at a low cost broker like TD Ameritrade or Fidelity and rollover all her 401-k balances there to start. I can almost guarantee that you are getting killed by fees in those 401Ks and should be buying something like Vanguard or IShares ETFs in your own IRA instead.
Then you can contribute up to 5500 for last year to the Traditional IRA you opened to rollover for the tax deduction, or open a second Roth IRA account an contribute 5500 post-tax instead. I’d say probably if your income is between $61,500-$75,900 for married filing jointly you probably want to use a Roth IRA and all other eligible incomes Traditional IRA - lower than 61500 for the savers credit, higher than 75,900 because you are saving out of the 25% or higher tax bracket.
It’s also probably a good idea to look into moving her past 401k accounts into IRAs.
The majority of 401ks do not have competitive fee structures because they have a captive audience of company employees who can’t go elsewhere, while IRA providers have to individually compete for business from individuals, and often do. So you’re probably paying more than you could be for those 401ks.
As the OP subsequently recognized, he was talking about an IRA, not a 401k.
But just for the record …
Self-employed (“SE”) individuals absolutely can have a 401k. Which is far more advantageous than having a mere IRA and/or SEP-IRA. These things are called “self-directed 401k” or “individual 401k”. Any decent financial services firm sells this product. They act as the “plan sponsor” to the IRS even though you manage all aspects of how much you invest and what you invest it in. It costs a few bucks to set up and entails one extra form per year on your taxes.
They’re not relevant if you aren’t at least partly SE. But if you are, make decent money, and you don’t have one you’re almost certainly saving too little and paying too much tax. I’ve had a main job as an ordinary corporate employee plus done my own separate SE for years. Being able to feed a lot of the SE income into the SE 401k has been nice and really reduced my taxes.