What we did was to stash extra money (about 20% of my gross pay) into non-retirement investment accounts, with reasonable growth, and then moved some of this into income producing accounts. This maximizes your flexibility. Since you pay tax on dividends each year, you can take money out of these accounts, if you need it, paying capital gains tax only. And you can mix taking money out of IRAs, moving money from IRAs to Roths and spending this post-tax money as your situation warrants.
And here is another benefit. Before I retired we computed how much money we’d need every year to maintain our lifestyle. I was worried that we’d have to cut something out to do this, but when I looked at our spending I found out that we were already there and the difference between our spending and my income (after taxes) was all going into savings.
So, you can practice living on the income you’ll have after retirement, and save the rest.
One more thing. My financial planner did a Monte Carlo simulation of my finances over thousands, perhaps tens of thousands, or scenarios. This gives a range of probabilities for how much money you’ll have at each age up to over 90. It was very comforting. As it turns out we are ahead of the 10% probability area (which means there is only a 10% probability we’d have that much) so so far, so good.
Any single estimate of how much you’ll have strongly depends on economic assumptions, which are usually wrong. This method removes a lot of that.
I disagree. I only started a Roth IRA after I retired but for the three years my wife was still working. After that since we were living on savings, I converted 10% of my IRA to the Roth IRA (at a low tax rate).
What not a Roth IRA? It avoids the PITA ‘basis’ mentioned above and can still be invested in the same funds as your IRA. The only catch I should if you exceed the income limit. In that case, you would need to play the backdoor game after rolling your current IRA accounts into your 401k. Then when you retire, roll the 401k back to an IRA for maximum flexibility.
A bit of a pain but if you think you could end up with a decent amount in Roth IRA for emergency/estate use…
In four years you could contribute $28K. Then between 65 and 70 (if you are living partially or completely on savings), convert a portion of your IRA each year (up to the top of the 12% tax bracket).
As noted, all of the contributed & converted dollars are available if needed with no tax and the growth in the Roth will never be taxed.
You must not have been at the movies lately. A place I avoid.
Not really. You don’t need to account for every penny. Our major credit card let us grab our years spending broken down into categories. We added our mortgage and the bills we paid online using our bank. That covered entertainment, food, and necessities.
We don’t budget since we’re both cheap and we both naturally spend less than we make. The rest of the money I made went right into savings, which I knew but since my wife wrote the checks I didn’t have a good feel for how much it was.
Not everyone is going to have such a pleasant experience doing this, but it isn’t really hard. This is one place where not using cash much helps.
Sort of. To put $25,000 in to a Roth 401k, you actually have to put in the $25,000 PLUS any taxes due on that amount. So your budget is allocating a larger amount to your retirement.
Let’s say you’re in the 20% tax bracket now and in retirement in 10 years (let’s also assume that contributing $25k into a pre-tax 401k didn’t affect your bracket). And we’ll say that $25,000 in a retirement account will grow to $50,000 in 10 years.
If you put that money in pre-tax, you’ll owe $10,000 in taxes on it when you take it out. If you put that money in post-tax, you won’t owe any taxes on it. Pretax, $25k got you $40k. Post-tax, $30k got you $50k. I’d rather pay the $5k in taxes now than the $10k later.
Yeah, it’s actually a wash when you run the numbers out. The other major advantage/feature is that it diversifies your tax-types. We don’t know if taxes will go up or down 10 years from now. But Social Security is taxed, the majority of his 401k will be taxed - but any Roth amounts won’t. They also won’t be subject to RMDs, which is nice.
That’s not right - if you take $30k, you have a choice to put all $30k into an IRA, or to pay $5k in taxes and put $25k into a Roth. In ten years, let’s say the value doubles, so the IRA is worth $60k but you owe $10k in taxes, or the Roth is worth $50 tax-free. You have $50k either way.
If your tax rate then is different from your tax rate now, then it wouldn’t be the same, but that’s a complicated question.
My company offers all 3. In the 22 years that I’ve worked here, (I support our payroll/benefits system) I’ve only known of one person that contributed to #3. He contributed nothing to 1 or 2. I never did understand why anyone would do that.
The max contribution into a 401k for someone over 50 is $25,000, either pre- or post-tax. (The max contribution for an IRA is actually $7000 for someone over 50, but I’m assuming you just meant pre-tax 401k contributions.)
Assuming regular (vs Roth): I think the distribution rules are similar. And you may have better investment choices in an IRA vs a 401(k).
The only real downside to the IRA is that the money is less protected from lawsuits and bankruptcy; if you are concerned about either, leave it in the 401(k).
Re the OP: Couldn’t hurt to put a bit into the Roth, for the reasons already cited. Yes, it’d be better to have invested that 20 years ago, but you’ll still reap some benefit. Plus the money is more accessible when you need it if you don’t want a tax hit.
I think the rule re withdrawals is more of an issue with a Roth IRA vs a Roth 401(k); I don’t know if the employer plan would even allow withdrawals while you’re still employed, and once you hit the minimum retirement age (59 1/2?) you wouldn’t have a penalty anyway.
Oooh, just spotted this: “So… what should I do with that extra money I am getting at the end of the year? I have a few traditional IRAs (mutual funds); I’m thinking I should direct it toward one of them?”
Bear in mind you might exceed income limits for such contributions being pretax. If you can swing it, from a cash flow standpoint, you’d be better off bumping up your 401(k) withholdings to absorb that money.
Supposedly mine would do the full matching even if I hit the limit earlier in the year.
Of course my employer also has changed their plan so they don’t match anything until mid-December. If you leave the firm earlier in the year, well, sucks to be you. (they do have an exception for if you retire mid-year; dunno if they also have an exception if you die midyear). Even before that, though, I think they would give the full matching.
And more from me (avoiding working here, as you can tell):
This seems to bear out that you can’t take distributions until the money has been there for 5 years - which stuns me. I mean, I know about Roth IRAs, but I had assumed that if you were past retirement age, that no longer applied.
They make a couple of interesting points, that Roth distributions will not affect things like Medicare Part B premiums and taxability of Social Security benefits.
I started a Roth IRA past retirement age and it certainly applies. What I’m not sure about is whether each contribution has the 5 year rule or if it applies to the fund as a whole - that is if you wait five years to take out your first contribution, you can also take out the one made the year previous.
My employer did not offer a Roth 401(K) which makes sense because one of the big benefits of the traditional 401(K) is delaying tax until you are in a lower bracket. I don’t really see the benefit of it.
A Roth IRA after retirement is a good place to stash money from a traditional IRA while you are in a low bracket, since you can control how much you convert.
The benefits are the same as with a Roth IRA: after-tax contributions, never pay any taxes o any of the earnings. PLUS, there are income limits on whether you can contribute to a Roth IRA; those do not apply to a Roth 401(k).
However, when someone does retire with money from a Roth 401(k), apparently you need to roll that over into a Roth IRA because otherwise, it’s subject to the same MRDs as the regular 401(k) money.
Once you start RMDs from pretax accounts, conversions can only be done to a Roth IRA for funds after taking the RMD. This could be at a higher bracket than you might wish.
To add to / clarify the above: not only are there no income limits, but you can contribute a lot more to a 401(k) than to any kind of IRA. 19,000 this year, vs 6,00 for an IRA.
Plus the “catch-up” contribution of 6,000 a year if you’re past age 50. So you could contribute 25,000 a year to the 401(k) versus 6,000 to an IRA.
Note that having a 401(k) does NOT preclude you from contributing to an IRA. So you could put 25K into the 401(k), and 6K into an IRA.
The above is all regardless of whether you do Roth or traditional, of course.
If your regular 401(k) contributions lower your income enough to make you eligible for a Roth IRA, that’s an option: put your Roth money in the IRA and regular in the 401(k). Then you don’t have the issue of rolling the Roth portion of the 401(k) into a separate IRA to avoid the RMD issue.
Setting aside the Roth discussion for a moment, tell me if I have this clear.
(assuming you are over 50)
Limit of contribution to an IRA per year: $7000.
Limit of contribution to a 401k per year: $25,000 ($19,000 + $6000 catch up)
Total you may contribute: $32,000.
Is this correct?
Also, this applies the same to a married couple as a single person? In other words, the spouse cannot also load an additional $7000 into an IRA, bringing the total to $39,000 can he or she?
mmm
That’s the combined limit for before-tax traditional 401k plus Roth 401k contribution. You may make after-tax traditional 401k contributions in addition, if your employer’s plan allows after-tax traditional 401k contributions.
Yes, a spousal IRA would allow the spouse to contribute an additional $7,000 provided that the combined compensation income of the two spouses is at least $14,000, they file jointly, and both are over 50. (“Compensation income” is taxable salary, wages, alimony, self-employment, and non-taxable combat pay.)
