Poll

How Much Should I Contribute to My 401k in 2016?

Full $18,000 (Have Enough of Emergency Fund and $325 is Enough Buffer)
52 (86.7%)
Between $10,000 and $15,000 (Good Balance b/w Aggressive Saving and Adequate Cash Flow)
8 (13.3%)
Less Than $10,000 to Preserve Cash Flow (Need This Cash Flow in Case of Emergency)
0 (0%)

Total Members Voted: 59

Author Topic: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?  (Read 6199 times)

ReadySetMillionaire

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Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« on: December 10, 2015, 03:27:44 PM »
I'm starting to look forward to 2016 and wondering how much I should contribute to my employer's 401k.

My monthly expenses are about $1400 and I make about $4,000 gross per month. The amount I net obviously depends on how much I contribute to my 401k. My best guesses (based on state and local tax rates, as well as other payroll deductions like health care and HSA contributions) are as follows:

$500/month to 401k (12.6% of gross): $2,260 net monthly income (thus leaving $860 left over to invest elsewhere).

$1000/month to 401k (25.3% of gross): $1,966 net monthly income (thus leaving $566 left over to invest elsewhere).

$1500/month to 401k (37.9% of gross): $1,725 net monthly income (thus leaving $325).

A few other things to note:

(1) I already have an emergency fund of about $11,000, which is about 4 months living expenses for my GF and me. This should be $15,000 after we get Christmas bonuses and tax returns, which gives us a full six month emergency fund.

(2) And obviously there's a lot of different numbers I could plug in (i.e., contribute $750/month, $1250/month, whatever). I guess I'm seeking what the right amount of "buffer" is.

So I can theoretically go all the way to $18,000, but there are two sides to this coin: (a) I like the idea of forced savings and forcing myself to live on $1,700 per month, but (b) that really decreases my liquidity and cash flow.

I think decreasing my contribution to somewhere between $10,000 and $12,500 and contributing to a tIRA at the end of the year (and thus improving cash flow) might be a better idea.

So, what do you think is best? Go for the full $18,000 max or bring that down a little to increase cash flow/liquidity (and then invest in tIRA with funds left over at end of year)?

ulrichw

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #1 on: December 10, 2015, 03:58:01 PM »
You're talking about "cash flow" and "liquidity" as if they're inherently good things. My question would be - what are you going to use that liquidity and cash flow for?

Your $11,000 emergency fund is pure liquidity, so it seems like you're covered there.

So the other side of the equation is "cash flow". The reason why you would need cash flow is if you're planning to spend the money (hence the "flow"). But it sounds like you're planning on having money to put into a tIRA at the end of the year - where are those coming from? Why not put those straight into your 401(k)?

It sounds even your highest deferral option leaves you with a healthy spending buffer.

I think you're getting caught up in the terms without thinking what they're for. If you're going to spend the money, then yes, defer less. If you're not, there's no value in accumulating the money now and putting it into a tax-deferred account later. Your liquidity and cash flow is getting you nothing other than delaying putting your money to work and making your accounting more complicated. (All IMO, of course)

RFAAOATB

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #2 on: December 10, 2015, 03:59:27 PM »
I'm going to piggy back on this and say I bumped my contributions up to the max.  We'll see how long I can hold out going from $3,000 a year to  $18,000.  My net pay should be close to what it was before I got all my promotions so we'll see how hard a pay cut hits me.

One question I did have is does the pretax 457b from my full time job and the pretax TSP contribution from my National Guard pay go into the same $18,000 bucket?  In other words does maxing out the 457b mean I have to cut the TSP or switch to ROTH TSP?


Jack

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #3 on: December 10, 2015, 04:09:12 PM »
I voted for $18,000, but that's only because I didn't see an "$18,000 in the 401k and $5,500 in the IRA" option.

ReadySetMillionaire

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #4 on: December 10, 2015, 04:15:38 PM »
I voted for $18,000, but that's only because I didn't see an "$18,000 in the 401k and $5,500 in the IRA" option.

Don't think I have enough for that (saving for a couple other expenses).

ShoulderThingThatGoesUp

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #5 on: December 10, 2015, 04:18:12 PM »
I voted for $18,000, but that's only because I didn't see an "$18,000 in the 401k and $5,500 in the IRA" option.

Don't think I have enough for that (saving for a couple other expenses).

I'm with Jack. What is so huge that is worth giving up that level of return?

Jack

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #6 on: December 10, 2015, 04:24:37 PM »
I voted for $18,000, but that's only because I didn't see an "$18,000 in the 401k and $5,500 in the IRA" option.

Don't think I have enough for that (saving for a couple other expenses).

It'll save you $825 in income tax. Use that for the other expenses instead.

Edit: I hit submit and then realized the difference would also kick you out of the Saver's Credit. (Well, almost: it would reduce your multiplier from 50% to 10%.) Maxing the IRA along with the 401k would save you $1625 in income tax.
« Last Edit: December 10, 2015, 04:31:01 PM by Jack »

Another Reader

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #7 on: December 10, 2015, 04:32:06 PM »
At an annual salary of $48k, how much you can defer depends a lot on your expenses.  I think for the first year I would start out with $15,000 going into the 401(k).  Every month at the end of the month, if I had not found a more compelling use for the $250 difference, that would go into the IRA.  At the end of six months, I would re-evaluate.  If I was able to live on the net, I would up the 401(k) to $1,500 a month.  All other savings would go to the IRA.

If you find yourself with a raise or a bonus, I would direct that money into one of the tax deferred pots of money as well.  In your shoes, I would put this year's bonus into the IRA, as you have a solid emergency fund already.

ReadySetMillionaire

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #8 on: December 10, 2015, 05:27:28 PM »
You're talking about "cash flow" and "liquidity" as if they're inherently good things. My question would be - what are you going to use that liquidity and cash flow for?

Your $11,000 emergency fund is pure liquidity, so it seems like you're covered there.

So the other side of the equation is "cash flow". The reason why you would need cash flow is if you're planning to spend the money (hence the "flow"). But it sounds like you're planning on having money to put into a tIRA at the end of the year - where are those coming from? Why not put those straight into your 401(k)?

It sounds even your highest deferral option leaves you with a healthy spending buffer.

I think you're getting caught up in the terms without thinking what they're for. If you're going to spend the money, then yes, defer less. If you're not, there's no value in accumulating the money now and putting it into a tax-deferred account later. Your liquidity and cash flow is getting you nothing other than delaying putting your money to work and making your accounting more complicated. (All IMO, of course)

This was really persuasive. Thanks. Think I'm going to the max.

ReadySetMillionaire

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #9 on: December 11, 2015, 05:55:19 AM »
I voted for $18,000, but that's only because I didn't see an "$18,000 in the 401k and $5,500 in the IRA" option.

Don't think I have enough for that (saving for a couple other expenses).

I'm with Jack. What is so huge that is worth giving up that level of return?
Traveling to a couple friends' weddings this summer (I'm in both) and saving for an engagement ring/wedding.
« Last Edit: December 11, 2015, 06:53:43 AM by ReadySetMillionaire »

ReadySetMillionaire

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #10 on: December 11, 2015, 06:54:14 AM »
I voted for $18,000, but that's only because I didn't see an "$18,000 in the 401k and $5,500 in the IRA" option.

Don't think I have enough for that (saving for a couple other expenses).

It'll save you $825 in income tax. Use that for the other expenses instead.

Edit: I hit submit and then realized the difference would also kick you out of the Saver's Credit. (Well, almost: it would reduce your multiplier from 50% to 10%.) Maxing the IRA along with the 401k would save you $1625 in income tax.

Can you run through these numbers for me? I know my taxes will obviously be lower if I contribute to pre-tax accounts, but I'm not 100% following your math.

Baron235

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #11 on: December 11, 2015, 07:06:15 AM »
Why max out the 401 k first?  Max out the IRA first.  You have more investing flexibility.  Then go for as much 401k like 12k. IRAs are better than 401ks except for the match.

ReadySetMillionaire

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #12 on: December 11, 2015, 07:11:57 AM »
Why max out the 401 k first?  Max out the IRA first.  You have more investing flexibility.  Then go for as much 401k like 12k. IRAs are better than 401ks except for the match.
My 401k is through Fidelity and has total stock market index funds with .07% expense ratios. I can't quite track where the other fees might be, but I like the idea of forced saving into the 401k and I'd be investing in the same fund in my tIRA anyway.

terran

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #13 on: December 11, 2015, 07:12:25 AM »
It'll save you $825 in income tax. Use that for the other expenses instead.

Edit: I hit submit and then realized the difference would also kick you out of the Saver's Credit. (Well, almost: it would reduce your multiplier from 50% to 10%.) Maxing the IRA along with the 401k would save you $1625 in income tax.

Can you run through these numbers for me? I know my taxes will obviously be lower if I contribute to pre-tax accounts, but I'm not 100% following your math.

I think where you're probably getting hung up is not accounting for the savers tax credit: https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Savings-Contributions-Savers-Credit

Other than that you can mess around with https://turbotax.intuit.com/tax-tools/calculators/taxcaster/ by reducing your gross income by the amount of 401k and IRA contributions you are contemplating.

Why max out the 401 k first?  Max out the IRA first.  You have more investing flexibility.  Then go for as much 401k like 12k. IRAs are better than 401ks except for the match.

Not always true. Actually not at all true in terms of legal protections (401k is better), so only true if the funds in the 401k aren't good.

ReadySetMillionaire

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #14 on: December 11, 2015, 08:49:15 AM »
It'll save you $825 in income tax. Use that for the other expenses instead.

Edit: I hit submit and then realized the difference would also kick you out of the Saver's Credit. (Well, almost: it would reduce your multiplier from 50% to 10%.) Maxing the IRA along with the 401k would save you $1625 in income tax.

Can you run through these numbers for me? I know my taxes will obviously be lower if I contribute to pre-tax accounts, but I'm not 100% following your math.

I think where you're probably getting hung up is not accounting for the savers tax credit: https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Savings-Contributions-Savers-Credit

Other than that you can mess around with https://turbotax.intuit.com/tax-tools/calculators/taxcaster/ by reducing your gross income by the amount of 401k and IRA contributions you are contemplating.

Why max out the 401 k first?  Max out the IRA first.  You have more investing flexibility.  Then go for as much 401k like 12k. IRAs are better than 401ks except for the match.

Not always true. Actually not at all true in terms of legal protections (401k is better), so only true if the funds in the 401k aren't good.

You're right, didn't know about the deduction. As I've posted in another thread, I'm also interested in earning some sort of side income, so if that works out, then I'd definitely would take the above poster's advice and try to max the tIRA as well.

terran

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #15 on: December 11, 2015, 08:51:55 AM »
The savers credit is a bit of a balancing act in terms of staying below the limits. That said, always best not to let the tax tail wag the income dog (increase income when you can and deal with the tax consequences that brings up).

dcozad999

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #16 on: December 11, 2015, 08:56:46 AM »
It'll save you $825 in income tax. Use that for the other expenses instead.

Edit: I hit submit and then realized the difference would also kick you out of the Saver's Credit. (Well, almost: it would reduce your multiplier from 50% to 10%.) Maxing the IRA along with the 401k would save you $1625 in income tax.

Can you run through these numbers for me? I know my taxes will obviously be lower if I contribute to pre-tax accounts, but I'm not 100% following your math.

I think where you're probably getting hung up is not accounting for the savers tax credit: https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Savings-Contributions-Savers-Credit

Other than that you can mess around with https://turbotax.intuit.com/tax-tools/calculators/taxcaster/ by reducing your gross income by the amount of 401k and IRA contributions you are contemplating.

Why max out the 401 k first?  Max out the IRA first.  You have more investing flexibility.  Then go for as much 401k like 12k. IRAs are better than 401ks except for the match.

Not always true. Actually not at all true in terms of legal protections (401k is better), so only true if the funds in the 401k aren't good.


The S&P Index fund in my Fidelity 401k has a .022% expense ratio.

Jack

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #17 on: December 11, 2015, 09:21:00 AM »
It'll save you $825 in income tax. Use that for the other expenses instead.

Edit: I hit submit and then realized the difference would also kick you out of the Saver's Credit. (Well, almost: it would reduce your multiplier from 50% to 10%.) Maxing the IRA along with the 401k would save you $1625 in income tax.

Can you run through these numbers for me? I know my taxes will obviously be lower if I contribute to pre-tax accounts, but I'm not 100% following your math.

You know what? I think I messed up before by accidentally using taxable income instead of AGI on form 8880 line 8. Embarrassing!

Sorry, it looks to me now like you'd be in the 10% range for the Saver's Credit whether you contributed to your IRA or not. If you could figure out some way to reduce your AGI by another $6250 (e.g. by other pre-tax deductions, such as premiums for employer-provided insurance, HSA contributions, etc.) then you'd get into the 50% range. If you could only manage to reduce it by $4750 then you'd at least be in the 20% range.

(By the way, I'm using a 2014 1040 and a 2015 8880 because they're the first results on Google, so these numbers may be $50 or so off.)

1040:
max 401k + IRA401k only$15000 to 401k
line 22 (total income)300003000033000
line 32 (IRA contribution)550000
line 37/38 (AGI)245003000033000
line 40 (standard deduction620062006200
line 42 (exemptions)395039503950
line 43 (taxable income)143501985022850
line 44 (tax)169525282970
line 51 (Saver's Credit)2002000
line 63 (net tax)149523282770
difference vs. $15K case-1275-4420

8880:
line 3 (contributions)235001800015000
line 6 (limit)200020002000
line 8 (AGI)245003000033000
line 9 (multiplier)0.10.10
line 12 (credit)2002000

ReadySetMillionaire

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #18 on: December 11, 2015, 09:34:09 AM »
You know what? I think I messed up before by accidentally using taxable income instead of AGI on form 8880 line 8. Embarrassing!

Sorry, it looks to me now like you'd be in the 10% range for the Saver's Credit whether you contributed to your IRA or not. If you could figure out some way to reduce your AGI by another $6250 (e.g. by other pre-tax deductions, such as premiums for employer-provided insurance, HSA contributions, etc.) then you'd get into the 50% range. If you could only manage to reduce it by $4750 then you'd at least be in the 20% range.

(By the way, I'm using a 2014 1040 and a 2015 8880 because they're the first results on Google, so these numbers may be $50 or so off.)

1040:
max 401k + IRA401k only$15000 to 401k
line 22 (total income)300003000033000
line 32 (IRA contribution)550000
line 37/38 (AGI)245003000033000
line 40 (standard deduction620062006200
line 42 (exemptions)395039503950
line 43 (taxable income)143501985022850
line 44 (tax)169525282970
line 51 (Saver's Credit)2002000
line 63 (net tax)149523282770
difference vs. $15K case-1275-4420

8880:
line 3 (contributions)235001800015000
line 6 (limit)200020002000
line 8 (AGI)245003000033000
line 9 (multiplier)0.10.10
line 12 (credit)2002000
This is why I pay an accountant $100 per year.  Thanks for trying to help!

sheepstache

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #19 on: December 11, 2015, 09:40:06 AM »
It'll save you $825 in income tax. Use that for the other expenses instead.

Edit: I hit submit and then realized the difference would also kick you out of the Saver's Credit. (Well, almost: it would reduce your multiplier from 50% to 10%.) Maxing the IRA along with the 401k would save you $1625 in income tax.

Can you run through these numbers for me? I know my taxes will obviously be lower if I contribute to pre-tax accounts, but I'm not 100% following your math.

You know what? I think I messed up before by accidentally using taxable income instead of AGI on form 8880 line 8. Embarrassing!

Sorry, it looks to me now like you'd be in the 10% range for the Saver's Credit whether you contributed to your IRA or not. If you could figure out some way to reduce your AGI by another $6250 (e.g. by other pre-tax deductions, such as premiums for employer-provided insurance, HSA contributions, etc.) then you'd get into the 50% range. If you could only manage to reduce it by $4750 then you'd at least be in the 20% range.

(By the way, I'm using a 2014 1040 and a 2015 8880 because they're the first results on Google, so these numbers may be $50 or so off.)

1040:
max 401k + IRA401k only$15000 to 401k
line 22 (total income)300003000033000
line 32 (IRA contribution)550000
line 37/38 (AGI)245003000033000
line 40 (standard deduction620062006200
line 42 (exemptions)395039503950
line 43 (taxable income)143501985022850
line 44 (tax)169525282970
line 51 (Saver's Credit)2002000
line 63 (net tax)149523282770
difference vs. $15K case-1275-4420

8880:
line 3 (contributions)235001800015000
line 6 (limit)200020002000
line 8 (AGI)245003000033000
line 9 (multiplier)0.10.10
line 12 (credit)2002000

A traditional IRA would lower their AGI, no? Some trade-offs there obviously.

Jack

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #20 on: December 11, 2015, 10:24:25 AM »
This is why I pay an accountant $100 per year.  Thanks for trying to help!

Hey, I was just doing a quick calculation for a forum post. If I were actually filling out taxes I'd have double-checked my math the first time.

It'll save you $825 in income tax. Use that for the other expenses instead.

Edit: I hit submit and then realized the difference would also kick you out of the Saver's Credit. (Well, almost: it would reduce your multiplier from 50% to 10%.) Maxing the IRA along with the 401k would save you $1625 in income tax.

Can you run through these numbers for me? I know my taxes will obviously be lower if I contribute to pre-tax accounts, but I'm not 100% following your math.

You know what? I think I messed up before by accidentally using taxable income instead of AGI on form 8880 line 8. Embarrassing!

Sorry, it looks to me now like you'd be in the 10% range for the Saver's Credit whether you contributed to your IRA or not. If you could figure out some way to reduce your AGI by another $6250 (e.g. by other pre-tax deductions, such as premiums for employer-provided insurance, HSA contributions, etc.) then you'd get into the 50% range. If you could only manage to reduce it by $4750 then you'd at least be in the 20% range.

(By the way, I'm using a 2014 1040 and a 2015 8880 because they're the first results on Google, so these numbers may be $50 or so off.)

1040:
max 401k + IRA401k only$15000 to 401k
line 22 (total income)300003000033000
line 32 (IRA contribution)550000
line 37/38 (AGI)245003000033000
line 40 (standard deduction620062006200
line 42 (exemptions)395039503950
line 43 (taxable income)143501985022850
line 44 (tax)169525282970
line 51 (Saver's Credit)2002000
line 63 (net tax)149523282770
difference vs. $15K case-1275-4420

8880:
line 3 (contributions)235001800015000
line 6 (limit)200020002000
line 8 (AGI)245003000033000
line 9 (multiplier)0.10.10
line 12 (credit)2002000

A traditional IRA would lower their AGI, no? Some trade-offs there obviously.

That's what line 1040 line 32 already shows. (The 401k deduction lowers AGI too, but it's already subtracted out from the "wages, salary and tips" box on the W-2. If you swapped the $18000 401k / $0 tIRA option (the column labeled "401k only") for a $12500 401k / $5500 tIRA option in my calculations above, 1040 line 32 would go up by $5500 but so would line 22, so the changes would cancel out and the rest of the lines would stay the same.)

monstermonster

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #21 on: December 11, 2015, 10:48:02 AM »
This is really interesting to me as I'm also trying to figure this out for next year (but on a slightly lower but mostly similar salary.)

The Saver's Credit doesn't make a ton of sense to me: if I save $18,000 and get my AGI from $39,500 to $21500, that appears to still put me in the same category (10%). Can someone help me out with understanding it?

Edit: OHHHH so the Saver's credit is after your standard deduction - which means that I'd be in the 50% category after $21500-$6200. Now this is making sense!
« Last Edit: December 11, 2015, 10:50:23 AM by monstermonster »

ReadySetMillionaire

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #22 on: December 11, 2015, 11:05:42 AM »
Hey, I was just doing a quick calculation for a forum post. If I were actually filling out taxes I'd have double-checked my math the first time.

Definitely wasn't trying to insult you. Was just saying that you ran the numbers and I still had no idea what all of them meant, which is why I pay an accountant to figure it all out haha.

Jack

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #23 on: December 11, 2015, 11:23:11 AM »
Hey, I was just doing a quick calculation for a forum post. If I were actually filling out taxes I'd have double-checked my math the first time.

Definitely wasn't trying to insult you. Was just saying that you ran the numbers and I still had no idea what all of them meant, which is why I pay an accountant to figure it all out haha.

Well yeah, you have to go look at IRS forms 1040 and 8880 (and perhaps read the instructions for each). You could probably do it with the simpler 1040A or maybe even 1040EZ, but the line numbers would be different.

It's actually not hard once you've tried it a couple of times and gotten used to it.

This is really interesting to me as I'm also trying to figure this out for next year (but on a slightly lower but mostly similar salary.)

The Saver's Credit doesn't make a ton of sense to me: if I save $18,000 and get my AGI from $39,500 to $21500, that appears to still put me in the same category (10%). Can someone help me out with understanding it?

Edit: OHHHH so the Saver's credit is after your standard deduction - which means that I'd be in the 50% category after $21500-$6200. Now this is making sense!

No, the Saver's Credit is based on your AGI, which is calculated before you take the standard deduction.

However, if your AGI is $39500, your gross income is higher than ReadySetMillionaire's, not "slightly lower." That makes me think you might be confused, so I'll explain:

ReadySetMillionaire said his gross salary is $4000/month. $4k * 12  = $48000/year. 401k contributions are deducted directly from gross salary before it's even shown on the W-2, so if he contributed $18000 to the 401k then his W-2 salary (and 1040 line 7) would be $30000.

Similarly, if your $39500 figure is really your AGI, and you're also maxing your 401k (and everything on 1040 lines 8 through 21 are $0), that means your gross wages are $9500 higher than his. On the other hand, if you misspoke and $39500 is really your gross wages, and you're still also maxing your 401k, then your 1040 line 7 would be $21500.

If the latter case is correct -- that your W-2 salary / 1040 line 7 is $21500 -- then maxing a traditional IRA would make your AGI $16000, which means you really would be into the 50% Saver's Credit range.

monstermonster

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #24 on: December 11, 2015, 12:07:31 PM »
Hey, I was just doing a quick calculation for a forum post. If I were actually filling out taxes I'd have double-checked my math the first time.

Definitely wasn't trying to insult you. Was just saying that you ran the numbers and I still had no idea what all of them meant, which is why I pay an accountant to figure it all out haha.

Well yeah, you have to go look at IRS forms 1040 and 8880 (and perhaps read the instructions for each). You could probably do it with the simpler 1040A or maybe even 1040EZ, but the line numbers would be different.

It's actually not hard once you've tried it a couple of times and gotten used to it.

This is really interesting to me as I'm also trying to figure this out for next year (but on a slightly lower but mostly similar salary.)

The Saver's Credit doesn't make a ton of sense to me: if I save $18,000 and get my AGI from $39,500 to $21500, that appears to still put me in the same category (10%). Can someone help me out with understanding it?

Edit: OHHHH so the Saver's credit is after your standard deduction - which means that I'd be in the 50% category after $21500-$6200. Now this is making sense!

No, the Saver's Credit is based on your AGI, which is calculated before you take the standard deduction.

However, if your AGI is $39500, your gross income is higher than ReadySetMillionaire's, not "slightly lower." That makes me think you might be confused, so I'll explain:

ReadySetMillionaire said his gross salary is $4000/month. $4k * 12  = $48000/year. 401k contributions are deducted directly from gross salary before it's even shown on the W-2, so if he contributed $18000 to the 401k then his W-2 salary (and 1040 line 7) would be $30000.

Similarly, if your $39500 figure is really your AGI, and you're also maxing your 401k (and everything on 1040 lines 8 through 21 are $0), that means your gross wages are $9500 higher than his. On the other hand, if you misspoke and $39500 is really your gross wages, and you're still also maxing your 401k, then your 1040 line 7 would be $21500.

If the latter case is correct -- that your W-2 salary / 1040 line 7 is $21500 -- then maxing a traditional IRA would make your AGI $16000, which means you really would be into the 50% Saver's Credit range.
Thanks, that made sense. I misspoke using AGI to mean gross. I make $39500 gross.

So the latter case is correct. Right now I make $39500 gross and only put 12% into my 401K and then $5500 into a Roth. I don't qualify for the saver's credit at all now. I also have $960 in pre-tax deductions for medical.

I'm running the numbers from moving up to 45% in my 401K + $5500 in the roth, I believe will put me in the 50% category giving me $1000 back. (I also pay 9.5% state tax but I don't thiiink that matters.)

Proud Foot

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #25 on: December 11, 2015, 12:23:17 PM »
You are planning on having a $15,000 emergency fund.  Unless your company restricts you with regards to contribution changes I would set your contributions at the beginning of the year to hit the max and then if something happens you can use the emergency fund and adjust your contributions to increase your cash flow/replenish the emergency fund.

ReadySetMillionaire

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #26 on: December 11, 2015, 12:40:52 PM »
You are planning on having a $15,000 emergency fund.  Unless your company restricts you with regards to contribution changes I would set your contributions at the beginning of the year to hit the max and then if something happens you can use the emergency fund and adjust your contributions to increase your cash flow/replenish the emergency fund.
Ya, that's what I'm thinking about doing. When I wasn't eligible for contributions I was netting something like $2,640 per month. That would immediately increase cash flow by about $1,000, which should take care of mostly everything minus a significant emergency. And that's what the emergency fund is for.

Malum Prohibitum

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #27 on: December 12, 2015, 11:17:16 AM »
I voted for investing 1500 monthly (the entire 18k) and job searching to get that income up.

MDM

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #28 on: December 12, 2015, 12:53:56 PM »
I think where you're probably getting hung up is not accounting for the savers tax credit: https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Savings-Contributions-Savers-Credit

Other than that you can mess around with https://turbotax.intuit.com/tax-tools/calculators/taxcaster/ by reducing your gross income by the amount of 401k and IRA contributions you are contemplating.

Good point to consider the saver's credit.  TaxCaster, however, does not consider it.  A full blown version of TurboTax, TaxAct, etc. will.  Also the MMM case study spreadsheet will do the saver's credit.

MDM

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #29 on: December 12, 2015, 01:10:22 PM »
Perhaps $12K to the 401k and $5500 to a Roth IRA?

Output below is from the spreadsheet mentioned above, with numbers (and guesses) based on the OP.

CategoryMonthly
Comments
Annual
Salary/Wages for earner #1$4,000$48,000
Pretax Health Ins.$200$2,400
Employer-sponsored HSA$279At maximum$3,350
FICA base salary/wages$3,521$42,250
401(k) / 403(b) / TSP / etc.$1,000Room to increase?$12,000
Income subject to IRS tax$2,521$30,250
Federal Total Income$2,521$30,250
Federal tax$1942015 rates, S, stand. ded., 1 exempt.$2,331
State/City tax$83Guess, using 5.00% * Fed. Taxable$998
Soc. Sec.$218$2,620
Medicare$51$613
Total income taxes$547$6,561
Income before other expenses  $1,974$23,689
Monthly Average Expenses:
Miscellaneous$1,400$16,800
Non-mortgage total$1,400$16,800
Other tax-advantaged investments:
Roth IRA$458At maximum$5,500
Total Expense$1,858$22,300
Total to invest$116$1,389
Summary:
"Gross" income$4,000$48,000
Income taxes$547$6,561
After-tax income$3,453$41,439
IRA+401k/403b/TSP/457 (Savers' credit)$1,458$17,500
HSA$279$3,350
Living expenses$1,600$19,200
After-tax investable$116$1,389


Filing Status11=S, 2=MFJ, 3=HOH
# Exempt.1
Total Income$30,250
Std. Deduct.$6,300
Act. Deduct.$6,300
Exemption$4,000
AGI$30,250
MAGI$30,250
Taxable$19,950
1040 Tax$2,531
Saver's credit$200
Tax after n-r credit$2,331
Child Tax Cred.$0
EIC$0
Net Tax$2,331
Monthly$194
State tax$9985.00%
VersionV7.05


FIRE_Buckeye

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #30 on: December 13, 2015, 08:32:19 AM »
I can relate to your situation RSM.
I gross about $55,000, which under normal circumstances would be plenty to comfortably max my 401k. But I'm also looking to potentially buy a house in the next 18-24 months (with my gf), as well as the potential of proposing at some point in the near-intermediate term (been dating 3.5 years). Have ran the numbers, and should be able to swing maxing while saving for the other two life events, but is definitely going to be tight.

Based on the details you've provided and assuming no major life events in your immediate future, you should be able to comfortably max your 401k without issue.

ReadySetMillionaire

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #31 on: December 13, 2015, 12:33:57 PM »
MDM: any tax reasons why you recommend part 401k and part Roth?

I'm actually trying to keep AGI low to keep my student loan payments in check. With that in mind, would you still recommend contributing to a Roth?

MDM

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Re: Does Maxing My 401k ($18,000) Make My Budget Too Tight in 2016?
« Reply #32 on: December 13, 2015, 12:59:06 PM »
MDM: any tax reasons why you recommend part 401k and part Roth?

I'm actually trying to keep AGI low to keep my student loan payments in check. With that in mind, would you still recommend contributing to a Roth?
No comment on the student loan payment issue - I just haven't explored that issue enough to say. 

The reason for part traditional 401k and part Roth IRA is that, in the 15% federal + whatever state tax bracket, you are in between the 25% and 10% boundaries in the "usual rules of thumb" (see below).  There is actually a good chance that "some of each" is in fact the right thing for you, thus the suggestion.  See links below for more details.


In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct.   
Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).   
   
WHAT   
0. Establish an emergency fund to your satisfaction   
1. Contribute to 401k up to any company match   
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.   
3. Max HSA    
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level   
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)   
6. Fund mega backdoor Roth if applicable   
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.   
8. Invest in a taxable account with any extra.   
   
WHY   
0. Give yourself at least enough buffer to avoid worries about bouncing checks   
1. Company match rates are likely the highest percent return you can get on your money   
2. When the guaranteed return is this high, take it.   
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.   
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic).  See also
   http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845
   and other posts in that thread about exceptions to the rule.
5. See #4 for choice of traditional or Roth for 401k   
6. Applicability depends on the rules for the specific 401k   
7. Again, take the risk-free return if high enough   
8. Because earnings, even if taxed, are beneficial   
   
The emergency fund is your "no risk" money.  You might consider one of these online banks: http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001   
      
If your 401k options are poor (i.e., high fund fees) you can check http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/ for some thoughts on "how high is too high?"   
   
See http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html for some data on historical returns.