Author Topic: Max 401k & IRA - Chase says NO!  (Read 710 times)

Steeze

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Max 401k & IRA - Chase says NO!
« on: October 08, 2018, 05:57:54 AM »
There is a Chase Bank branch down the street from my office. I've had two co-workers tell me that thier investment advisor told them they could not put 18.5k in their 401k and 5.5k in their IRA in the same year. He told them the max was 18.5k combined!

They have a hard time believing me over a banker when I tell them Chase is wrong. I tell them to get a second opinion from Vangaurd or fidelity, but I doubt they will. Instead they are opening IRAs with Chase and not maxing their 401ks.

Is there any "official" ie. IRS document stating this fact in plain English I can point them to? Should I go talk to this Chase guy and call him out? Is there a formal way to report him?

I feel like he is giving misinformation to sell IRAs and collect a commission. Am I wrong here?


terran

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Re: Max 401k & IRA - Chase says NO!
« Reply #1 on: October 08, 2018, 06:07:31 AM »
Here's the information on IRA contribution limits: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

You'll note that the only limitation created by participating in a retirement plan at work (including either employee or employer contributions) is for higher income households. So depending on your coworkers household income the Chase folks might be technically correct, but that applies if ANY contributions are made to the 401(k) which would mean your coworkers will have to miss out on any match. They're being misled if nothing else.

Steeze

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Re: Max 401k & IRA - Chase says NO!
« Reply #2 on: October 08, 2018, 07:40:33 AM »
Quote
Modified AGI limit for traditional IRA contributions increased. For 2018, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is:

More than $101,000 but less than $121,000 for a married couple filing a joint return or a qualifying widow(er),
More than $63,000 but less than $73,000 for a single individual or head of household, or
Less than $10,000 for a married individual filing a separate return.

Quote
Modified AGI limit for Roth IRA contributions increased. For 2018, your Roth IRA contribution limit is reduced (phased out) in the following situations.

Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $189,000. You canít make a Roth IRA contribution if your modified AGI is $199,000 or more.
Your filing status is single, head of household, or married filing separately and you didnít live with your spouse at any time in 2018 and your modified AGI is at least $120,000. You canít make a Roth IRA contribution if your modified AGI is $135,000 or more.
Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than zero. You canít make a Roth IRA contribution if your modified AGI is $10,000 or more.


So, for an individual, if MAGI is < $63,000 you can invest in a tIRA and take the full deduction, phases out at $73,000
If Married filing jointly, if MAGI < $101,000 you can invest in a tIRA and take the full deduction, phases out at $121,000

So, for an individual, if MAGI < $120,000 ROTH is available, phases out at $135,000
If Married filing jointly, if MAGI < $189,000 ROTH is available, phases out at $199,000

I am 89% sure that both these co-workers would qualify for the ROTH under these guidelines in addition to maxing out the 401k.
Meaning that they could contribute the full 18.5k in the 401k, and an additional 5.5k to a ROTH IRA.
tIRA is probably out of the question, but it has nothing to do with the 401k limit as suggested by the Banker.
The goal of both these individuals is to reduce tax liability. I cannot imagine a scenario where not maxing or contributing to the 401k would improve things.

Also probably need to re-characterize my tIRA contributions to a ROTH now that DW is working full time! Oops!

Thanks for the link - I had read that before, but didn't take the "if you are covered by a retirement plan at work" quote as saying "in addition to the limits of your 401k" - but I suppose that is what they are getting at. I was hoping there was something that said this explicitly...

Steeze

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Re: Max 401k & IRA - Chase says NO!
« Reply #3 on: October 08, 2018, 07:47:23 AM »
I suppose above the ROTH limit, you can contribute to the tIRA as non-deductible contributions, then roll them into a ROTH the following year. Hence the "backdoor ROTH".

Correct me if I am wrong, thank you!!

terran

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Re: Max 401k & IRA - Chase says NO!
« Reply #4 on: October 08, 2018, 07:48:53 AM »
Yes, sounds like you've got it. Also, if the 401(k) contribution can get them under any of the limits after subtracting it from income than can actually MAKE them eligible for the Roth contribution or traditional deduction.

The only sense in which the Chase banker is even kind of correct is that if you don't participate in a retirement plan at work at all (no employee or employer contribution) then you can make deductible traditional contributions at a higher income, and if neither you nor your spouse participate in a retirement plan at work at all then you can make deductible IRA contributions at any income. Like you say, this is silly though as you'll miss out on any match and the 401(k) limit is much higher than the IRA limit, so you'll get to deduct much more by contributing to the 401(k) than not participating in the 401(k) at all so that you can deduct IRA contributions.

terran

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Re: Max 401k & IRA - Chase says NO!
« Reply #5 on: October 08, 2018, 07:51:02 AM »
I suppose above the ROTH limit, you can contribute to the tIRA as non-deductible contributions, then roll them into a ROTH the following year. Hence the "backdoor ROTH".

Correct me if I am wrong, thank you!!

You're right, as long as you don't have any existing traditional IRA balances (including rollovers from old 401(k) plans. If you do have a traditional IRA balance you either need to roll it into the 401(k) if allowed, or convert it and pay tax on the conversion. With no previously deducted IRA balances you're exactly right, and again, this has nothing to do with whether you contribute to a 401(k).

Steeze

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Re: Max 401k & IRA - Chase says NO!
« Reply #6 on: October 08, 2018, 08:58:55 AM »
So in that scenario -

Say I have $20,000 in an tIRA that was a rolled over 401k from a previous employer and/or tIRA contributions.
I then add another $5,500 non-deductible contributions the next year and want to convert to a ROTH the year after.
I would need to convert the entire $25,500 to a ROTH, paying taxes on the $20,000 as additional income in that year

BUT

If I rolled the $20,000 into a 401k first, then add the $5,500 non deductible contributions to a new tIRA, then convert to ROTH
I avoid paying the taxes on the $20,000 now and defer that tax liability to a later date.

^^ Any errors there?

(Also thanks for the schooling!!)

terran

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Re: Max 401k & IRA - Chase says NO!
« Reply #7 on: October 08, 2018, 03:25:56 PM »
So in that scenario -

Say I have $20,000 in an tIRA that was a rolled over 401k from a previous employer and/or tIRA contributions.
I then add another $5,500 non-deductible contributions the next year and want to convert to a ROTH the year after.
I would need to convert the entire $25,500 to a ROTH, paying taxes on the $20,000 as additional income in that year

BUT

If I rolled the $20,000 into a 401k first, then add the $5,500 non deductible contributions to a new tIRA, then convert to ROTH
I avoid paying the taxes on the $20,000 now and defer that tax liability to a later date.

^^ Any errors there?

(Also thanks for the schooling!!)

Yes, both of those look right to me.

My understanding is that you wouldn't actually have to roll the $20k over either before contributing or converting the $5.5k, but rather you would need to roll it over by the end of the year in which you make the backdoor conversion.

You also don't necessarily have to convert the full balance of the IRA to Roth, but if you don't then the conversion will be considered to have come from both the previously deducted (taxable) and not deducted (not taxable) portion in proportion to the balances. This is called the prorata rule. You should look through form 8606 to see what would happen if you convert from traditional to Roth. Here is a good post about it: https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/

Generally you don't want to do a backdoor Roth if you have too much in previously deducted IRA balances, so if you can roll an IRA into your 401(k) and your 401(k) has decent investment options you should do it. This is because if you need to do a backdoor Roth instead of making a direct Roth contribution you're in a pretty high tax bracket (certainly higher than a mustachian will be in in retirement), so converting a previously deducted IRA kind of defeats the whole purpose. I'm sure there some lower limit where it would be worth converting despite the tax hit in order to get the extra Roth space for however many years, but I don't know what that would be.