I might be putting too much into my 401k?

[missundecided]

I started a new job in mid-July (I'd been in school the first half of the year, so I have had no other income). Annual pay is $65k gross. I've been contributing 30% (the company's cap) to my 401k. Employer match is only 2 or 3%, thereabouts. I'm planning to max my Roth IRA and $7300 for HSA (I'm covered by my partner's health plan but we are not married).

Is there a calculator to determine if I'm overdoing the 401k this year or hereafter? If so, I was thinking I would go up to the benefit amount then the rest contribute to my Roth 401k.

Other considerations: I want my AGI to be as low as possible to continue to be eligible for the REPAYE student loan income limit. And/or I was thinking keep maxing my 401k and using up the available space to convert my trad IRAs to Roth.

Am I overthinking this?

[Brystheguy]

What do you mean by “overdoing?” Saving a lot if you can isn't a bad thing! Your Roth IRA will not reduce your taxable income but the HSA will. HSAs are amazing vehicles, especially if you start early like you are doing. Converting that IRA to a Roth gives it a long time to grow tax free so would probably be worth the move. Are you overthinking? Maybe. Just keep a steady system going automatically in the background and you'll do just fine. You are off to a great start!

[ixtap]

So you are earning <$30k this year? Why not put everything in Roth IRA? I have not heard of a company that offers Roth IRA but does not match it when they have any matching program.

One consideration for sticking with traditional is the savers credit. Look into how close your are to that  cut off once you figure your income for this year. Likely, it will become important to choose traditional next year to meet the cut of off. (ETA: looks like if you were a student Jan - June, you are not eligible this year: that means it would be.hard to justify anything but Roth for 2022, but you should revisit for 2023).

[Sanitary Stache]

Sounds like you are looking for the investment order. Read the US one carefully (if you are in the US). @MDM has included good references, including a link to how to choose tIRA or Roth based on seeking tax credits. I am not sure how student repayment works with AGI, but I maximize EITC by filling the traditional IRA bucket even though it is likely I’ll have a higher tax bracket in retirement when the kids are out of the household.

https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

I haven’t heard of a company being able to limit 401k contributions. I am under the impression that if a 401k plan is offered then it is governed by federal law. So a 30% of salary limit doesn’t seem right to me. Unless you are talking about how the company calculates their match. Which seems like it could be confusing.

https://smartasset.com/retirement/does-employer-match-count-toward-the-401k-limit

That last link also suggests that you structure your employee contribution to 401k so as to not max the federal limit before the end of the year, and to include employer contributions in the limit (so account for the employer match amount when calculating your pay period contributions to last the whole year - unless you don’t expect to stay with the job for the full year.

You won’t be maxing 401k this year though.

[ixtap]

Sounds like you are looking for the investment order. Read the US one carefully (if you are in the US). @MDM has included good references, including a link to how to choose tIRA or Roth based on seeking tax credits. I am not sure how student repayment works with AGI, but I maximize EITC by filling the traditional IRA bucket even though it is likely I’ll have a higher tax bracket in retirement when the kids are out of the household.

https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

I haven’t heard of a company being able to limit 401k contributions. I am under the impression that if a 401k plan is offered then it is governed by federal law. So a 30% of salary limit doesn’t seem right to me. Unless you are talking about how the company calculates their match. Which seems like it could be confusing.

https://smartasset.com/retirement/does-employer-match-count-toward-the-401k-limit

That last link also suggests that you structure your employee contribution to 401k so as to not max the federal limit before the end of the year, and to include employer contributions in the limit (so account for the employer match amount when calculating your pay period contributions to last the whole year - unless you don’t expect to stay with the job for the full year.

You won’t be maxing 401k this year though.

MOST 401k plans limit how much you can put in per paycheck. Even our remarkably generous, the only thing I have found lacking is matching after tax contributions plan has a limit. Ours is 85%, but some folks have mentioned as low as 15%.

Also, employer contribution is not included in the deferral limit. You have to have an extraordinarily generous match or be using after tax (post 86) contributions to worry about employer contributions putting you over any limits in a company plan.

[rantk81]

If you're only going to have half of a full year of income, and the total taxable income for the whole tax year is going to be pretty low -- then a reasonable priority list of priority might be:

1. 401k contributions up to the point of any employer match
2. HSA contributions (if you have a plan that allows for HSA contributions)
3. Roth IRA contributions up to the IRS limit
4. Circle back to the 401k contributions, as much as you can.  If the 401k plan offers Roth contributions -- go for that!

It sounds like for this year, you're going to be in a fantastically low tax bracket -- so it makes sense to put as much into tax-free accounts (HSA, Roth IRA, Roth 401k) as much as you possibly can.

That said, there is also something to be said for keeping a little bit of easily accessible cash on hand for an emergency too.

[lifeisshort123]

If you have student loans and do income based repayment, or qualify for certain government income benefits, the equation changes in my view.  Here is the ideal order if you are trying to limit your AGI:

1. Employer 401k up to the match
2. HSA Contributions
3. Employer 401k up to the limit
4. Traditional IRA if you qualify
5. Roth IRA if you do not qualify for traditional.

[Ron Scott]

Along with work-life balance there is a spend-save balance in life. I would not reduce the quality of life for myself and my family for a decade to retire a year earlier for example.

So long as you’re keeping that in mind it seems you’re on a good path.

[Sanitary Stache]

Sounds like you are looking for the investment order. Read the US one carefully (if you are in the US). @MDM has included good references, including a link to how to choose tIRA or Roth based on seeking tax credits. I am not sure how student repayment works with AGI, but I maximize EITC by filling the traditional IRA bucket even though it is likely I’ll have a higher tax bracket in retirement when the kids are out of the household.

https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

I haven’t heard of a company being able to limit 401k contributions. I am under the impression that if a 401k plan is offered then it is governed by federal law. So a 30% of salary limit doesn’t seem right to me. Unless you are talking about how the company calculates their match. Which seems like it could be confusing.

https://smartasset.com/retirement/does-employer-match-count-toward-the-401k-limit

That last link also suggests that you structure your employee contribution to 401k so as to not max the federal limit before the end of the year, and to include employer contributions in the limit (so account for the employer match amount when calculating your pay period contributions to last the whole year - unless you don’t expect to stay with the job for the full year.

You won’t be maxing 401k this year though.

MOST 401k plans limit how much you can put in per paycheck. Even our remarkably generous, the only thing I have found lacking is matching after tax contributions plan has a limit. Ours is 85%, but some folks have mentioned as low as 15%.

Also, employer contribution is not included in the deferral limit. You have to have an extraordinarily generous match or be using after tax (post 86) contributions to worry about employer contributions putting you over any limits in a company plan.

Thanks! I didn’t realize there was a second limit that included employer contributions.

I also didn’t realize employees would limit the per paycheck employee contribution. I can’t think of a reason why they would do that.  I have a 457b and am going to check out if there is a maximum per paycheck percentage I can save through it.

[teen persuasion]

Sounds like you are looking for the investment order. Read the US one carefully (if you are in the US). @MDM has included good references, including a link to how to choose tIRA or Roth based on seeking tax credits. I am not sure how student repayment works with AGI, but I maximize EITC by filling the traditional IRA bucket even though it is likely I’ll have a higher tax bracket in retirement when the kids are out of the household.

https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

I haven’t heard of a company being able to limit 401k contributions. I am under the impression that if a 401k plan is offered then it is governed by federal law. So a 30% of salary limit doesn’t seem right to me. Unless you are talking about how the company calculates their match. Which seems like it could be confusing.

https://smartasset.com/retirement/does-employer-match-count-toward-the-401k-limit

That last link also suggests that you structure your employee contribution to 401k so as to not max the federal limit before the end of the year, and to include employer contributions in the limit (so account for the employer match amount when calculating your pay period contributions to last the whole year - unless you don’t expect to stay with the job for the full year.

You won’t be maxing 401k this year though.

Do you have non-wage income you are trying to offset with the tIRA contributions?  Otherwise, tIRA usually doesn't help with EITC.

EITC tests on both w2 wages and AGI, and you get the lower credit (which usually is on the higher income tested).  Payroll contributions to a 401k or similar will reduce both w2 wages and AGI (good for EITC), but tIRA contributions only reduce AGI, not w2 wages.  So unless the tIRA contributions offset some *other* income that increases AGI, tIRA isn't very helpful for increasing EITC.

We put as much as possible into 401k and HSA to increase our EITC, which was also matched 30% by our state.  Given the 21% phaseout rate on EITC for multiple children, plus that 30% state match (another 6.3% effective phaseout), stacked on top of federal and state tax brackets, and FICA for the HSA contributions, we approached 50% marginal rate on those contributions.  As EITC is fully refundable, and other kid credits partially refundable, we got some 5 figure refunds, enough to fund Roth IRAs (because there was no more tax advantage to using tIRA instead, outside of 4% state tax).  So we've ended up about 1/3 Roth, 2/3 traditional.

[Sanitary Stache]

Thanks! I was just following the tax prep software and it showed a higher refund with every higher amount we contributed to our tIRAs. I think we had unemployment income last year. Would that be non wage income?  It’ll be different this year so I will look into contributing to a Roth IRA. We have been using our refund to contribute to the IRAs.

[BC_Goldman]

Thanks for the EITC reminder. Our son was born late last year but I had already done a Roth conversion so missed out on the opportunity there. May be able to do it for 2022.

[teen persuasion]

Thanks! I was just following the tax prep software and it showed a higher refund with every higher amount we contributed to our tIRAs. I think we had unemployment income last year. Would that be non wage income?  It’ll be different this year so I will look into contributing to a Roth IRA. We have been using our refund to contribute to the IRAs.

Good question.  I haven't had to work around unemployment income, so wasn't sure.

https://turbotax.intuit.com/tax-tips/unemployment/do-i-qualify-for-earned-income-credit-while-on-unemployment/L1mFOWW6f

Looks like unemployment is NOT treated as earned income, so yes, tIRA contributions could offset it and reduce your AGI netting you more EITC.  As long as you had *some* earned income during the year.

[PhrugalPhan]

I also didn’t realize employees would limit the per paycheck employee contribution. I can’t think of a reason why they would do that.  I have a 457b and am going to check out if there is a maximum per paycheck percentage I can save through it.

There has to be some limit below 100% to how much you can contribute due to various required deductions (taxes, Insurance, pension, what-not...).  I am in a 457b and our stated limit is 80%, though I expect my upper limit in reality will be less, especially as I put in totally as Roth.  I will find out what the real limit for me is next year as I plan on $0 take home for the first few months of the year.

[Must_ache]

I assume the emergency fund (item zero on the investment order list) has been satisfied?

Aggressive retirement savings is good, but I would also want to have enough money on hand to deal with day-to-day unforeseen expenditures.  There isn't a lot of discussion around this, the post just says to have one "to your satisfaction". 

[afox]

I believe the traditional advice to max out your 401k no matter what has been complicated by IRMAA's. Everyone saving a lot for retirement should read up on IRMAA's!

[MDM]

I believe the traditional advice to max out your 401k no matter what has been complicated by IRMAA's. Everyone saving a lot for retirement should read up on IRMAA's!

Many 401k plans now offer both traditional and Roth options.  When it comes to the "max 401k" step in the investment order, one can then choose between those options.

[PhrugalPhan]

I believe the traditional advice to max out your 401k no matter what has been complicated by IRMAA's. Everyone saving a lot for retirement should read up on IRMAA's!

+1

As pointed out above if your 401/403/457 plan has a Roth option you should read up on IRMAA and how this can affect your expenses at 65+ y.o.   Due to IRMAA I have been putting in all Roth, zero Pre-Tax for the past 5 years.  If you retire really early (like many aspire to here) it probably won't be an issue for you, but for oldsters like me (with a pension) it is an issue that has caused me to stop all pre-tax savings (except for an HSA). 

[simonsez]

I believe the traditional advice to max out your 401k no matter what has been complicated by IRMAA's. Everyone saving a lot for retirement should read up on IRMAA's!

+1

As pointed out above if your 401/403/457 plan has a Roth option you should read up on IRMAA and how this can affect your expenses at 65+ y.o.   Due to IRMAA I have been putting in all Roth, zero Pre-Tax for the past 5 years.  If you retire really early (like many aspire to here) it probably won't be an issue for you, but for oldsters like me (with a pension) it is an issue that has caused me to stop all pre-tax savings (except for an HSA).

Thanks, hadn't heard of IRMAA before.  This is really stupid due to the elementary math involved but after looking into it, I feel like the filing single limit (91k currently) would be more of an issue than the MFJ limit (182k).  I'm not currently single but I'm sure there is a significant non-zero chance I would be single at 65 (or my spouse would be if I'm dead).  Something about the pooling of resources makes me feel it is much easier to be efficient with staying under 182k (in today's dollars) for two people than it would be for 1 person to stay under 91k.  The income limits and actual penalties are definitely first world problems. 

We don't really plan to retire that early (mid 50s) and both have pensions so I could see IRMAA as something to keep an eye on.  I do have a Roth option in my 401k equivalent but I have to admit I've really gotten used to the fat tax deduction being realized NOW every year.

Thanks for the food for thought.

[dandarc]

Eh - IRMAA looks like a "I have too much money" problem to me at first glance (then again, we are MFJ at least until one of us dies). If you're close to the edge in terms of having enough money, it might make a small difference in the analysis, but to even know if you are that close you probably need to be fairly close to a traditional retirement age or already retired.

There's also a straightforward technique to manage this at withdrawal time once RMD's kick in and that too-large traditional 401K or IRA balance starts spitting out income that is more outside of your control - the qualified charitable distribution.

Is there a more in-depth analysis somewhere? I'm finding articles spelling out how this works with numbers, but hardly an analysis that tries to determine how much might be too much in traditional retirement accounts with this factored in. Maybe I'm too myopic to our own situation (MFJ with 2 months left before we're both in our early 40's), but health insurance premiums potentially costing a few thousand dollars more per year once we're in our 70's doesn't move the needle much for me, but I'm also willing to be convinced.

[simonsez]

Eh - IRMAA looks like a "I have too much money" problem to me at first glance (then again, we are MFJ at least until one of us dies). If you're close to the edge in terms of having enough money, it might make a small difference in the analysis, but to even know if you are that close you probably need to be fairly close to a traditional retirement age or already retired.

There's also a straightforward technique to manage this at withdrawal time once RMD's kick in and that too-large traditional 401K or IRA balance starts spitting out income that is more outside of your control - the qualified charitable distribution.

Is there a more in-depth analysis somewhere? I'm finding articles spelling out how this works with numbers, but hardly an analysis that tries to determine how much might be too much in traditional retirement accounts with this factored in. Maybe I'm too myopic to our own situation (MFJ with 2 months left before we're both in our early 40's), but health insurance premiums potentially costing a few thousand dollars more per year once we're in our 70's doesn't move the needle much for me, but I'm also willing to be convinced.

That's about where I am.  I'm glad to no longer be ignorant about it, but don't think this will keep me up at night.  I figure I'll have 8 to 10 years to optimize my traditional vs Roth amounts from the time I retire until I'm 65 if the amounts of income I expect are in this ballpark in addition to traditional vs Roth choices now during accumulation. If you retire earlier you'd have even more time to manipulate your taxable retirement income for 65+. I expect to be the higher earner relative to my partner (would love to be wrong!) moving forward so being single would change the calculus somewhat - not so much as to change my financial behavior, but just to expect that I'd be at a higher risk to have higher premiums as a result of IRMAA.

If I make it to old age and one of my financial "regrets" is that I have too much of a certain kind of money and have to use an additional ~1% of my income on healthcare, I'll be alright with that.

[PhrugalPhan]

Is there a more in-depth analysis somewhere? I'm finding articles spelling out how this works with numbers, but hardly an analysis that tries to determine how much might be too much in traditional retirement accounts with this factored in. Maybe I'm too myopic to our own situation (MFJ with 2 months left before we're both in our early 40's), but health insurance premiums potentially costing a few thousand dollars more per year once we're in our 70's doesn't move the needle much for me, but I'm also willing to be convinced.

For a normal retirement age person, I have read some people believing an amount of 1/3 to 1 Million $ (per person) is where the "too much" point is for traditional retirement accounts.  If you have a pension or other annuity your number would be lower.  For very early retirees the number can be higher.  Since I have a pension and will be about 60 at retirement I am aiming for about $400K.  My traditional amount in my 457 is already too high for my taste ($575K) so I have been doing "In Plan Roth Rollover"s to bring this number down.  I will have a large tax hit next April but its something I am willing to do.

[MDM]

...I have read some people believing an amount of 1/3 to 1 Million $ (per person) is where the "too much" point is for traditional retirement accounts.  If you have a pension or other annuity your number would be lower.  For very early retirees the number can be higher.

The two qualitative sentences at the end are correct.

As for the first, as with all traditional vs. Roth choices it depends on the current marginal tax rate vs. the expected future one.  "Too much" in traditional accounts for someone currently paying >40% in federal+state taxes will be very different compared with someone currently paying 10-12%.

[dandarc]

@PhrugalPhan - hopefully the bulk of your 457 is simply yet more "after age 59.5" money. If you've been planning on taking significant advantage of the main 457 feature - penalty free withdrawals upon separation from the employer which might be well before 59.5 (particularly on this forum), then you should be sure you understand the tax treatment of Roth 457B withdrawals before age 59.5.

I'll reiterate that I'd like to see your math that concludes this IRMAA thing is such a big deal that converting within a 457 right now is the move. If I was inclined to convert some traditional money to Roth, my wife's 457 would be the last account that happens in because of the fundamental shift in taxation on withdrawal. Is this a governmental 457?

[simonsez]

Quasi-related Medicare/SS question:  If your SS FRA is 67 and 67 is when you plan to start SS, can you delay signing up for Medicare until you're 67?  Or is that stupid because Medicare is always/almost-always superior compared to other healthcare alternatives?

I don't know the rules on Medicare and how "good" the healthcare really is.  But if someone was planning to take SS after age 65 and you can delay Medicare enrollment - that could give people who are worried about IRMAA a couple more years in their 60s to arrange their buckets for retirement income as they see fit.

@PhrugalPhan did you do any kind of cost/benefit analysis when you decided to convert traditional funds to Roth?  You mention you will have a big tax bill coming up in April.  I'm wondering how big the conversion tax bills would have to be - while you're still working now with what I assume is a higher income than you will have in retirement - where you actually come out even (which would point to the status quo of doing nothing as superior) or behind compared to just letting the money sit in traditional and then pay higher IRMAA premiums in some years (but perhaps lower federal and state taxes due to lower income in retirement compared to working years).  I could see it being a fairly messy analysis due to the different tax rates while working vs not-working and then sophisticated model options (e.g. spending more in retirement years up to 65 and then tapering off the retirement income when you start medicare, or 2 years earlier I suppose based on the IRMAA calculation looking at MAGI from two years prior).  Plus then you have the RMDs at age 72 for most of us.  Lots of variables!

[dandarc]

About the only "out" in terms of delaying medicare penalty-free is if you or your spouse is still working and has coverage that way. But a lot of employer plans require you to enroll at 65 and effectively become secondary insurance. Varies, so naturally you've got to research your own particulars at that time. Found this to try and help with the decision: https://www.cms.gov/Outreach-and-Education/Find-Your-Provider-Type/Employers-and-Unions/FS3-Enroll-in-Part-A-and-B.pdf

Penalties for late enrollment are substantial - with part B, for example, once you have enrolled you'd pay a 10% additional premium per year that you were late enrolling for the rest of your life.

So basically this is something you want to be very sure about before you decide to delay enrolling.

[PhrugalPhan]

@dandarc & @simonsez : To your questions regarding my situation: I am single & 59.5 y.o. and I am in a governmental 457b program.  I will retire in a few months with a full pension (60% salary for 6.5 years, 40% thereafter, all with a COLA).

As to why I have been going full Roth for the past 5 years and am doing conversions: My assumptions are tax rates will revert to 25%/28% in 2026 (as they are currently set to revert from 22%/24%).  Also looking at current IRMAA premiums if I do no conversions I expect RMDs to force IRMAA to add 1.5% to my effective tax rate.  And I expect my investments to grow at least 5% above the rate of inflation.  And I am not taking state tax into the calculations - it looks to be a wash.

My current salary puts me just into the 24% bracket, so all my conversions are all 24%.   Based on my my pension numbers above I will only have 3 years where my marginal tax rate will be below 22%25%, but just barely with $5K-$10K headroom (2030-2032). After 2032 I will have to start SSI, and at that point I will have maybe $30K of conversion room at a then 25% rate with anything else going into the 28% bracket.  At age 72 two years later I will need to start RMDs from the 457 plan.  If my investments grow @ 5%, adding the RMDs to my pension and the SSI... I will be already into the 24%28% bracket.  And then add 1.5% more for IRMAA at that time as well.  And if I take out the minimum yearly distribution (as I plan on) the RMDs will quickly drag me up into the 28% bracket (maybe in ~4 years?).

So my back of the napkin math says I can convert at 24% now or that same money will be taxed at 29.5% starting in a decade.  And starting in 2026 almost all money put into my 457b before 2026 will be taxed a minimum of 25% & quite possibly higher.  I realize my conclusion may not apply to many here on MMM, but I have gone over the figures and I can't see a scenario where it doesn't work out for me (Sometimes conversions are close to a wash, other times it is at least over 5% savings)

[afox]

The IRMAA issue was discussed in more detail on a recent episode of the longview podcast (my favorite podcast for financial planning and retirement):
https://www.morningstar.com/podcasts/the-long-view/159

Im not going to stop contributing to tax deferred accounts, everyone's situation is different and there's no right formula/investment order for everyone. In my case I contributed heavily to 401k early in my career so now just contribute upto my employers match.

[LightStache]

I don't think you're going to find a calculator for Roth vs traditional because it's so individualized. But it all boils down to the tax rate in contribution years versus the expected rate in withdrawal years.

To steal from the investment order post, if current tax bracket > predicted tax bracket in retirement, use traditional, otherwise use Roth. For the majority of Mustachians, that means maxing out tax deferred limits when you're working.

I have my expected annual contributions and withdrawals for each account type modeled out in excel so there's some analytical rigor behind the amounts I contribute to each type -- taxable, Roth, tax deferred, and HSA.

[MDM]

I don't think you're going to find a calculator for Roth vs traditional because it's so individualized. But it all boils down to the tax rate in contribution years versus the expected rate in withdrawal years.

To steal from the investment order post, if current tax bracket > predicted tax bracket in retirement, use traditional, otherwise use Roth. For the majority of Mustachians, that means maxing out tax deferred limits when you're working.

Yup, that's pretty much it.

In finer detail, it's the marginal tax rates now and in the future that matter.  Those may or may not be the same as tax brackets. 

The Case Study Spreadsheet will show marginal rates for the contribution/conversion/withdrawal/whatever of interest.  Accuracy for the current year should be very good.  Accuracy for what income and tax law will be decades from now, probably not as good, but so it goes.