Author Topic: my retirement  (Read 2071 times)

HAULIN3

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my retirement
« on: April 22, 2014, 10:53:14 AM »
I'm looking at picking up where we left off contributing to our retirement.  I'll be debt free except our house Aug 1st.  I'll begin to do 15% until our house is paid for.  Here is my question:

our 401k has the option of doing ROTH contributions.  We are both over 50.  Should we do $6,500 in another mutual funds outside our 401K first? then go back and do the ROTH or the traditional 401k?

Can you even do that? I was reading online trying to figure out what we can do maximum.. isnt it $23,000 401k and 6,500 roth?  I'm confused...

NewStachian

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Re: my retirement
« Reply #1 on: April 22, 2014, 11:02:48 AM »
The 401(k) vs ROTH question is dependent on your income and if you plan on retiring in a state with higher or lower state taxes.

To clarify, you can contribute the max to your 401(k) and your ROTH each year. I don't know the over 50 amounts, but they're easily googleable. The normal ones are $5,500 and $17,500 for the rest of us.

If you file jointly and are high earners, or you plan on retiring in a state with low state income taxes, the 401(k) might be a better option to max out first. It looks like Illinois is a 5% tax state, so if you plan on retiring in Florida, why pay the 5% on the ROTH that you would never have to pay with a 401(k). Obviously, if you are high earners the marginal rate deductions would help you out a lot.

If you have a low income, ROTH might be the way to go if you can handle the taxes.

When you retire, one strategy people use is to draw from the tax-deferred accounts first to maximize the ROTH compounding. You also have your minimum withdrawals for a 401(k)/Traditional IRA that kick in around 70 as well that you have to worry about.

I don't know how much you owe on your house or what your interest rate is... but personally i wouldn't touch extra mortgage payments until both 401(k) and ROTH were maxxed for the year. With a low interest rate and inflation up to 1.8% and growing, that debt may be a good inflation hedge for you.

sherr

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Re: my retirement
« Reply #2 on: April 22, 2014, 01:45:47 PM »
That's fine information NewStachian, but I don't think you answered HAULIN's question.

The over-50 contribution limits you're referring to are $23,000 for a 401k and $6,500 for an IRA (each). 401k and IRA refer to the type of account, a 401k is an employer-sponsered retirement account, an IRA is an Individual Retirement Account that you open for yourself. Traditional and ROTH refer to when you will pay income tax on the money, in Traditional accounts (both 401ks and IRAs) you pay it on withdrawing the money, in ROTH accounts (both 401ks and IRAs) you pay it when you contribute the money.

Most 401k accounts are Traditional 401ks. So much so that it's assumed that when people are talking about 401ks they're talking about Traditional 401ks. Your 401k though has the option of allowing you to make contributions either as a Traditional or ROTH 401k. Regardless of which you choose (or you could do both), your contributions to your 401k will still count against your 401k limit of $23,000. In addition you can contribute to an IRA (or IRAs) (ROTH or Traditional or both) up to the IRA limit of $6,500.

As to which you should invest in first that's where NewStacian's post becomes helpful. If your tax rate is going to be lower in retirement than it is while you are working (true for almost everyone) then you should wait to pay income tax until you are withdrawing, aka you want to invest in Traditional accounts. If not then vice versa. As to the order of 401k vs IRA, order is generally 401k up to the company match (if any), IRA next so that you have complete control over what funds you can purchase, and then 401k again after IRA is maxed out. If you can max out both 401k and IRA contributions then order matters not at all.

The issue is further complicated by less visible IRS rules. For example, even though you can always *contribute* $6,500 to a Traditional IRA, you can only *deduct* the full amount from your taxes if you make below certain income limits ( http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/2014--IRA-Contribution-and-Deduction-Limits---Effect-of-Modified-AGI-on-Deductible-Contributions-If-You-ARE-Covered-by-a-Retirement-Plan-at-Work ). If you make too much and can't deduct a Traditional IRA contribution, then there's very little point in making it in the first place; you'd be better of with a ROTH IRA. But ROTH IRAs have their own limits too, where if you make too much you simply can't contribute to them ( http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-for-2014 ). So in that case the really high-income people have to do silly things, like contribute to a non-deductable Traditional IRA and then convert it to a ROTH IRA. 401ks have the benefit of not being bound by these silly additional rules.

So anyway, it is complicated, it's not just you. Hopefully that helps clear things up more than it muddies them though.