Author Topic: Questions about 401k and IRAs for 2012 tax season  (Read 6622 times)

bearman

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Questions about 401k and IRAs for 2012 tax season
« on: September 15, 2012, 10:31:28 AM »
Hi all - I've been a MMM reader for quite some time, but this is my first post in the forum. So, hello!

While I've read many posts/threads here and elsewhere on the topic, I wanted to check my understanding of 401k and IRA maxing, specifically about the 2012 tax year. So I'm hoping you can weigh in with your experience, knowledge and suggestions. So far this year, I've only contributed the employer-matched max to my 401k, nothing to IRAs. My wife's employer doesn't offer a 401k.

1. For my 401k, I'll try to max that at $17k. I need to do this by Dec 31, right?
2. For our IRAs (because there are two of us), we need to have 2 IRAs, each with $5k, right? Because we are in a higher tax bracket now than we would expect to be in retirement, this means that both IRAs should be Roths, correct? Also, we have until we file our 2012 taxes to fund these accounts, right? (So Feb/Mar 2013...?)
3. Earlier this year, I had rolled a previous employer's Simple IRA into a Traditional IRA - that doesn't affect any of my planning, right?
4. Because my 401k is provided through Fidelity, I'd like our IRAs to be there as well. That said, I'd like to invest the IRAs in the various Vanguard funds mentioned throughout the MMM forum/posts. Can I purchase these funds through Fidelity? Any downside to that?

Thanks for any insight! If you have any other advice about tax-deferred savings, I would be grateful to hear that too. Thanks!

artistache

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Re: Questions about 401k and IRAs for 2012 tax season
« Reply #1 on: September 15, 2012, 12:47:02 PM »
I want to add a question: the 17k 403b/401k max does not include employer match, right? 

ShavinItForLater

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Re: Questions about 401k and IRAs for 2012 tax season
« Reply #2 on: September 15, 2012, 01:23:31 PM »
Yes, I believe you have to complete your 401k contributions by your last pay period of 2012--anything from Jan 2013 onward would count toward 2013.  The 17K limit does not include employer match--there is an upward limit on it but you're very, very unlikely to ever reach it (the match would have to be probably over 100% of your salary). 

For IRAs you have until April 15th, 2013 (tax filing deadline).  However, you didn't state what your income is.  If your modified adjusted gross income (MAGI) is too high, your ability to contribute to IRAs is phased out.  The phase out range if you contribute to a 401k is from $92,000 $112,000 if you file "married filing jointly".  If you do not contribute to a 401k, then the phase out range jumps up to $173,000 - $183,000.

If you're above $112,000 in MAGI, then no IRAs for you.  Unless you want to try the "back door Roth" method (google it).  If you do have to do the "back door Roth" method, then that might be superior to just taxable accounts, assuming you want to put away that much for retirement.

Assuming that's not an issue, then if you expect your tax bracket to be lower in retirement than what you are paying now, then DO NOT do a Roth.  It would be better to do the Traditional IRA and not pay the higher taxes now, and instead pay the lower taxes later.  There are a variety of opinions on this though, and you can't really know what tax rates will be in the future anyway.  Some think tax rates are likely to be much higher in the future.

The rollover should not have any impact on current year contributions.

I think you can buy certain Vanguard funds or ETFs through Fidelity, but they may charge you fees or commissions that you would avoid buying direct from Vanguard.  I don't know why it's important for you to have it all at Fidelity, but assuming it is, I would suggest you look for comparable funds offered by Fidelity--in many cases for the most popular Vanguard funds (especially the kinds of low cost indexes and low cost ETFs often recommended here), Fidelity sells ones just like them, and in the case of ETFs each brokerage has a list of commission-free ETFs. 

If I were in your shoes I would either buy Vanguard funds from Vanguard, or buy Fidelity funds from Fidelity.  It might be easier to look at your portfolio having it all there, but I don't think that's really a big deal, so unless you had some restriction where you couldn't use certain brokerages, I don't see any good reason to keep it all at Fidelity.
« Last Edit: September 15, 2012, 01:35:40 PM by ShavinItForLater »

bogart

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Re: Questions about 401k and IRAs for 2012 tax season
« Reply #3 on: September 15, 2012, 08:09:26 PM »
1. For my 401k, I'll try to max that at $17k. I need to do this by Dec 31, right?

Yes, your employer may also have rules about how much you can contribute each month -- mine does.  Not likely to be a problem assuming you are making regular contributions, could be an issue if you're planning to do big lumps toward the end of the calendar year.

simonsez

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Re: Questions about 401k and IRAs for 2012 tax season
« Reply #4 on: September 16, 2012, 09:17:24 AM »
To the OP:  Will you have kids or grandkids that you plan to help out with college expenses?  If you already plan on doing this, look into 529 Plan options.  While not deductible on your federal taxes, some states offer contributions to a 529 as tax deductible.  Also, I'm not aware of any income phaseouts.  You also pay tax only on the contributions in the year they were contributed and the interest is all deferred.  This idea might not be feasible/optimal but thought I would throw it out there.

Also, you probably already realize this but not only do you need to max out your 401k by Dec 31 (if you plan on maxing it) but you will want to max it out ON Dec 31 to maximize the free matching money.  Typically if you max out before the end of the year, the employer won't match any longer as there is nothing to match on in the relevant pay period(s).

And for 2012, the maximum your 401k account can increase by (principal only) is the lesser of: your salary or 50k.  You can contribute 17k personally and your employer could theoretically contribute up to 33k as long as your salary was at 50k or higher.  So, in the extreme case where you employer matches $2 for every $1, I guess you would only want to contribute $16666.67 (with the last dollars trickling into the account on Dec 31st of course) to maximize the employer match, haha.  What a "problem" that would be to have!

hoppy08520

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Re: Questions about 401k and IRAs for 2012 tax season
« Reply #5 on: September 16, 2012, 06:07:55 PM »
1. For my 401k, I'll try to max that at $17k. I need to do this by Dec 31, right?
Yes, if under 50 years old. Over 50, you can do an additional "catch up" contribution of $5,500 extra.
2. For our IRAs (because there are two of us), we need to have 2 IRAs, each with $5k, right? Because we are in a higher tax bracket now than we would expect to be in retirement, this means that both IRAs should be Roths, correct? Also, we have until we file our 2012 taxes to fund these accounts, right? (So Feb/Mar 2013...?)
You can do $5,000 each assuming you're under age 50. Over that, $6,000 year.

You've got it backwards on Roth. Since you're in a high bracket today, you want the tax deductions today. When you withdraw, you'll be in a lower tax bracket.

For example, suppose you're in the 25% tax bracket today and you expect to be in a 15% bracket when you retire. If that's the case, you wouldn't want to pay 25% of your taxes to put that money in a Roth when you could deduct that money today by contributing to a traditional IRA and pay just 15% of it when you withdraw.

This means you should do traditional deductible IRA if eligible (see other post). If you're over the limit, then you can do Roth IRA. If you're over that limit, then you can do what's called a backdoor Roth IRA.

See http://novelinvestor.com/retirement-planning/roth-ira/2012-ira-contribution-and-deduction-limits/ for more.

Your wife is very likely eligible to do a deductible traditional IRA because she's not covered by a retirement plan at work.

3. Earlier this year, I had rolled a previous employer's Simple IRA into a Traditional IRA - that doesn't affect any of my planning, right?
Correct.

4. Because my 401k is provided through Fidelity, I'd like our IRAs to be there as well. That said, I'd like to invest the IRAs in the various Vanguard funds mentioned throughout the MMM forum/posts. Can I purchase these funds through Fidelity? Any downside to that?
Only downside is that if you don't invest through Vanguard, you might not always be eligible for the lower expense Admiral share classes that Vanguard offers to investors who are at Vanguard. There seems to be conflicting information about this, so you might need to verify. I don't see any point of having your IRAs at Fidelity just because your 401k is at Fidelity.


Jamesqf

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Re: Questions about 401k and IRAs for 2012 tax season
« Reply #6 on: September 16, 2012, 09:06:44 PM »
4. Because my 401k is provided through Fidelity, I'd like our IRAs to be there as well.

I'd suggest that this is a mistake.  Suppose Fidelity goes belly-up for some reason?  If I were you, I'd have 401K and IRA at two different companies, and maybe the wife's IRA (if legally separate?  I'm single, so don't know offhand) at a third.

arebelspy

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Re: Questions about 401k and IRAs for 2012 tax season
« Reply #7 on: September 16, 2012, 09:10:33 PM »
4. Because my 401k is provided through Fidelity, I'd like our IRAs to be there as well.

I'd suggest that this is a mistake.  Suppose Fidelity goes belly-up for some reason?  If I were you, I'd have 401K and IRA at two different companies, and maybe the wife's IRA (if legally separate?  I'm single, so don't know offhand) at a third.

This is not a concern.  SIPC coverage covers the first 500,000 you have deposited, private insurance generally covers up to 25MM. 

Your money is safe, even if Fidelity or Vanguard or whatever goes under.
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