Questions on retirement plan options and limits when switching mid-year.

[Angie55]

Okay. So right now I'm not really sure if we will be saving the money in regular accounts or throwing it into retirement accounts. But I need to know all the possibilities before I decide. Please let me know if there are any other details I can provide that will help.

DH got laid off from a regular company salaried job in April this year. At that time he had put ~5,000 into the company pre-tax 401k. Additionally, I put $1,000 in a Roth IRA for 2014 contributions. For myself, I have maxed my Roth for 2014. I plan to increase my 401k contributions to the max allowed for the remainder of the year. Unfortunately my company caps at 30% of your pay so I won't be able to hit the 17500 limit. Now he is working through the hiring process for a contract job through a contract firm. There are no benefits. Since it is going through a firm I assume it will be w2 work.

Our estimated taxable MAGI (before standard deductions and exemptions) for 2014 with my job, unemployment, and projected contract work would put us at 120,000 if I increase my 401k contribution to the 30% company max allowed. AGI should be 97,500. AGI is around 120,000 with all projected income. MAGI would then be 122,000 adding in student loan interest deduction.

What options do I have for his money? Obviously due to our income bracket I'd like to stash as much in the pre-tax accounts as possible. Being as its the first non-salaried job either one of us as held I'm not really sure of the avenues available. Starting mid-year is confusing me as well since most start with "if you are covered by an employer plan".

Anyone navigate this before that can provide some options and optimal solution? Any specific paperwork I'll need to prove eligibility for contributing to certain accounts?

[Angie55]

Additionally, when I logged into my current 401k account there is a spot for "Roth Basic" contributions. A quick google makes me think this may be a Roth 401k. Does this mean I can contribute to this also with after tax dollars? Can I max out this Roth Basic AND my 401k both at 17,500?

If so, I feel like I've been missing a big piece of the puzzle. If it is a Roth 401k this would mean I'm putting in post-tax dollars now. Are the earnings when removed then tax free?

I feel so lame that the prospect of extra retirement accounts make me excited. But then they make me stressed because I don't earn enough combined with spending too much of my income to maximize them!

[mozar]

I'm not sure of all the details but you can put 5500 in a regular IRA. I think you have to choose between Roth and regular though. And your husband may be able to open a self-employment (contractor?) 401k.

[Fuzzy Buttons]

Additionally, when I logged into my current 401k account there is a spot for "Roth Basic" contributions. A quick google makes me think this may be a Roth 401k. Does this mean I can contribute to this also with after tax dollars? Can I max out this Roth Basic AND my 401k both at 17,500?

I'm only going to address this, because I only have experience with regular employer 401(k) plans.  My company also allows me to contribute either pre-tax (standard) or post-tax (Roth) dollars to my 401(k). But the IRS yearly limit is $17,500 total between the two.  So you don't actually have a "second" 401(k), you just have a choice of how to fund the one you do have.  So pick whichever option best fits your tax situation, and put it all in there.  And yes, Roth 401(k) dollars work just like Roth IRA dollars - after tax now, but no tax when you withdraw.  There's also a chance to pull out the contributions tax and penalty free, in my plans case after a vesting period of 5 years.

Side note one, I have contributed some Roth and lots of pre-tax over the years.  I have $16k of Roth contributions I can pull out tax and penalty free now, as they've been in there 5 years.  But I'm dreading how all this will work out if I ever try to roll it to an IRA (or IRAs).  Completely beside the tax implications, I wish I'd kept it all just standard pre-tax contributions for simplicity's sake.

Side note two, can you give me a brief description of why your MAGI is so much higher than your AGI?  No need to reveal details you don't want to, I'm just assuming that's all related to contract and self-employment stuff.  I'm looking to make a traditional IRA contribution this year, and want to make sure I'm correctly forecasting my MAGI so I can deduct it.  Thanks.  :)

[Angie55]

I always thought MAGI was before the standard deductions and per person exemptions. I may be wrong though. That tax term always confused me a little. 125k would be the income after any paycheck deductions (HSA, my 401k, health/dental) but before the ~20k deductions.

At least the Roth 401k would be a way to side step the 30% of salary limit my employer puts for contributions. The system allows me to allot 30% to each one. So then I can at least get myself up to the 17,500 limit (prev. with the 30% and 4 months left I could only reach 15,500). Better than nothing I guess.

[Fuzzy Buttons]

I believe that neither the AGI nor the MAGI are affected by your standard or itemized deductions, exemptions, etc.  The only thing that affects them is the above-the-line deductions (literally, above the line on the 1040 that says "This is your Adjusted Gross Income").  That line gives you your AGI.  Then to calculate your Modified Adjusted Gross Income (MAGI), you have to add back in a few of those deductions that are not allowed to be counted for that.  This doesn't get done on the 1040 itself, as far as I can see.

In my simple case, my gross income will be 72k this year, and I'm single and have a 401(k) with my employer.  To deduct a traditional IRA, I need to get my MAGI below 60k.  I put about 4k of Roth contributions into my 401(k) already, and that doesn't help at all.  But I'll be maxing out the rest as traditional 401(k), so that will reduce my income line by 13.5k to 58.5k.  My HSA contribution of 3.3k and the 5.5k traditional IRA itself are above-the-line deductions, and will then reduce my AGI to 49.7k.  To calculate my MAGI, I have to add the IRA back in, though (you can't use the IRA itself to make yourself eligible for an IRA), so that makes my MAGI 55.2k.  Still well under the 60k.  At least I think that's right - this is my first time doing this, and when I saw yours were so different I thought maybe I was doing it wrong.

As to your 401(k) contributions, if they allow 30% of each type then I think you are right, that will help you max it.  But it's odd that they force you to split it that way.  I know the plan rules can be arbitrary - my first 401(k) had a 25% limit and no Roth option.  My current has a 75% limit - which I'm currently using because I had it set so low in the first half of the year.  My last semi monthly paycheck was only $350.  :)

Probably the reason is that so few employees really try to hit the yearly limit.  If you're just putting 15% away, a 30% limit doesn't bother you.  So I guess it's a Mustachian problem.  :)

[Angie55]

Okay took a look at my last tax return to get some clarity. I guess I've been using AGI incorrectly forever. That sucks because now I am nowhere near the limit to use a traditional IRA! Oh well. Updated posts above to reflect.

[Fuzzy Buttons]

Cool, hopefully we're both doing that right.  :)

I was confused by this part of your inital post:

DH got laid off from a regular company salaried job in April this year. At that time he had put ~5,000 into the company pre-tax 401k. Additionally, I put $1,000 in a Roth IRA for 2014 contributions. For myself, I have maxed my Roth for 2014.

Now I think what you meant was that DH put $1000 in his Roth IRA, and you maxed yours.  Though I guess if it's the same pot of money it doesn't matter where it came from.  As a single person, these complications have always eluded me.

But as to your main question, I think all you can do to max your tax-deductible investments is put as much as you can in your 401(k) as pre-tax dollars.  Then you can finish that out as Roth, and finish funding his Roth IRA for $4500 more.  I see you have access to an HSA, you can max that.  After that, you're stuck with investing in after-tax accounts.  As one of the other threads here said, that's a Mustachian problem.  You're just saving too much money.  :)

For future years, you might want to front load your 401(k) contributions.  That way if either of you loses access to a plan (as your husband did this year), you will have taken as much advantage of it as possible while it was available.  This will be limited by the plan contribution percent, of course.

[Angie55]

Yeah, just sucks that we lost out on ability to save pretax on his 401k and we will be making too much money to save in any other deductible accounts. So dumb. Unfortunately HSA is already planned to be maxed out. So frustrating paying an extra 2500 in taxes and can't save as much. Double whammy. Guess that means I'm stuck saving that money post-tax and can start a house down payment fund? That's where my heart would be although I know its totally the wrong move to buy an overpriced house that likely needs work with unstable jobs.

His paperwork came in yesterday and sent some generic 401k sheet. So now I'm even more confused. I'm unsure if he is actually eligible for that but if he is it says he can contribute up to 100% of his income after a 30day waiting period. So we might be able to max his out after all. He would just get a paycheck of $0 every week. I don't think hubby will go for that psychologically. Working mandatory OT with a one hour commute and getting 0$ in a paycheck. Would be kind of funny though.

One last question... If he maxes out his 401k we could be put squarely in the middle of the phaseout for deductibility of a traditional IRA. Does this mean we could only deduct 50% of our contributions to a traditional IRA. OR does it mean we can deduct 50% of the maximum allowed by law? If the latter, we would each split the 5,500 max between Roth and traditional IRA. If the former, then I think we would still be better off with the Roth.

[Fuzzy Buttons]

Don't think of it as a $0 paycheck.  The money is still coming in, it's just showing up in the 401(k) account instead of the checking account.  And there's more of it.  :)

One last question... If he maxes out his 401k we could be put squarely in the middle of the phaseout for deductibility of a traditional IRA. Does this mean we could only deduct 50% of our contributions to a traditional IRA. OR does it mean we can deduct 50% of the maximum allowed by law? If the latter, we would each split the 5,500 max between Roth and traditional IRA. If the former, then I think we would still be better off with the Roth.

This I cannot answer, so I'll leave it to others.  My gut tells me that it's a percentage of what you put in, because that would be more annoying and that's how the tax code seems to work.