Author Topic: Stupid 401k question?  (Read 2076 times)

Broadway2019

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Stupid 401k question?
« on: June 01, 2017, 08:07:00 AM »
I make $125k annually and have a pension and 401k at work. The pension is free and I do not contribute to it. The 401k I contribute to.

Currently, I am trying to contribute $18,000 for the year into the 401k. It is split evenly between before tax into a 401k and the other half into an after tax roth 401k.

I see a lot of people say to open a roth and put the max into it. Does my roth 401k count or should I be opening another account outside work? I have no other accounts besides work so trying to figure out what other tax advantage accounts to open.

Gin1984

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Re: Stupid 401k question?
« Reply #1 on: June 01, 2017, 08:12:56 AM »
First, if you earn $125,000, you should not be splitting the 401k between a traditional and Roth, put it all in a traditional.  Second, the Roth people are referring to is the Roth IRA, an account opened through a brokerage firm though, I can't remember the earning cap, so you'd need to check that.

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Broadway2019

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Re: Stupid 401k question?
« Reply #2 on: June 01, 2017, 08:15:51 AM »
First, if you earn $125,000, you should not be splitting the 401k between a traditional and Roth, put it all in a traditional.  Second, the Roth people are referring to is the Roth IRA, an account opened through a brokerage firm though, I can't remember the earning cap, so you'd need to check that.

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Oh I thought I as doing good splitting it up. So I should just contribute max to the Traditional before tax 401k and nothing to after tax? Also, would the same apply to someone who makes $90k (asking for fiance)?

afuera

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Re: Stupid 401k question?
« Reply #3 on: June 01, 2017, 08:19:26 AM »

Gin1984

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Re: Stupid 401k question?
« Reply #4 on: June 01, 2017, 08:23:51 AM »
First, if you earn $125,000, you should not be splitting the 401k between a traditional and Roth, put it all in a traditional.  Second, the Roth people are referring to is the Roth IRA, an account opened through a brokerage firm though, I can't remember the earning cap, so you'd need to check that.

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Oh I thought I as doing good splitting it up. So I should just contribute max to the Traditional before tax 401k and nothing to after tax? Also, would the same apply to someone who makes $90k (asking for fiance)?
Yes, just put it all in pre-tax.  Likely yes for your fiance, though your fiance would be able to also find his/her Roth IRA. 

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Bracken_Joy

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Re: Stupid 401k question?
« Reply #5 on: June 01, 2017, 08:27:03 AM »
The roth 401(k) lacks like... ALL the advantages of the roth IRA. And even traditional vs roth IRA is heavily debated in person finance (see afuera's link above). It is important, with your earnings, to do the traditional 401(k) for the tax savings. And as Gin pointed out, the roth people refer to is the roth IRA, which is an account YOU open yourself, not through your employer. People shorthand "roth" on this, because the roth 401(k) is pretty new, so that's not reflected in the personal finance language people use.

If you are a single filer, and under 50, then phaseout for the roth IRA for 2017 starts at $118k https://investor.vanguard.com/ira/roth-ira-income-limits?lang=en and goes through $133k. So my understanding is this is part of why doing all traditional 401(k) contributions would be very important for you- it would reduce your MAGI, so then you could contribute more to your roth IRA, increases your access to tax advantaged space. Hopefully someone will correct my understanding if that is wrong =)

Hope that helps!

MDM

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Re: Stupid 401k question?
« Reply #6 on: June 01, 2017, 08:32:48 AM »
http://www.gocurrycracker.com/roth-sucks/
Although for most people traditional is better, the math used in this article is incorrect and makes traditional seem better than it is.

In other words, Roth accounts don't suck as much as GCC would have one believe.  In particular, when one has
- a large pension, or
- an already large traditional balance, then
the case for Roth contributions becomes much better.  Not saying one is always better than the other, just that a fair comparison should be made for one's own sake.

See https://www.bogleheads.org/wiki/Traditional_versus_Roth for more details.

MDM

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Re: Stupid 401k question?
« Reply #7 on: June 01, 2017, 08:41:36 AM »
...it would reduce your MAGI, so then you could contribute more [through the "front door"] to your roth IRA....
With the minor edit above, yes.  In other words one can still get money into a Roth IRA regardless of income, but it's more straightforward if one is under the nominal contribution limit.

See Backdoor Roth IRA - Bogleheads for more.

Broadway2019

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Re: Stupid 401k question?
« Reply #8 on: June 01, 2017, 08:47:43 AM »
Thanks everyone! I just changed it to have everything come out before tax. Also, will vanguard auto stop once I hit the limit or do I need to exactly calculate?

FLBiker

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Re: Stupid 401k question?
« Reply #9 on: June 01, 2017, 09:09:04 AM »
Also, will vanguard auto stop once I hit the limit or do I need to exactly calculate?

Where I work, HR will stop the deductions once I hit $18000.  I'm not sure if Vanguard does.

Also, I'm not sure if you've already understood this from the previous posts, but I'd encourage you to do the trad 401K AND a trad IRA if you can afford it.

MDM

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Re: Stupid 401k question?
« Reply #10 on: June 01, 2017, 09:15:05 AM »
do...a trad IRA if you can afford it.
Should be affordable whether as single or MFJ.  Won't be deductible, however, due to 2017 IRA Deduction Limits - Effect of Modified AGI on Deduction if You Are Covered by a Retirement Plan at Work.  Sure would be nice though.

Mgmny

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Re: Stupid 401k question?
« Reply #11 on: June 01, 2017, 09:27:28 AM »
do...a trad IRA if you can afford it.
Should be affordable whether as single or MFJ.  Won't be deductible, however, due to 2017 IRA Deduction Limits - Effect of Modified AGI on Deduction if You Are Covered by a Retirement Plan at Work.  Sure would be nice though.

I was thinking the same thing. I started 2017 with changing my IRA contributions from Roth to traditional, and after about a month of auto-drafting into the account, i realized what you mentioned above and that the traditional IRA didn't help me at all. So I had to go back, re-characterize them, and dump it all into roth.