Author Topic: Tax sheltered savings for last year  (Read 3641 times)

77rider

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Tax sheltered savings for last year
« on: February 03, 2015, 01:17:40 PM »
I screwed the pooch last year. My goal was to max out my 401k and hit the IRS limit. The catch is I also wanted to maximize my employer match. Since the match is computed off each paycheck, I had to stretch the installments out over the entire year. Unfortunately I misunderstood the IRS max. I understood the max ($17,500 for last year) to include both my contributions and the employer match. I now know this to not be the case.

I figure I left about $7,800 worth of potential tax shelter and retirement savings on the table. Instead I put that into taxable savings.

To add insult to injury, I am pretty sure that $7800 would have brought me under the income limits for a Roth IRA. I'm still trying to compute my overall adjusted gross income, but at this point it looks like I am deep into the phase out, if not totally ineligible to do a roth this year.

Does anyone have any ideas for options? I have about $10k of cash savings I'd love to plug into a tax deferred retirement account.

I am covered by a workplace 401k and my income is WELL over the regular IRA limits to deduct. I believe I can contribute to an IRA, but not deduct those contributions.

One idea I had was to drop $5500 of the taxed savings I have into an IRA and immediately convert it to a Roth IRA. Unfortunately I also have a sizable rollover or conduit IRA that came from an old 401k. To avoid paying tax, I believe I would first need to zero out the conduit IRA by rolling it into my current 401k. Otherwise I would have a mix of pre and post-tax IRA money and the roth conversion would be ugly. That would at least be something.

At this point I'm thinking I should just call it a learning experience and not make that mistake again. I've already adjusted my 401k contribs to max out at the full $18,000 this year.

ZiziPB

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Re: Tax sheltered savings for last year
« Reply #1 on: February 03, 2015, 01:53:11 PM »
Sounds like you're out of luck on this one.  I don't think you have any other options to reclaim that tax-deferred space from last year.  I would put it in the category of an expensive lesson learned and move on.  At least you didn't spend the money but put it into your taxable account instead.  Good job on that!

Gone Fishing

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Re: Tax sheltered savings for last year
« Reply #2 on: February 03, 2015, 02:48:21 PM »
I know it hurts but you are not alone.  I was on a ROTH 401(k) kick for several years when I knew nothing about a ladder.  I just figured it out and changed around mid 2014, but I was front loading so it didn't help much.  I cringe everytime I think about what it cost me in taxes over the past several years.  First world problems I know, but I am going to lose a good chunk of child tax credit as well because of my mistake.  Just take your lumps and put it behind you, knowing you are getting it right this year!

77rider

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Re: Tax sheltered savings for last year
« Reply #3 on: February 03, 2015, 06:09:53 PM »
Grumble.

So what about leveraging a non-deductible IRA contribution? I can't take the deduction, but I do think I can shovel $5500 in there. Then immediately roll it to a roth IRA. No tax would be due because I had started it with already taxed money .. right?

I think they call this a 'back door' roth ira contribution.

The catch is I'd have to clear out my conduit IRA. Which would incur some fees and bounce the apple cart around a bit.

Grumble again.

MDM

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Re: Tax sheltered savings for last year
« Reply #4 on: February 03, 2015, 09:54:11 PM »
Grumble.

So what about leveraging a non-deductible IRA contribution? I can't take the deduction, but I do think I can shovel $5500 in there. Then immediately roll it to a roth IRA. No tax would be due because I had started it with already taxed money .. right?

I think they call this a 'back door' roth ira contribution.

The catch is I'd have to clear out my conduit IRA. Which would incur some fees and bounce the apple cart around a bit.

Grumble again.
Appears you have figured the back door nuances correctly.

gluskap

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Re: Tax sheltered savings for last year
« Reply #5 on: February 03, 2015, 10:46:02 PM »
I'm going to be phased out for Roth IRA contributions too and am wondering is it worth it to roll over an old traditional IRA into 401k to do backdrop Roth? Isn't fees in 401k higher? Maybe just do a conversion and pay taxes? Or should you just keep the traditional 401k and just convert when you retire and are in a lower tax bracket?

MDM

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Re: Tax sheltered savings for last year
« Reply #6 on: February 03, 2015, 10:54:23 PM »
I'm going to be phased out for Roth IRA contributions too and am wondering is it worth it to roll over an old traditional IRA into 401k to do backdrop Roth? Isn't fees in 401k higher? Maybe just do a conversion and pay taxes? Or should you just keep the traditional 401k and just convert when you retire and are in a lower tax bracket?
Depends on the 401k.  Some have outrageously high fees.  Some give you access to institutional class shares and have wonderfully low fees.

mrtimo

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Re: Tax sheltered savings for last year
« Reply #7 on: February 04, 2015, 12:21:24 AM »
Unfortunately I misunderstood the IRS max. I understood the max ($17,500 for last year) to include both my contributions and the employer match. I now know this to not be the case.
Wow. I'm new at this, and this is news to me too. What is the case? I can contribute 18k this year, and then my employer can contribute their match (say 7k) this year in addition? I guess it pays to read this forum!

MDM

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Re: Tax sheltered savings for last year
« Reply #8 on: February 04, 2015, 12:23:19 AM »
I can contribute 18k this year, and then my employer can contribute their match (say 7k) this year in addition?

Yes, you have it exactly right.  Enjoy!

77rider

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Re: Tax sheltered savings for last year
« Reply #9 on: February 04, 2015, 06:13:10 AM »
Wow. I'm new at this, and this is news to me too. What is the case? I can contribute 18k this year, and then my employer can contribute their match (say 7k) this year in addition? I guess it pays to read this forum!

Was a hot topic amongst a couple of us more saving-crazed types at work the other day. I dug in and found it from the horses mouth if you want to verify.

Salary deferrals (ie employee part) is capped at $18k for 2015.
Total cap (employee + employer match) is capped at $53k for '15. Now that's a generous match!

There is also a salary max that I don't understand the impact of. Fortunately (or not) it does not apply to me. So.

77rider

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Re: Tax sheltered savings for last year
« Reply #10 on: February 04, 2015, 06:14:30 AM »
I haven't done the deep dive. Fortunately my 401k seems to have pretty good options available. I've bought into the index fund philosophy and the funds seem comparable to where I have the money at now. I'm not really inclined to move the money, but if it means I can shovel some more money into the deep freeze savings and away from the tax man.. may be worth it.

Appears you have figured the back door nuances correctly.

Right-o. Thanks all.
« Last Edit: February 04, 2015, 06:17:14 AM by 77rider »