Author Topic: Defined Contribution and 401k/Roth Info  (Read 2339 times)

fromer14

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Defined Contribution and 401k/Roth Info
« on: October 20, 2012, 06:49:06 AM »
My wife and I just got married and are looking for the best way to go about her retirement accounts.  I understand her 401K, but I am not quite sure about her new Defined Contribution Plan and how it ties into pre and after tax retirement accounts.

She currently puts the max allowed 6% into her DC plan to receive the company 4.5% match, but her contributions are after tax.  Does that money count towards her $5000 a year Roth eligibility?

She has an old 401k from her college working days and depending on how exactly the DC plan affects pre/post taxes on if we’ll roll her 401k into vanguard and attempt to max it out or set up a Roth IRA and put as much extra as possible into the 401k after maxing the Roth?  Once again it comes down to what we can do while getting the company match with the DC plan.  The DC plan falls under section 401 (a) of the Internal Revenue Code. 

I hope this is enough info, thanks for help and input.     

hoppy08520

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Re: Defined Contribution and 401k/Roth Info
« Reply #1 on: October 20, 2012, 08:48:12 AM »
So your wife has a 401(k) and a 401(a)? Does she get an employer match for both accounts, or just the 401(a), or can she choose which account to take the match?

Contributions to a 401(a) work like this:
* Employer contributions, and earnings, are tax-deferred. You won't pay taxes on them until withdrawal. Similar to Traditional 401(k).
* Employee contributions are, as you noted, after-tax (note: some 401(a) plans allow for pre-tax employee contributions. Maybe she has a choice?). When you withdraw, you won't pay taxes on these contributions (under current law) so this is similar to a Roth 401(k).
* To answer your main question, employee contributions to a 401(a) do not count toward your $5,000 annual contribution limit to an IRA (Roth or Traditional).
* I'm not certain, but I suspect that your wife can contribute at most $17,000 combined to her 401(a) and 401(k). EG, $10,000 to 401(k) and $7,000 to 401(a).

I think your best bet is:
* IF she only gets employer match in the 401(a) option, then contribute to the maximum to get the match. If she can get a match based on contributions to either 401(k) or 401(a), then choose which option is better for you. (Hint: for most people, you're better off with tax-deferred over Roth because you're likely to have a period in your life when you'll be in a lower tax bracket when you take distributions.)
* If you can invest more, then put your next $5,000 into an IRA, either Roth or deductible Traditional (if eligible based on income limits). Choose Roth or deductible Traditional (if eligible) based on your personal tax considerations.
* If you can invest more, than invest to the maximum $17,000 in 401(a) or 401(k) or a combination. If you are looking to lower current taxes, then favor traditional 401(k).
* If you can still save more, than add investments in a taxable account.

Now that you're married, ensure that your combined accounts make up a coherent total portfolio that reflects your desired asset allocation and goals. Don't look a each account as its own portfolio, look at the complete package.

fromer14

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Re: Defined Contribution and 401k/Roth Info
« Reply #2 on: October 20, 2012, 09:38:10 AM »
Thanks hoppy,

The 401(a) is the only account that the company will match up to 4.5% which we are currently doing for the free money.  You cleared up the pre/post tax 401 section pretty well for us.  I do like the last paragraph about asset allocation as a whole and not seperate.  I like to think i'm pretty aggressive, but with multiple accounts, we may be heavier in bonds than I thought.