raise 401K withholding or do something different?

[msbutterbean]

Hi. I have a nice size 401K with my employer due in large part to a rollover I made when I got a divorce-related payout. If I could do that part over again, I would have opened my own account that wasn't connected with my employer. I'll do that if I leave this job (not something on the horizon), but for now it is what it is. I continue to make pre-tax contributions, though am nowhere near the max, and would like to increase that savings to include the raise that will take effect in January. If I want to do that pre-tax, my only option is the employer 401K, right? Is it worth looking at opening an individually controlled after-tax retirement account, or is that something that only makes sense after you max out the pre-tax? My employer account isn't ridiculously costly, but I am paying more in fees than I would with a low-cost, passively managed fund.

[Cromacster]

https://forum.mrmoneymustache.com/investor-alley/investment-order/

Read the link.

The general consensus is to contribute enough to 401k to get the full employer match, then fill IRA's, then go back to 401k

[35andFI]

After contributing enough to get the full match, if you want to stay "pre-tax", you can open and contribute to a traditional IRA then claim those IRA contributions come tax time. This is essentially the same as a traditional 401k except it is not controlled by your employer and has a lower contribution limit.

Note that you may not be able to claim all (or any) of the traditional IRA contributions depending on your income.

If you wanted to go post-tax, you can contribute to a Roth IRA.

[msbutterbean]

Thank you, Cromacster. I have looked at that, but have a little trouble following it given some of the "ifs." So I do appreciate your translating that with the "general consensus" line.

Thanks, too, 35andFI. Is there a quick way to ballpark whether one's income allows for the favorable tax treatment on a traditional IRA?

[35andFI]

Sure, check this out:

https://www.irs.gov/retirement-plans/plan-participant-employee/2018-ira-contribution-and-deduction-limits-effect-of-modified-agi-on-deductible-contributions-if-you-are-covered-by-a-retirement-plan-at-work

Note that there is a case to be made for contributing to a traditional IRA even if you can't deduct the contributions.

For anyone else that comes across this, these income limits for deductions are only applicable if you (or your spouse I believe) are covered by a retirement plan at work.

[35andFI]

As far as contributing to Traditional vs Roth (pre-tax vs post-tax), that depends on whether or not you think that your tax bracket in retirement will be higher than your tax bracket now.

A lot of people in this community, myself included, choose to go pre-tax since we estimate that we will not need as much in retirement as we are making now.

Plus, there are ways to not pay taxes now and not pay taxes (or pay minimal taxes) later.
As Financial Samurai put it, "once you pay taxes you lose"... or something like that.

[MDM]

Thank you, Cromacster. I have looked at that, but have a little trouble following it given some of the "ifs."

If you could note the parts that aren't clear, perhaps we can reword to make things clearer for future readers...?

[msbutterbean]

I thinks it's as clear as it can be, but I personally don't know enough to answer or calculate some of the ifs. For example ... "if you need the 401k deduction to be eligible for (and desire) a tIRA deduction," or "Fund a mega backdoor Roth if applicable/Applicability depends on the rules for the specific 401k."

[MDM]

I thinks it's as clear as it can be, but I personally don't know enough to answer or calculate some of the ifs. For example ... "if you need the 401k deduction to be eligible for (and desire) a tIRA deduction,"

Added
The MAGI calculation for Roth IRA purposes is https://www.irs.gov/publications/p590a#en_US_2017_publink1000230985
Then see Retirement Topics IRA Contribution Limits | Internal Revenue Service.
The MAGI calculation for traditional IRA purposes is https://www.irs.gov/publications/p590a#en_US_2017_publink1000230489.
Then see IRA Deduction Limits | Internal Revenue Service

or "Fund a mega backdoor Roth if applicable/Applicability depends on the rules for the specific 401k."

Added reference to Mega Backdoor Roth IRA.

Thanks for the feedback!

[35andFI]

You can only deduct part or all of your tIRA (traditional IRA) contributions if your MAGI (modified adjusted gross income is low enough. Contributing to a traditional 401k lowers your MAGI.

As for the mega backdoor Roth, since you’re talking pre-tax, I don’t think that is something that you should concern yourself with at this point but I’ll explain what it is.

The mega backdoor Roth is a way to get up to $36,500 (for 2018) in after tax money into a Roth IRA.

Here is a good article explaining the mega backdoor Roth:
https://www.madfientist.com/after-tax-contributions

Essentially, you make after tax contributions into your 401k then roll only those contributions (if your company allows) into a Roth IRA.

[Hellohi]

I maxed out my 401 k and have not contributed to an ira. It might not be the optimal play but for me it was close enough to optimal plus simpler. I have a fidelity 401k with some good index fund options.

[maizefolk]

Note that there is a case to be made for contributing to a traditional IRA even if you can't deduct the contributions.

What would the case be for making a non-deductible tRHA contributing rather than a Roth contribution (or backdoor Roth if your income was high enough you couldn't make a regular Roth contribution)?

[35andFI]

Note that there is a case to be made for contributing to a traditional IRA even if you can't deduct the contributions.

What would the case be for making a non-deductible tRHA contributing rather than a Roth contribution (or backdoor Roth if your income was high enough you couldn't make a regular Roth contribution)?

My statement was not suggesting that a non deductible tIRA is beneficial over a Roth IRA.
If your income is high enough, you may not be able to make a Roth IRA contribution directly (as you said).
As you also mentioned, one of the cases for funding a traditional IRA even if you can’t deduct the contributions would be to roll it over to a Roth IRA.
Another case would be that the money in a traditional IRA grows tax free unlike the money in a taxable account.

Here’s one article:
https://www.thesimpledollar.com/nondeductible-ira-contributions/