Post by mysticmuffin on Aug 21, 2014 9:25:07 GMT -5
Short time lurker here with a few retirement planning questions. H and I just got married in June, but we've had combined finances for a while now. We are WAY behind (read zero) on retirement planning.
I am currently a contractor, so I setup my SEP IRA with Vanguard a few weeks ago, and I've started contributing there.
H has a new FT job with a 401k plan. He's only been at the job a couple of weeks so we're still working on paperwork and the 401k is high on my list. His company offers a 3% match, so I know that we want to contribute at least that to get the match.
I'm projecting that our MAGI will be right around the phase-out or not eligible threshold for 2014. A lot will depend on H's bonus.
1. Should I set the money aside for a Roth IRA and contribute if eligible after our accountant does our taxes?
-or-
2. Should I start contributing to a Roth IRA (for both of us?) and worry about making an adjustment if our accountant tells us we are over either threshold.
I don't know anything about SEP-IRAs, but our income is over the AGI limit for Roth IRAs, and every year we contribute to a traditional IRA, then convert it to a Roth. It's basically a legal back door.
I added a link to my original response. Googling Roth IRA conversion brings up tons of articles. It's very easy, any financial institution has the form to fill out - it takes me like 5 minutes a year.
Contribute to a traditional IRA, then after your taxes come back showing you are eligible for a Roth, you can easily convert it.
Ok, so that's an easy thing then?
With my SEP-IRA, does that preclude me from contributing to a Traditional IRA (or a Roth IRA if eligible)?
It is easy to do a conversion, but you are correct, your SEP-IRA makes it messy at best, and probably inadvisable. It's the same problem as having an existing traditional IRA - the IRS prorates ALL your IRAs so you will owe taxes on part of the conversion and you will be leaving post-tax money in your new IRA.
So a couple points - you are at a tax bracket where the Roth starts to make less sense. It depends of course on what your tax rate will be when you retire, but the Roth is not all that compelling. See: thefinancebuff.com/case-against-roth-401k.html
I personally would target more money to the 401(k)/SEP accounts since you are not planning to max them out. That will reduce your MAGI and give you the tax break today. IF in early 2015 you find that you are under the Roth phase out for 2014 and you have some extra cash, you can throw it at a Roth as a 2014 contribution.
For 2012, we unexpectedly hit the phase out even though we'd been contributing to our Roths all year. It wasn't too hard to call our IRA provider and recarachterize, but it was a pain for tax filing (we had to wait on the amount from Vanguard since they have to recharacterize earnings too, and then report it on our 2012 taxes, PLUS now we have to report our IRA basis on form 8606 every year until perpetuity or until we fully roll over our traditional accounts). So I'd say that if you decide you do want to do a Roth, I'd go with the method you described in #1 in the OP.
EDIT: I originally said #2 in the OP but I meant #1 - wait until you know you're eligible and then contribute.
Post by mysticmuffin on Aug 21, 2014 10:22:09 GMT -5
Thank you Poppy. I think for now targeting the 401k and SEP sounds like a good plan, at least until I get a lot better at understanding all of the nuances of retirement planning. Thanks!
So if I'm understanding this right (and the article that ohyouknow posted, thanks there is a lot of info there) a feasible/good plan would be:
1. Contribute to my SEP-IRA as much as possible up to 25% of my salary.
2. a. H's 401k to 3% to get the match. 2. b. Traditional IRA for H to the $5500 limit. 2. c. Increase H's 401k.
I would NOT do 2b since it sounds like with your income and H's access to a 401(k), the tIRA contribution would not be deductible, and in most cases a non-deductible tIRA is less favorable than just investing outside a retirement account.
How you split between the SEP and the 401(k) is up to you guys and may depend on how good the fund options and expenses are.
And I would add a 3, which is to consider contributing to a Roth for the previous year when you do your taxes if you've got the extra money and you're eligible.
You'd be able to convert your DH's IRA to a Roth because your SEP won't affect his basis.
Assuming you're not eligible for Roth or deductible IRA, I'd probably do: 1. H's 401k to 3% to get the match. 2. Contribute to SEP-IRA as much as possible. 3a. If you'll be doing Roth conversion for DH, traditional, nondeductible IRA for H to the $5500 limit, then convert to Roth. 3b. If you're not going to do Roth conversion, probably better to go back and up 401(k). 4. If there's money left over, nondeductible IRA for you (or both of you if you went with 3b) and then taxable accounts.
So if I'm understanding this right (and the article that ohyouknow posted, thanks there is a lot of info there) a feasible/good plan would be:
1. Contribute to my SEP-IRA as much as possible up to 25% of my salary.
2. a. H's 401k to 3% to get the match. 2. b. Traditional IRA for H to the $5500 limit. 2. c. Increase H's 401k.
I would NOT do 2b since it sounds like with your income and H's access to a 401(k), the tIRA contribution would not be deductible, and in most cases a non-deductible tIRA is less favorable than just investing outside a retirement account.
How you split between the SEP and the 401(k) is up to you guys and may depend on how good the fund options and expenses are.
And I would add a 3, which is to consider contributing to a Roth for the previous year when you do your taxes if you've got the extra money and you're eligible.
Why do you say that? You still get tax-deferred growth. Is there something I'm not considering?
in most cases a non-deductible tIRA is less favorable than just investing outside a retirement account.
Why do you say that? You still get tax-deferred growth. Is there something I'm not considering?
Well, ok so tax policy can change and it somewhat depends on what you invest in and your tax bracket, etc, etc. But generally, under today's rules:
a) The gains in a regular investment account will be taxed as long term capital gains whereas withdrawals of IRA earnings will be taxed as ordinary income. For OP, that's likely 15% vs 28%. b) IRAs will be subject to RMDs (forced withdrawals starting at age 70.5) which means you start losing control over when you pay those taxes. c) If you do not spend the money, the gains in a taxable account will get a stepped up basis for your heirs (basically those earnings will no longer be taxable) whereas in an IRA the heirs will still owe ordinary income taxes on the IRA earnings. d) Minor, but there is some inconvenience with having to file Form 8606 every year
Yeah, you'll pay some in taxes as you go via dividends, but generally that's still at a lower rate and the bulk of your earnings if you're investing in stock will be capital gains rather than dividends. Also, if you buy/sell a lot, your tax treatment is worse (may not get long term CG and you will owe taxes when you exchange funds). But as a buy and hold investor of stocks, you still get a lot of tax deferral.
Now of course there are some things that make an IRA look a little better - better protection against creditors, it hurts you less for the FAFSA when your kids go to college, you have the option to convert to Roth in low tax years, yada yada. But I'm guessing these benefits aren't worth that much to OP given that they aren't maxing 401(k)/SEP and can get the tax deduction now with those.
Why do you say that? You still get tax-deferred growth. Is there something I'm not considering?
Well, ok so tax policy can change and it somewhat depends on what you invest in and your tax bracket, etc, etc. But generally, under today's rules:
a) The gains in a regular investment account will be taxed as long term capital gains whereas withdrawals of IRA earnings will be taxed as ordinary income. For OP, that's likely 15% vs 28%. b) IRAs will be subject to RMDs (forced withdrawals starting at age 70.5) which means you start losing control over when you pay those taxes. c) If you do not spend the money, the gains in a taxable account will get a stepped up basis for your heirs (basically those earnings will no longer be taxable) whereas in an IRA the heirs will still owe ordinary income taxes on the IRA earnings. d) Minor, but there is some inconvenience with having to file Form 8606 every year
Yeah, you'll pay some in taxes as you go via dividends, but generally that's still at a lower rate and the bulk of your earnings if you're investing in stock will be capital gains rather than dividends.
Now of course there are some things that make an IRA look a little better - better protection against creditors, it hurts you less for the FAFSA when your kids go to college, you have the option to convert to Roth in low tax years, yada yada. But I'm guessing these benefits aren't worth that much to OP given that they aren't maxing 401(k)/SEP and can get the tax deduction now with those.
Thanks!
We're currently doing Roth conversions, but it probably won't make sense for my husband to do it this year or after ... so we'll definitely have to take a closer look at cap gains vs. income tax.
You got great specific advice from the previous replies. My only encouragement is just make sure you start investing and now! The vehicles you choose to invest in matter, absolutely. But the most powerful weapon an investor has is time. So invest and invest often....and keep a very close watch on fees from your brokerage and fees from the funds you pick.
You'll be surprised at how fast you can get ahead when your money is working for you. It is awesome.
You got great specific advice from the previous replies. My only encouragement is just make sure you start investing and now! The vehicles you choose to invest in matter, absolutely. But the most powerful weapon an investor has is time. So invest and invest often....and keep a very close watch on fees from your brokerage and fees from the funds you pick.
You'll be surprised at how fast you can get ahead when your money is working for you. It is awesome.
I had this exact conversation with H the other night when bugging him (again) to get the paperwork for the 401k from work. He tried to push back that he didn't want to do it right now. I told him to bring me the paperwork, we're behind and even if we can't max out our contributions right now, something is better than nothing.