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Author: milleniumfalcon Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75335  
Subject: Hurray For Me!!! (And New Qustions) Date: 5/23/2002 5:42 PM
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As of June 30, 2002 I will be debt free! I can now start seriously to begin to save for my retirement and get the ball really rolling in my favor.

I have some questions I'd like your input on regarding my retirement funding. I know that the combined knowlegde here will help me get to where I want to be. But first some background info:

General
Age:35
Marital Status: Single
Health: Very good
Housing: Rent
Debt:$0 (as of June 31)

Salary
Gross Annual Salary: $36,509.
Net Salary: $24,464. (Insurance, Gym, FICA, 401(k) etc. take a toll)
Gross Monthly: $3,042.
Monthly Take Home: $2,038.

Savings
ING Account: $175.

Retirement Accounts
Monthly 10% into 401(k): $304.
Current Total in 401(k): $4,975.

8.5% Employer Contribution:$258
Current Employer Total: $4,321.
(I'll be fully vested in this as of August 31st)

Obviously, with my debt gone, I can either a) spend more or b) save more. I prefer the latter. First thing I obviously want to do is set up an emergency fund. Given my current situation, I will need about $2000. That covers my rent, etc., for about three months.

I was thinking about upping my 401(k) contributions to 15%. However, I have heard that it might be a better deal to open up a Roth IRA, because even if though is taxed now, it will not be taxed later on when I need all the dough I can get my hands on.

I am not the greatest mathematition, so here's what I have come up with:

If I up my 401(k) to 15% that is a 5% increase over what I am doing now. Over one year, that will equal $1,825. over what I put in now. I can put $2,500 into a Roth per year.

Then there is the taxes situation. Being a single male, I get popped by the Feds, Missouri & the city of Saint Louis. Obviously I am at a pretty high bracket. Every month they take out $438.00 for a total of $5,256 per year. It equals 14% of my gross and is 22% of my take home pay.

So what in the world is a better deal, a Roth or my 401(k)? Is it wiser for me, givem my current life status to take the tax relief now, or later? That's the part I am having difficulty figuring.

Thanks way ahead of time!

milleniumfalcon
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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34593 of 75335
Subject: Re: Hurray For Me!!! (And New Qustions) Date: 5/23/2002 6:42 PM
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If your employer matches a part of your 401k, you will want to put enough into the 401k to qualify for ALL the free money.
For a young person, a Roth IRA is a really great choice. So my order of priorities would be:
First, enough into 401k to qualify for all match money
Second, fund a Roth ($3000 this year)
Third, go back to increase 401k to maximum allowed.
Fourth, tax-efficient investments in taxable account.

And lots of congratulations on becoming debt-free!
Best wishes, Chris

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Author: brwhiz Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34594 of 75335
Subject: Re: Hurray For Me!!! (And New Qustions) Date: 5/23/2002 8:44 PM
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If your employer matches a part of your 401k, you will want to put enough into the 401k to qualify for ALL the free money.

For a young person, a Roth IRA is a really great choice. So my order of priorities would be:
First, enough into 401k to qualify for all match money
Second, fund a Roth ($3000 this year)
Third, go back to increase 401k to maximum allowed.
Fourth, tax-efficient investments in taxable account.


I would offer much the same advice, provided that you can afford to fund the 401(k) AND the Roth IRA to the point that you can build up your emergency reserve of $2000 in the Roth fairly quickly. Since you only need to contribute $258 for the employer match, this should be a cinch.

In fourth place, I would recommend a traditional non-deductible IRA. You are allowed to put the same amount of after-tax contribution into this type of IRA as you can into a Roth. And your contributions (but not any yields) to BOTH types of account are retrievable, in case of an emergency, without any penalties. The EARNINGS on the traditional IRA are like your 401(k); you aren't taxed until you take a distribution against earnings. So after retirement, you first withdraw against your contributions until you have withdrawn an amount equal to your TOTAL contributions, THEN you pay taxes on any subsequent withdrawals at whatever your marginal tax rate is at THAT point.

You have until April 15, 2003 to fully fund the $3000 into each of the IRA's (later, if you file for extensions on filing your return - up to October 15, 2003).

So this year you can contribute $11,000 to your 401(k), $3000 to your Roth, and $3,000 to the non-deductible IRA for a total of $17,000. Add to that the $258 contribution by your employer and that's a darn good jump on your future retirement (if you stick to maximizing your contributions).

Another thing you might want to check on is the possible availability of some variety of 457 plan. These are typically restricted to government employees and employees of non-profit organizations, but they are cropping up more and more in some strange places. If available, you could sock away another $11,000 of PRE-TAX contributions this year. But I would put that in fourth place, after getting the emergency fund established in the Roth.

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Author: Azotic Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34595 of 75335
Subject: Re: Hurray For Me!!! (And New Qustions) Date: 5/23/2002 8:50 PM
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So what in the world is a better deal, a Roth or my 401(k)? Is it wiser for me, givem my current life status to take the tax relief now, or later? That's the part I am having difficulty figuring.

My guess is the Roth, because you're unlikely to be in a lower tax bracket at retirement. However, you'll have to figure that out for yourself. :-)

-- Mark


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Author: jtr56 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34596 of 75335
Subject: Re: Hurray For Me!!! (And New Qustions) Date: 5/23/2002 10:30 PM
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So this year you can contribute $11,000 to your 401(k), $3000 to your Roth, and $3,000 to the non-deductible IRA for a total of $17,000.

I don't think Uncle Sap will like that!

Cheers!
jtr

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Author: SirTas Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34597 of 75335
Subject: Re: Hurray For Me!!! (And New Qustions) Date: 5/23/2002 11:54 PM
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So this year you can contribute $11,000 to your 401(k), $3000 to your Roth, and $3,000 to the non-deductible IRA for a total of $17,000.

I don't think Uncle Sap will like that!

Right. The $3,000 limit is a limit on the total amount that you can contribute to any and all IRA's that you may have. See Pub. 590: http://www.irs.ustreas.gov/formspubs/display/0,,i1%3D50%26genericId%3D12598,00.html


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Author: brwhiz Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34599 of 75335
Subject: Re: Hurray For Me!!! (And New Qustions) Date: 5/24/2002 10:59 AM
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So this year you can contribute $11,000 to your 401(k),$3000 to your Roth, and $3,000 to the non-deductible IRA for a total of $17,000.

I don't think Uncle Sap will like that!

Uncle Slam may not LIKE it, but the IRS says that it is perfectly LEGAL and you will suffer NO tax consequences. The key point is that the contributions to the non-deductible IRA are made with AFTER-TAX dollars, which you can't deduct from your taxable income. But the proceeds from this IRA are tax deferred until distributed, so you get the benefit of compounding on the proceeds (which have not been reduced by any taxation). And after age 59 1/2 you have a nice bundle of money on which the taxes have already been paid (your contributions) and that can be withdrawn without impacting your tax bracket or costing you one additional cent of tax. It is only after you have withdrawn ALL of your contributions and start taking distributions on the earnings that your taxable income is then increased.

Be aware that contributions to both of these type of IRA's become restricted or prohibited if your income is above certain levels (something around $90,000 for singles and $160,000 for joint filers).

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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34600 of 75335
Subject: Re: Hurray For Me!!! (And New Qustions) Date: 5/24/2002 11:42 AM
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I think there's an error here. I'm not a tax pro, but I'm sure you are only allowed $3000 a year of IRA contributions total per year ($3500 if over, is it 50, or 55 years of age as "catch-up contribution"). If the poster is eligible for a Roth, it is clearly a better choice than the non-deductible IRA.
But the penalties for over-contributing are quite serious.
Sorry I don't have the reference to the IRA publication giving the rule, but if you go over to the tax strategies board one of the pros will provide it.
Another fine point is that you are not limited to ONE Roth or One nondeductible traditional IRA--only the TOTAL contribution per year is limited, and you can divide that contribution up any way you like.
Best wishes, Chris


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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34601 of 75335
Subject: Re: Hurray For Me!!! (And New Qustions) Date: 5/24/2002 11:50 AM
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And your contributions (but not any yields) to BOTH types of account are retrievable, in case of an emergency, without any penalties.

Could you point out where in the tax code it says that? I was plenty sure that was only the case for Roth IRAs.

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34602 of 75335
Subject: Re: Hurray For Me!!! (And New Qustions) Date: 5/24/2002 12:18 PM
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Sorry brwhiz, but your understanding of the IRA rules is not correct.

Take a look at Internal Revenue Code sections 408(a)(1), 408(b)(4), 219(b)(1)(A), and 219(b)(5)(A). After reading these, you will understand that there is a single limit for contributions to ALL types of IRA's. You can choose among the various types of IRA's as you see fit, and as other sections of the Code allow.

The penalty for excess contributions is 6% of the excess every year (IRC section 4973).

The IRA withdrawl ordering rules are also a bit different that what you have explained. You are correct for Roth IRA's. The first monies withdrawn are your contributions, which are not subject to tax or penalties. Then you withdraw any conversions. These are not taxable, but may have a penalty if they have not been in the account for 5 years or if you are not yet 59 1/2. Finally you withdraw the earnings in the account. These will be tax and penalty free only if the Roth has been open for 5 years AND you are 59 1/2.

Traditional IRAs are a bit different. You can't withdraw non-deductible contributions separately from earnings. EVERY withdrawl from your traditional IRA after you have made a non-deductible contribution must be partially a return of your contribution and partially earnings. The earnings are always taxable, and may be subject to penalty.

I hope this clears up some of the bad information posted on this thread.

--Peter

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Author: jtr56 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 34606 of 75335
Subject: Re: Hurray For Me!!! (And New Qustions) Date: 5/24/2002 10:11 PM
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Thanks, ptheland and others for giving the correct information. I apologize for being glib in my first reply, instead of clarifying the rules myself.

cheers!
jtr

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