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Author: pguduru Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76082  
Subject: Retirement investing Date: 11/4/2008 5:02 PM
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Hi,

I recently switched jobs. I had an employer sponsered 401K plan in my previous job to which I used to make voluntary contribution. But, my new job is a contract job, which pays by the hour and absolutely no benefits. Can anyone enlighten me what my retirement investment options are? Also, I used to contribute the maximum possible amount of $15K or so in my previous job. Can I still contribute a similar amount if I open an independent retirement account?

Thanks for the responses.
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Author: wrjohnston91283 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64406 of 76082
Subject: Re: Retirement investing Date: 11/4/2008 5:26 PM
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Can I still contribute a similar amount if I open an independent retirement account?

No. The maximum to an IRA in 2008 is $5000, a bit more if you are over 50.

Are you going to be on the payroll at your new job, or working as a contractor? If you are on the payroll, an IRA is pretty much your only option. If you are a contractor (self employed) there are self employment retirement options that allow more to be contributed. I'll leave those to others, as I have never dealt with them.

WRJ

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Author: pguduru Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64407 of 76082
Subject: Re: Retirement investing Date: 11/4/2008 5:47 PM
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Thanks WRJ. I am on the payroll in my new job. I guess that limits me to $5K.

Also, do you happen to know if there is a ceiling on my annual pay to be eligible for tax deferral even on that $5K contribution?

Thanks.

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64408 of 76082
Subject: Re: Retirement investing Date: 11/4/2008 5:56 PM
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... I guess that limits me to $5K....

If you are married, then your spouse can also make an IRA contribution even if they don’t have income.

There are also various education savings accounts if you have kids.

I’m not up to speed on them but you should also look into HSA’s (healthcare savings accounts) if you are providing your own health insurance.

If you are in a very high tax bracket then annuities and life insurance will make sense once in a blue moon but don’t invest in them unless you have had a fee only(by the hour) financial advisor review your situation. More often than not these are either outright bad investments or sold in inappropriate situations.

Greg

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Author: pguduru Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64409 of 76082
Subject: Re: Retirement investing Date: 11/4/2008 6:37 PM
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Thanks Greg. My spouse contributes to her employer sponsered retirement plan and we buy health insurance through her employer. I guess that eliminates her IRA option.

I will do some research into the annuities you mentioned.

We are just about to start a college fund for our infant. Besides my IRA contribution, that seems to be the only option left to defer taxes. I was just looking at the 1040 form to see where the college fund contribution gets reported and deducted; but did not find it. I wonder how that works.

I didn't even think about all these issues when I accepted my new job, which just shows my financial illiteracy. I guess I have a lesson to learn here.

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Author: wrjohnston91283 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64410 of 76082
Subject: Re: Retirement investing Date: 11/4/2008 7:38 PM
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Also, do you happen to know if there is a ceiling on my annual pay to be eligible for tax deferral even on that $5K contribution?

Depends on the type of IRA:

http://www.fool.com/Money/AllAboutIRAs/allaboutiras.htm

Which type of IRA to contribute to depends a lot on your current income, tax rate, time to retirement and future expected tax rate.

WRJ

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Author: DrDraconian One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64411 of 76082
Subject: Re: Retirement investing Date: 11/4/2008 7:54 PM
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We are just about to start a college fund for our infant. Besides my IRA contribution, that seems to be the only option left to defer taxes. I was just looking at the 1040 form to see where the college fund contribution gets reported and deducted; but did not find it. I wonder how that works.

It doesn't work the way you think. There is no up-front deduction for college savings plans. There are potential deductions and credits for actual, current college expenses (will depend on income levels and many other factors), but no deductions for savings that are specifically directed towards saving for college.

The two plans currently existing that were specifically developed for college savings are the Coverdell Education Savings Account (formerly known as the Education IRA), and state-sponsored 529 Plans. Both of these allow you to put away after-tax money (i.e. there is no federal income tax deduction), but the earnings/growth in the account will accumulate tax free, and will not be taxed upon withdrawal if it is used to pay for certain, allowed education-related expenses (there will be tax due, plus penalties, if the money is withdrawn and not used to pay for educational expenses). The one caveat to the after-tax nature of these two plans is that many (most/all?) states that have income taxes will allow you deduct contributions to a 529 plan IF you contribute to their particular 529 plan (i.e. if you live and pay taxes in CA, you will get a CA state income tax deduction if you contribute to a CA 529 plan, but not if you contribute to, say, a VA 529 plan. Why would you even think of using another state's plan, you ask? Because the different plans have different rules/investment options, and some plans are more investor friendly than others).

The Coverdell ESA currently has contribution limits of $2K/ year, while 529 plans have much higher limits. You can use both savings plans if you like, but when it comes time to withdraw money when your child is in college, you need to be careful about how you allocate the expenses (you can't double dip, i.e. withdraw money from both sources to pay for the same expenses).

The details, especially for 529 plans, are way too complicated to try to cover in a single post. Just Google "Coverdell ESA" and "529 savings plan", and you'll be well on your way to information overload. Luckily, since your child is an infant, you have some time to learn about these things (of course you don't want to procrastinate too long - i.e. years, because time is money :)

Of course, with a change in administration, government priorities will possible change, and these tax-advantaged plans may be changed / eliminated / replaced with something else. You'll have to stay updated on what goes on as your child grows.

Don't forget, you can (and should) save for your child's educational expenses in non tax advantages accounts as well, which will typically not have as many limitations on how you accumulate or spend the money. Diversity in investments is a good thing.

DrD

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Author: PSUEngineer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64412 of 76082
Subject: Re: Retirement investing Date: 11/4/2008 8:48 PM
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Thanks Greg. My spouse contributes to her employer sponsered retirement plan and we buy health insurance through her employer. I guess that eliminates her IRA option.

The IRA option is not eliminated. The only thing eliminated is the deductible traditional IRA. You can contribute to a Roth IRA if you are below the income limits. If you are above them, you can still contribute to a non-deductible traditional IRA.

PSU

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Author: JanBrady2 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64413 of 76082
Subject: Re: Retirement investing Date: 11/4/2008 11:29 PM
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Hey DrD nice post. Stick around here I could learn alot from you!

Jan

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Author: Fuskie Big funky green star, 20000 posts Top Favorite Fools Old School Fool Ticker Guide SC1 Red Winner of the 2010 Rule Breakers Challenge Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64415 of 76082
Subject: Re: Retirement investing Date: 11/5/2008 3:21 PM
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My spouse contributes to her employer sponsered retirement plan and we buy health insurance through her employer. I guess that eliminates her IRA option.

Hopefully you had DW add you to her health insurance plan. I believe your losing your full time job qualifies as a life event that would allow it. Or be sure to add yourself now during open enrollment for 2009. I assume the baby (congrats!) is also on mom's healthcare plan.

You have already read that you can make a $5k Roth IRA option for DW even while she is participating in her employer-sponsored retirement savings plan. It is not tax deferred but any earnings will be tax free when distributions are taken upon retirement, so it is tax advantaged.

This year I have worked W2 for an employer with a 401k, W2 for one without benefits, and 1099 for a couple employers (I am contracting too). My options were contributing to the 401k (with $0.25 on the dollar matching contributino for the first 4%), plus I will be elligible to make a RIRA contributin and also a contribution to my SEP IRA, which was established the last time I went contracting. I have since rolled over the $500 resulting from the 401k to my Traditional IRA (does not count against my $5000 annual contribution limit).

Note that the amount you can contribute to a SEP IRA is based on the amount of self-employment (1099 contract) income you take in during the year. I think it is around 40% with a maximum but its been a while since I have scoped it out and I am at work and can't really do the research right now. The SEP IRA is tax advantaged with the ability to deduct contributions in the calendar year in which they are made, and monies can be invested through your favorite broker just like your RIRA and TIRA accounts.

Fuskie
Who is also remembering to set aside 25% of his 1099 income to cover income tax liability and is setting aside additional funds to cover RIRA and SEPIRA contributions next April...

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Author: pguduru Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64428 of 76082
Subject: Re: Retirement investing Date: 11/6/2008 11:35 AM
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Thank you all for the useful information. I certainly had some of my misconceptions dispelled.

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64451 of 76082
Subject: Re: Retirement investing Date: 11/7/2008 1:00 PM
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...The IRA option is not eliminated. The only thing eliminated is the deductible traditional IRA.....

I believe that this changed a few years ago, not even if you have an employer pension plan the traditional IRA can still be deductable if your AGI income isn’t too high, see the worksheet 1-2 on page 23

http://www.irs.gov/pub/irs-pdf/p590.pdf

Greg

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Author: rj876 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 64460 of 76082
Subject: Re: Retirement investing Date: 11/7/2008 11:48 PM
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Actually, I am in a similar situation to the original post. I switched jobs last week. In my earlier job, I was contributing to 401K and when I left that job, I contributed about $8K to it in 2008. In my new job, I will be eligible for 401K only after I stay in this company for a year. If I open a traditional IRA now, can I contribute to it (up to $5K) in 2008, tax deferred? Or, because I already contributed $8K in my previous job, the tax advangate is no longer available to me in the IRA for 2008?

Thanks.

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Author: aj485 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: 64465 of 76082
Subject: Re: Retirement investing Date: 11/8/2008 7:19 AM
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Actually, I am in a similar situation to the original post. I switched jobs last week. In my earlier job, I was contributing to 401K and when I left that job, I contributed about $8K to it in 2008. In my new job, I will be eligible for 401K only after I stay in this company for a year. If I open a traditional IRA now, can I contribute to it (up to $5K) in 2008, tax deferred?

Well, it depends on what you mean by 'tax deferred' - if you mean can you deduct the IRA contribution, the answer is maybe - it depends on your filing status and your MAGI (Modified Adjusted Gross Income). IRS Pub 590 has the details.

If what you mean by 'tax deferred' is that the gains on your contribution will not be taxed until you withdraw them, although the initial contribution may not be deductible, then the answer is yes. For 2008, anyone with 'earned income' may contribute to a traditional IRA up to the amount of their earned income or $5000 ($6000 if 50 or older), whichever is less. As noted above, the deductiblity of their contribution depends on their filing status and their MAGI. Non-deductible contributions need to be documented on form 8606.

Another option is a Roth IRA, where the contributions are not deductible, but the gains, when withdrawn, will be tax free. The eligibility for this type of IRA is dependent on your filing status and MAGI, but not the eligibility for a 401(k) or other employer's retirement plan. IRS pub 590 has details.

For 2008, if you meet the MAGI requirements detailed in IRS Pub 590, you may contribute to any combination of traditional deductible IRA, traditional non-deductible IRA or Roth IRA, but the total of the contribution amount cannot exceed $5000 ($6000 if 50 or older), and the contribution must be made by April 15, 2009.

Or, because I already contributed $8K in my previous job, the tax advangate is no longer available to me in the IRA for 2008?

It's not the fact that you contributed to a 401(k). The fact that you were eligible to contribute to a 401(k), whether or not you actually contributed, is the deciding factor. Since you will be eligible to contribute to the 401(k) at your new job for 2 months in 2009, you will face similar restrictions on the deductibility of your traditional IRA contribution.

AJ

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