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401K help for 2012, strategy
Old 10-13-2011, 02:51 AM   #1
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401K help for 2012, strategy

I am trying to set my retirement date for either end of 2011 or early 2012. The limits for 2012 will be at least $16500 plus $5500 catch up. I know the catch up can be done in any amount you can manage. In 2011 I did $1000 a paycheck and 7% in order to maximize employer contribution. So catch up was paid by mid March. (bi-weekly pay schedule). And 7% lasted most of year to reach maximum.

Now I have not done the math, but is it possible to say do the contribution at 75% and the catch up at $2000, and set retirement date at mid February? I know I have to pay FICA and Medicare, but then use 100% of remainder to get 401K maxed out then retire. So almost all of 2012 income is tax deferred. I know I can start SS and work at the same time and this way SS will have minimal tax as W2 will be close to zero. I realize I miss matching $, but at least get maximum deferred.

Anyone know if this will work?
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Old 10-13-2011, 03:51 AM   #2
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Although it was end of January, 2010, that I retired, I actually had 3 paychecks through March 2nd and I maxed out 20% of paychecks both for regular and catch-up payments. (20% of gross was the max my company allowed towards 401k).

In other words, yes, I agree with your thinking
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Old 10-13-2011, 08:28 AM   #3
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I retired on March 1st and put as much into my 401(k) as possible. The limiting factor was my particular company's rules on contributions.....which I honestly can't recall anymore.........

I did also get paid for 5 weeks unused vacation, but for some reason this was not eligible for the 401(k).
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Old 10-13-2011, 08:51 AM   #4
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Don't see an issue with it unless your employer has limits on how much of any single paycheck you can contribute. You will likely miss out on some employee match as most employers only match up to a certain % of each paycheck.
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Old 10-13-2011, 08:52 AM   #5
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To me the only caveat is if you will be in the 15% bracket if you don't have enough other income for the year...

I would never want to contribute money at 15% when it might be taxed later at a higher rate...
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Old 10-13-2011, 10:59 AM   #6
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To me the only caveat is if you will be in the 15% bracket if you don't have enough other income for the year...

I would never want to contribute money at 15% when it might be taxed later at a higher rate...
+1

If your income is going to be that low, with SS, consider contributing directly to a Roth IRA or go ahead and contribut to the 401k and convert some to a Roth while your taxes are lower than they will be in the future. You'll have to run the numbers for yourself to check which tax rates will apply.
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Old 10-13-2011, 10:22 PM   #7
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My Megacorp added a Roth 401k option. It makes more sense for me to contribute to a regular 401k and get the tax deduction in years I work the full year, but I expect that in the year I retire I will want to switch to the Roth 401k and max out contributions at the highest rate they allow for as many months (just a few) I work that year.
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Old 10-14-2011, 05:36 AM   #8
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Even after I retire I will be in a higher tax bracket. Could even be in the highest at least as long as the wife is still working. Still working through that issue. Setting everything up as tax efficient as possible, but got 10 years of deferred income payouts that will drive me into a minimum 28% and probably 35% as long as we have the second income.
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Old 10-14-2011, 06:17 AM   #9
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Originally Posted by l2ridehd View Post
Even after I retire I will be in a higher tax bracket. Could even be in the highest at least as long as the wife is still working. Still working through that issue. Setting everything up as tax efficient as possible, but got 10 years of deferred income payouts that will drive me into a minimum 28% and probably 35% as long as we have the second income.
If that is what you actually mean, then you have a problem most on this board will be envious of.

To be in the 35% tax bracket after you retire would mean your wife's salary + income from your savings (dividends etc) will be higher than $379k.

You don't have to pay taxes on your tax-deferred money until you choose to draw it down.
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Old 10-14-2011, 06:57 AM   #10
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Wife has a good job. The deferred income is in a Rabbi trust and I had to select how it was to be paid when deferred. Choices were lump sum, 5 years or 10 years. I chose 10 years but even at that it is about 90K a year. And I can't change that schedule. Along with pension, wife's income, rental income and a few other income streams it will be close. Depends on deductions. But 28% will definitely happen as long as she is working. But this is why I wanted to maximize 401K and catch up by working one or two months in 2012. I have learned a little more about our company plan. Seems you can do up to 50%, but as a "highly compensated employee" my limit is 14%. So I will probably only work January and maximize the catch up, do the 14% for a month and then retire. Keep 2012 income on a W2 to a minimum.
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Old 10-14-2011, 07:09 AM   #11
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Thanks for the explanation.

With your wife still working you will at least both be able to contribute to traditional IRA's, even though that will be using after tax money.
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Old 10-15-2011, 06:53 AM   #12
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Don't think so. Our MAGI will still be above the 180K limit while she is working.
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Old 10-15-2011, 07:01 AM   #13
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With your wife still working you will at least both be able to contribute to traditional IRA's, even though that will be using after tax money.

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Don't think so. Our MAGI will still be above the 180K limit while she is working.
Doesn't matter - there is no limit to being able to contribute to a tIRA. The 180K limit is for deductible (before tax) contributions. We contributed the max to our tIRA's for many years even though our MAGI was over the deductible limit. It is still nice to have the IRAs grow tax free even though after tax money is used to make contributions.
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