401K tax question

[neatokimmo]

Hi, I need help please.

The short version is, my Mom makes 20K a year. She recently discovered her $900 a month at 66 ss is now going to be $1726 at 62. She is able to draw off my Dad whom she was married for 20 years, who died last year.

She is 62 and I am taking over her finances because she is overwhelmed. I am basically getting all her misc rolled 401Ks in one spot and getting her small stock account straitened out. I'll prepay all her bills a year in advance and give her a monthly allowance (which she won't spend and will hoard but that is just how she is. She lives on $700 a month).

We were told that if she reduced her hours to make 14K a year, she'll get 12 checks instead of 10. 12 checks are more than what she makes at her job. Plus she is excited about the thought of being part time.

So I was thinking about putting her entire paycheck into her 401K. The match isn't great, like 2% but would that take her gross adjusted income down to zero?

I am trying to avoid paying tax on the SS by keeping her AIG + 1/2ss less than 25K.

Are there any pros/cons with putting the whole check in there that I don't know about?

 

[Martha]

She working for fun? It looks like she doesn't need or want the money. Why is she taking SS early? She will lose benefits if she earns more than an earnings cap which applies to people who are taking SS before full retirement age: You can work and get Social Security at the same time

• If you are under full retirement age for the entire year, we deduct $1 from your benefit payments for every $2 you earn above the annual limit.
  For 2010, that limit is $14,160.

Another unrelated question: Why are you paying bills a year in advance? Is it some special kind of bill?

There is nothing legally that would stop her from contributing all her income to a 401k, up the the maximum one can contribute to a 401k. I did that when I went very part time and I went a couple of years without a paycheck. Actually, this was a bit demoralizing. However, her 401k plan might limit what she can contribute. Also, FICA and medicare would be taken out of her pay first.

Another thing to think about is the fact that she might be taking money out of the 401k someday. This could cause her to end up paying taxes on her SS later and who knows what the tax rates might be at that time. Hard to think that they may be lower.

Sorry for the disjointed nature of my thoughts. And see my signature.

 

[Martha]

Hum. It looks like that the 401k contributions may be counted when determining whether she exceeds the earnings cap for reduction of benefits. Here is the rule, not artfully expressed: SSA Handbook §1811


Wages for employment covered by social security likely include her 401k contributions as social security is taken out of 401k contributions.

If that is the case she should probably wait on collecting social security or make sure that her total earnings from employment before 401k contributions do not exceed the $14,160 cap (which will change from year to year).

I would check on this with the SSA.

 

[neatokimmo]

.

She working for fun? If you don't count the SS, she needs the money for bills. Her retirement accounts are low for her age. But her house is nice for the area and it is paid off. Her fixed expenses are very low. But she needs health insurance.


It looks like she doesn't need or want the money. Why is she taking SS early? That 2 in the hand bush thing. My Dad died at 64. She will lose benefits if she earns more than an earnings cap which applies to people who are taking SS before full retirement age: You can work and get Social Security at the same time

• If you are under full retirement age for the entire year, we deduct $1 from your benefit payments for every $2 you earn above the annual limit.
  For 2010, that limit is $14,160. (that would be our goal, that puts her at 26 hours)

Another unrelated question: Why are you paying bills a year in advance? Is it some special kind of bill? (I look at a yearly budget, not a monthly one. I pay my utilities a year in advance. I've been known to miss payments and get late fees which cost more than the meager amount I'd earn in a savings account. With two households to manage, I'm not taking any chances lol)

There is nothing legally that would stop her from contributing all her income to a 401k, up the the maximum one can contribute to a 401k. I did that when I went very part time and I went a couple of years without a paycheck. Actually, this was a bit demoralizing. However, her 401k plan might limit what she can contribute. Also, FICA and medicare would be taken out of her pay first.

Another thing to think about is the fact that she might be taking money out of the 401k someday. This could cause her to end up paying taxes on her SS later and who knows what the tax rates might be at that time. Hard to think that they may be lower. (Good point. I will talk to her about it.)

Sorry for the disjointed nature of my thoughts. And see my signature. (thank you for your detailed post!)

 

[LOL!]

Although it is nice not to have SS taxed, you may wish to concentrate on total after-tax income especially if she likes working.

Don't forget that conversion of a 401(k) to a Roth IRA in small amounts may be beneficial.

Many 401(k) plans allow for "in-service" rollovers for workers over age 59.5, so she may be able to roll over her 401(k) assets to a less expensive place. Since you are consolidating her finances, this may also be helpful.

 

[Koolau]

I think the conventional wisdom is to contribute to the 401(k) as much as will be matched. Probably little argument there. My personal opinion is that after that, it might make more sense to place any "extra" money in a Roth IRA rather than funding the 401(k). Yes, she will possibly pay some taxes, but her gains will all be tax free within the Roth. Also, her taxable income (as you describe her income) should all be in the lowest bracket. As Martha pointed out, at some point, she will be forced to take her 401(k) money out. At that point, does anyone think taxes will be lower than they are now? I personally wish I had a "do over" on some of the money I put in 401(k)s.

Sounds like, in any case, your mom has someone looking out for her and she is frugal, so she should be okay. That has to be a relief to the entire family. Way to go, neatokimmo!

PS: See Martha's disclaimer. I'm even less qualified!