401k maxed: what next?

[djasper]

I'm married, and work. I max my 401k, plus my employer matches a portion. My wife is a real estate agent - no sales in 2007, so no employer sponsored retirement plan money can be set aside. (The agency offers a Keogh, which I think she could participate in IF she sold something and earned a commission).

I believe that we make too much for a Roth, which seems limited to those earning $150K combined or less.

Is there anything else that either of us can do? Could she open a SEP, or something else? Or, are we together limited to nothing but my 401k?

DJ

[SecondCor521]

You both could contribute to a non-deductible traditional IRA. You can both contribute $4,000 for 2007 (up until ~4/15/08.) and can contribute $5,000 each for 2008 (up until ~4/15/09).

Note that even if your wife didn't earn any income in 2007, she can still contribute under the spousal IRA rules.

Doublecheck what I wrote above with the IRS documents. Pub 590, I think, is what you want to look at.

2Cor521

[SecondCor521]

P.S. - Welcome to the board!

2Cor521

[djasper]

Originally Posted by SecondCor521

You both could contribute to a non-deductible traditional IRA. You can both contribute $4,000 for 2007 (up until ~4/15/08.) and can contribute $5,000 each for 2008 (up until ~4/15/09).

Note that even if your wife didn't earn any income in 2007, she can still contribute under the spousal IRA rules.

Doublecheck what I wrote above with the IRS documents. Pub 590, I think, is what you want to look at.

2Cor521

Thanks much for the response, and the welcome!

I'm not sure I understand why we'd bother - if it's not deductible, what's the point?

Or, do gains grow tax free? If so, is this a big benefit?

-Dane

[Want2retire]

Originally Posted by djasper

I'm not sure I understand why we'd bother - if it's not deductible, what's the point?

Or, do gains grow tax free? If so, is this a big benefit?

A non-deductible traditional IRA allows you to defer taxes on your investment returns. Often, one is taxed at a lower rate in retirement than when working. That's the only advantage I can think of but I am no expert!

[firewhen]

Nothing wrong with good old taxable savings! A problem with nondeductible IRAs is that when you eventually pull money out, you cannot designate it as solely nondeductible. It is apportioned between all IRAs. So if you have $90k in deductible IRAs and $10K in nondeductibles, for a total of $100k, if you elect to withdraw $10k, it cannot be the nondeductible IRA. It will be designated as 90% from the deductible pot (since 90% of your IRA money was originally deductible). Even if most of your retirement money is in 401ks now, when you retire you likely will move that money in to IRAs. Also, there are IRA withdrawals rules at pre 59.5 and post 70.5.

With good old taxable savings, you do not have these issues. If you put that savings in something like an index fund, there is almost no capital gains and the gains are also tax deferred. About your only current income is off of dividends, which are taxed at a lower rate and are only 2% of your investment currently. Plus, you can access these funds at any time with no 10% penalty.

[nun]

Originally Posted by djasper

I'm married, and work. I max my 401k, plus my employer matches a portion. My wife is a real estate agent - no sales in 2007, so no employer sponsored retirement plan money can be set aside. (The agency offers a Keogh, which I think she could participate in IF she sold something and earned a commission).

I believe that we make too much for a Roth, which seems limited to those earning $150K combined or less.

Is there anything else that either of us can do? Could she open a SEP, or something else? Or, are we together limited to nothing but my 401k?

DJ

Firstly congratulations on maxing out on the 401k. I agree that after tax investment is the way to go. Save regularly into something like a Vanguard Target Retirement Fund, that's a simple way to start. Then you can easily start the Keogh if you wife qualifies.

Another thing to consider might be buying a rental property

[Martha]

If only one spouse is covered by a 401(k), then the other spouse can have a traditional IRA. For 2007, there is full deductibility for AGI less than $150,000; partial deductibility for AGI of $150,000-$160,000. If you are looking at a ROTH, the AGI limitations are the same. You can't have a ROTH for AGIs over $160,000 but you can have a non-deductible IRA.

The applicable IRS publication: Publication 590 (2006), Individual Retirement Arrangements (IRAs)

[ChrisC]

Can't you fund the nondeductible IRA and then convert it to a Roth IRA in 2010 when the income caps are removed? I thought a lot of people were doing this.

[Martha]

Yes Chris. If the law remains the same in 2010.

[djasper]

Originally Posted by Martha

Yes Chris. If the law remains the same in 2010.

I think I'm getting slightly more confused. Our AGI seems to preclude doing anything at all, but you're saying that we could do a small IRA, and the gains would not be taxed, then we could convert it to a Roth..? What's the up side?

--
DJ

[ChrisC]

The upside is that you can shelter the earnings tax free in the nondeductible IRA, then convert the nondeductible IRA in 2010 into a Roth (paying modest taxes on the conversion, perhaps, as you've contributed after tax money into the nondeductible and the earnings were previously sheltered) and then never paying anymore taxes on the converted Roth IRA.The upside is that you would have a running head-start on funding (if you contribute for 2007, 2008, and 2009) the Roth IRA in 2010 when the income caps are lifted, assuming the law remains the same.

[frayne]

There are some new rules for contributing to a traditional IRA for 2007 even if you are covered by an employer retirement plan. It is based on your modified adjusted gross income. I believe you have to make less than $62K single, $130K married filing jointly or qualifying widower. See chapter 17 of IRS publication 17.

[jIMOh]

the income limits are AGI, not gross income.

I would run a quick turbo tax return for 2007 using an old version or an online version, and see if you make less than the AGI limits (160k, I think). Look at the AGI line on tax return- your 401k contributions reduce the AGI... so if you are putting 15,500 ito the 401k, that reduces AGI by the 15,500 you put into 401k.

Mortgage interest and other deductions also lower AGI.

[kaudrey]

I want to second what "firewhen" said - open a regular taxable account -and invest in low cost index mutual funds.

Since you are on these boards, I assume you plan to FIRE. You will need access to money in those early years that aren't tied up in retirement accounts (OK, you can get money out of IRAs early, under somewhat difficult rules, I hope to avoid and let those accounts grow until I am older).

[Shawn]

Originally Posted by djasper

Is there anything else that either of us can do? Could she open a SEP, or something else? Or, are we together limited to nothing but my 401k?
DJ

As other people have suggested, non-deductible contributions should be considered. I opened a traditional IRA last year with non-deductible funds and plan to convert to a Roth IRA in 2010 when the income exclusion limit on conversions is eliminated (or when I ER). Since I've already paid taxes on these contributions, I will pay taxes only on the gains. Of course, this assumes no significant changes to the tax law.

In addition, you might consider non-deductible contributions to your 401k if they are allowed by your employer. I believe the current IRS 415c limit is 46K for 2008, meaning that you can make considerable after-tax contributions in addition to your deductible 15.5K and employer match.

Also, you may be able to roll after-tax 401k contributions (and corresponding gains) into a traditional IRA after you leave your employer, and then convert to a Roth IRA in the future. Before and after-tax contributions to a 401k are tracked differently as independent sources. I am told by Fidelity and others that you can roll over either or both as separate entities into a traditional IRA. In this way, you can generate a traditional IRA funded with after-tax contributions (and their taxable gains while in the 401k). If the funds were not in the 401k for a long period of time, the gains will be small, and your tax liability when you convert to a Roth will be small.

Even without the Roth conversion, the advantage of after-tax contributions is that distributions will compound tax free. Of course, you will need to pay taxes on the gains when you withdraw the funds. These taxes may or may not be greater than the taxable gains you will pay if you instead had the money in a taxable index fund (for example). It is a function of expected income and capital gains tax rates now and in the future. For most people, I think there is a financial advantage to non-deductible contributions. A disadvantage is that the money will not be available for use without penalty until you are old enough to receive distributions.

Personally, I basically do all of the above. I max out my deferred contributions to my retirement plan (currently a 401k, previously a 403, 457, and 401a). I max out my after-tax contributions to my retirement plan and to my non-deductible IRA. Then, I contribute to low cost index funds in taxable accounts.