Accumulation and account titles

[jIMOh]

I am divorced, and files taxes as head of household.
I am 41 yo
I started a "high paying" position in March, so I am making decisions based on 9 months of income this year (I did work first 6 weeks of 2014 for a different job).

If I hit my numbers, I will likely gross between $130-$150k
I put 25% of my gross into the 401k (all pre-tax right now)

I can likely qualify for a Roth, curious how people with variable pay do the math. My base is about $78k, and the rest is a monthly bonus based on many factors. I'm on pace for $150k, however I want to realistically plan to be less than that.

I am looking for suggestions on how to deal with Roth, considering I might be over income limits (and might not). And the decision I make now may not apply to 2015, so curious how to handle this going forward.

I am better off investing on my own (not using the 401k), because of the high pay rate (I made half of this at my last position), I just put all my investment money into 401k until I got on my feet and settled in, I am now settled in, and looking to invest less in 401k and more on my own, but would really like to qualify for a Roth if at all possible.

If you are in this situation, how do you stay under the $114k Roth AGI limit? I need to use single limit, correct?

Feel free to also discuss 6% 401k with 2% match, Roth IRA and then the balance into a taxable account, vs coming close to maxing 401k with minimal taxable investments.

Thank you

 

[meierlde]

Note that you will go taxable before the end of the year in your 401k since the contribution limit is 17,500 per year roth and regular combined. At that point you can either contribute after taxes to the account and go thru the hassle of later figuring out the taxes when you withdraw, (since gains will be taxable all be it your original after tax part will not be taxable). Note that if you make 150 you will not be eligible to make any Roth contributions either. So when you hit 17500 go to a taxable account. (note that you may want to stress equities in the taxable account and fixed income in the 401k account due to the better rates on capital gains and dividends).

 

[mpeirce]

The one time I was able to fund a ROTH IRA (not a rollover) I opened it in March of the following year right after doing my taxes. By then I knew I qualified.

Any reason you can't wait?

Have you talked this over with your CPA (if you have one)?

 

[Rdub]

Assuming you don't have another IRA, you can always look into a backdoor Roth IRA even if you exceed the income limits.

 

[Animorph]

When your income peaks like this I'd max out the 401k to reduce your income as much as possible. That's only $17,500 for 2014.

Then you can use the "backdoor" Roth contribution, if you don't have any deductible IRA's in your name. This gets around the contribution income limits. Save $5500 to a traditional IRA as a nondeductible contribution. Then do a conversion of that tIRA value into a Roth account. Because you already paid taxes on the $5500, that will go into the Roth with no tax impact. You will owe taxes on the excess above $5500 if your $5500 earned some interest or otherwise grew in value. The one potential problem is that all your tIRA's are pooled together to determine the Roth conversion tax basis. So if you have some deductible tIRA's already, they will increase the tax impact and may make this scheme impractical. This will work whatever your income ends up being, though a straight forward Roth contribution would be easier if you can.

The rest ends up in a taxable account.

 

[jIMOh]

When your income peaks like this I'd max out the 401k to reduce your income as much as possible. That's only $17,500 for 2014.

Then you can use the "backdoor" Roth contribution, if you don't have any deductible IRA's in your name. This gets around the contribution income limits. Save $5500 to a traditional IRA as a nondeductible contribution. Then do a conversion of that tIRA value into a Roth account. Because you already paid taxes on the $5500, that will go into the Roth with no tax impact. You will owe taxes on the excess above $5500 if your $5500 earned some interest or otherwise grew in value. The one potential problem is that all your tIRA's are pooled together to determine the Roth conversion tax basis. So if you have some deductible tIRA's already, they will increase the tax impact and may make this scheme impractical. This will work whatever your income ends up being, though a straight forward Roth contribution would be easier if you can.

The rest ends up in a taxable account.

I was likely going to backdoor the Roth if I could not do so otherwise.

One other note, my style of living is based on the 78k for the most part. Only change I made was I am sending kids to private school with the new job, where as with old one it would have been much tighter on just the base salary.

I can likely save most of the take home above the $78k, but not sure how to capture that.

The goal is to save 25-35% per year and move away in 13-16 years (whether I can retire then or consult part time remains to be seen).

 

[growing_older]

You may be a good candidate for backdoor Roth. Can you clear your IRA of any tax deductible contributions (roll into 401k for instance)?

 

[jIMOh]

You may be a good candidate for backdoor Roth. Can you clear your IRA of any tax deductible contributions (roll into 401k for instance)?

my old 401k is still at its old custodian, with paperwork rolling it into a new custodian.