Investing in an IRA? Well, You Are The Exception

[brucethebroker]

As stated this was a poorly formed question, the better question is are you contributing to a retirement savings plan, such as an IRA, 401k 403b etc.

I was thinking the same while reading this post.
We used other methods (401-k, rental properties) over the years and replaced IRA contributions. Not having an IRA did not mean we weren't saving for retirement.

Ford recently announced they would no longer sell cars (only SUV and trucks, with the exception of the mustang.) It would be easy to write a "the sky is falling" article focusing only on the loss of cars, not total vehicles being sold to the American public (New research shows only 40% of Americans still own cars....).

 

[brucethebroker]

When I was working, there were several people in my office who contributed either nothing or very little to their TSP. These are folks who basically live paycheck-to-paycheck. The country is full of folks who live like that.

I saw that too (along with those ee's who did not take advantage of company paid higher education re-imbursement.)

David Bach pretty well hit the (non-retirement savings) nail on the head in his book The Automatic Millionaire, refering to the frittering away of (possible) future fortunes through the "latte' factor.

 

[ncbill]

I saw that too (along with those ee's who did not take advantage of company paid higher education re-imbursement.)

David Bach pretty well hit the (non-retirement savings) nail on the head in his book The Automatic Millionaire, refering to the frittering away of (possible) future fortunes through the "latte' factor.

But you can just stop buying lattes.

What makes me cringe is when I see (often over on bogleheads) posts like "We have a combined income of around $200,000 but live in a HCOL area. So we are planning to buy a $1+ million home."

 

[Perryinva]

If the IRS came out with the number, it is just likely based on returns where their income is suched that they are employed and have earmed income that makes then eligible.I also wonder if a Roth is included in that number. So of course the number would be low. Like the others, I have no tax advantage at all making an IRA contribution, so it is entirely funded by rollovers., though I do max out my Roth IRA. We also do the 6500/yr on DWs IRA, because she has been retired for 10 years.

 

[RunningBum]

I wasn't really "taken aback" by any certain person, I was just surprised at the low number of folks that invested in IRAs when they were eligible to do so. And I do realize that a large number of folks DO contribute to 401Ks, TSPs, etc...but I would bet that number isn't very large, either. But...I would be willing to bet that 80% of the same demographic have a smart phone that is no more than 18 months old!

My first impression was to be surprised by the low number, then I realized it didn't include 401Ks or rollovers, and realized how meaningless that stat is.

 

[Mdlerth]

Perhaps this explanation might help https://www.goodfinancialcents.com/401k-limits-for-highly-compensated-employees/


omni

A good introductory article; it was one of many I had read but still don't feel like a master of the subject.

For example, suppose you're a a non-executive HCE making 120k who got limited to 6%, you can't contribute more than $7200. But in the same company, if you're a VP scoring 500k, the 6% cap doesn't affect you at all; the 18,500 limit would be only 3.7%. It hardly seems fair to punish ordinary engineers and accountants with limitations invented to stick it to senior management. But I think I just don't fully understand it.

 

[DFDubb]

Wife and I had Roths and traditional IRA's when we started working, but it's my understanding that after making a combined income of over 185k'ish a year, you can no longer contribute to these? We've always maxed out our 401k's and IRA's, but we crossed that 185k threshold in our early 30's and haven't contributed to an IRA since. All that we save/invest after maxing out our 401k's goes into a taxable portfolio, which is about 50k a year.

I'm glad this thread came up. Am I going about this the right way? Am I missing any opportunities to contribute more pre-tax dollars after the $18,500 max per 401k?

 

[karen1972]

I am not surprised

1. If you don't have a 401k, there isn't an "automatic" account set up for you, so you now have to go figure out who to trust your money with, setup account, etc.. so thats already a big hurdle for many.

2. So you set up an account and now have an option of 10,000 funds, so you have no idea where to start and if you look up the funds they say $1,000 or $3,000 minimums, so immediately that voids most of these people who will start with $25 or $50.

3. NO ONE knows about the Savers Credit and you can't get it if you use the EZ form. Its like they put this great tax credit in and want no one to use it.

So for me its been a 1 on 1 process with my relatives and usually takes months to convince them to take the first step, but finally I have a few contributing $25-50/month to a Roth IRA.. and now that I have a few, they are sharing with their friends and it is slowly spreading since reality is your going to trust your other poor friend more than some "rich" person who doesn't understand your situation.

I have to suck it up and realize they prefer a local finance place that I'm sure is charging them more than they should, but at least they are investing on a regular basis. Once they actually start making money on their money it will encourage them to invest more.

Ironically the one thing that finally convinced my sister was that I had been giving 1 McDonald share to my Nieces and Nephews every Christmas. Year 8 and she was like wait, what.. my kids each have over $1400 worth of stock and I don't even have $1400 in my savings account. I'm like just start.. $10/20 a month, just ANYTHING.

 

[brokrken]

With no tax break for the tIRA and not qualifying for Roth plus the need to grow my pile of taxable money to help bridge the gap between RE and 59.5, I haven't contributed to an IRA in years.

 

[jazz4cash]

I am not surprised

1. If you don't have a 401k, there isn't an "automatic" account set up for you, so you now have to go figure out who to trust your money with, setup account, etc.. so thats already a big hurdle for many.

2. So you set up an account and now have an option of 10,000 funds, so you have no idea where to start and if you look up the funds they say $1,000 or $3,000 minimums, so immediately that voids most of these people who will start with $25 or $50.

3. NO ONE knows about the Savers Credit and you can't get it if you use the EZ form. Its like they put this great tax credit in and want no one to use it.

So for me its been a 1 on 1 process with my relatives and usually takes months to convince them to take the first step, but finally I have a few contributing $25-50/month to a Roth IRA.. and now that I have a few, they are sharing with their friends and it is slowly spreading since reality is your going to trust your other poor friend more than some "rich" person who doesn't understand your situation.

I have to suck it up and realize they prefer a local finance place that I'm sure is charging them more than they should, but at least they are investing on a regular basis. Once they actually start making money on their money it will encourage them to invest more.

Ironically the one thing that finally convinced my sister was that I had been giving 1 McDonald share to my Nieces and Nephews every Christmas. Year 8 and she was like wait, what.. my kids each have over $1400 worth of stock and I don't even have $1400 in my savings account. I'm like just start.. $10/20 a month, just ANYTHING.

Spot on. People generally do not LBYM, so how could they have anything leftover to save for emergencies, let alone RETIREMENT. The simplest of concepts (pay yourself FIRST, i.e. save some off the top) just don't seem to resonate. This board is the exception.

 

[ExFlyBoy5]

3. NO ONE knows about the Savers Credit and you can't get it if you use the EZ form. Its like they put this great tax credit in and want no one to use it.

That is a very good point. I forget about it every year until I do the taxes and see that mysterious credit...then I remember...OH YEAH! "Free" money...sweet!

Odd that these type of articles never discuss this credit.

 

[pjigar]

FYI: It all the more important to contribute to IRA after phaseout. It is called backdoor Roth IRA!

 

[RE2Boys]

Interesting and I'm totally surprised at the percentage of folks not using TIRA or Roth IRAs. I'm a total outlier as I can't recall a year that i did not contribute to some IRA account, though I may have skipped some years in the 1980s as the rules kept changing.
I probably used IRAs quite a bit as the federal employees 401k (TSP) was extremely limited in 1980s and 1990s with, if I remember, a 5% max contribution, no matching, and for a period of time where you could only invest in the G (govt bond) fund. So IRAs were my main avenue for retirement savings, outside of the generous govt pension system. My form 8606s (to keep track of after tax contributions) date back to the early 1990s.

Once the Roths were available (1997?), all new contributions go to Roths.

 

[GrayHare]

Wife and I had Roths and traditional IRA's when we started working, but it's my understanding that after making a combined income of over 185k'ish a year, you can no longer contribute to these? We've always maxed out our 401k's and IRA's, but we crossed that 185k threshold in our early 30's and haven't contributed to an IRA since. All that we save/invest after maxing out our 401k's goes into a taxable portfolio, which is about 50k a year.

I'm glad this thread came up. Am I going about this the right way? Am I missing any opportunities to contribute more pre-tax dollars after the $18,500 max per 401k?

Yes, it sounds like you are missing an opportunity. Everyone with earned income, regardless of how high the income is, can contribute to a traditional IRA. When income is high the contribution is not tax deductible, but it still gets into the tIRA where it can be converted to Roth IRA (the so-called backdoor Roth), and if you have no pre-tax tIRA money titled in your name that conversion to Roth happens with $0 tax. Subsequent growth inside the Roth happens free from tax when you withdraw it during retirement.

If you are saving anyhow into ordinary non-retirement accounts, the growth of which will be subject to tax, you might as well make some of that money grow tax-free via the backdoor Roth.

An example with approximate specifics. If starting in your 20s you save into an ordinary account $5000 per year for 10 years, that totals $50k. After 30 years of growth at 7.2% annually that $50k becomes $400k, $350k of which is subject to tax. At a 20% retirement tax rate you'll be left with $330k to spend. But had you done the backdoor Roth you'd pay no tax during your 20s nor upon retirement withdrawal, and thus have the full $400k tax free, an extra $70k "free" (actually it did require a little extra IRA paperwork during your 20s).

 

[RE2Boys]

At one time, if your income was above a certain threshold ($100K?), you could not do Roth conversions, hence, no backdoor Roth. But this restriction was removed somewhere around 2010.