A quick question on personal IRA and 401 contribution limits

[seraphim]

I'm helping my 25 year old son get started in investing. I didn't use a personal IRA, only 457 tax deferred contributions, so I don't know if a contribution into a personal IRA or 401 account affects how much one can legally contribute into the other?

I want to get it straight before I talk to him about opening tax deferred or or taxable investment accounts. He hasn't a 401k option yet, but that may change shortly

 

[Ronstar]

AFAIK, the 401k contribution limit is not affected by the Ira contribution and vice versa. I believe I had years where I maxed out both, but it was a long time ago.

 

[aim-high]

I'm helping my 25 year old son get started in investing. I didn't use a personal IRA, only 457 tax deferred contributions, so I don't know if a contribution into a personal IRA or 401 account affects how much one can legally contribute into the other?

I want to get it straight before I talk to him about opening tax deferred or or taxable investment accounts. He hasn't a 401k option yet, but that may change shortly

It may affect the tax deductibility of the contribution to the IRA.

If you contribute to your 401(k) account, you may still contribute to a Roth IRA and/or a Traditional IRA; however, your participation in the 401(k) plan may affect your ability to take a tax deduction for any Traditional IRA contributions. It will not affect the amount you are able to contribute. (To learn more, see Are You an Active Participant? and Traditional IRA Deductibility Limits.)

Your 401(k) contribution has no effect on your Roth IRA contributions. You only need to ensure you meet the eligibility requirements for funding a Roth IRA. (For more on this, see Roth IRA: Back To Basics.)

Can I contribute to both a 401(k) and an IRA?

 

[RetireAge50]

You can contribute the max to both. In lower tax brackets a good order might be 401k up to match, then Roth to max, then 401k to max.

 

[Animorph]

You can contribute the max to both. In lower tax brackets a good order might be 401k up to match, then Roth to max, then 401k to max.

+1. That's what I'd do. Roth IRA, not traditional IRA.

 

[pb4uski]

+1. That's what I'd do. Roth IRA, not traditional IRA.

+2 if in 15% bracket or lower.

 

[Sue J]

Check out the Savers Credit which is a TAX CREDIT, not a tax deduction. It's for lower income taxpayers (under $29,500 single/$59,000 MFJ) who contribute to a Traditional or ROTH IRA. The lower the AGI, the higher the tax credit %, between 50% to 10% of the IRA contribution.

Find IRS form 8880.

My son opened a ROTH with $1000 and got a Savers Credit that eliminated his income tax. He still paid plenty in Self Employment taxes but the ROTH IRA was a great idea for him this year.

 

[seraphim]

Thanks all. He has $10k to invest, and I'm steering him towards VTSAX. He's looking for a full time position - a couple of possibilities - so I was wondering if he should stash $5k in tax deferred IRA, or put it all in a taxable account. I don't know that he'll have a 401k. He just spent two years as an actor after college, and decided he'd rather have a conventional job and actually make enough money to live on with some to invest lol.

Appreciate the thoughts

How many companies actually match dollar for dollar any more?

 

[Alan]

+2 if in 15% bracket or lower.

+3

This is exactly what my son does. He contributes 6% to his 401k and gets the full 6% matched by his employer, then contributes some to his ROTH each year. (He is in the 15% marginal tax bracket)

 

[someguy]

How many companies actually match dollar for dollar any more?

Quite a few have at least a fractional match (e.g., matching 50c per dollar). And of course even a "small" 25% match is a guaranteed 25% rate of return that can't be touched with any other investment.

I wish I had done more Roth IRA back when I could.

 

[Animorph]

Thanks all. He has $10k to invest, and I'm steering him towards VTSAX. He's looking for a full time position - a couple of possibilities - so I was wondering if he should stash $5k in tax deferred IRA, or put it all in a taxable account. I don't know that he'll have a 401k. He just spent two years as an actor after college, and decided he'd rather have a conventional job and actually make enough money to live on with some to invest lol.

Appreciate the thoughts

How many companies actually match dollar for dollar any more?

Many company matches are being restored now. My DS just got a tech job that has one.

The Roth IRA will beat a taxable account nearly all the time. The only reason I wouldn't use the Roth would be if I was saving for a short-term goal. Roth contributions can be removed any time, so they make a decent emergency fund if you really don't expect to use it. If he has a partial working year with a really low income this year, the Roth is likely to be a great move.

If he gets a job with a retirement plan, a contribution to a traditional IRA will only be deductible if he makes less than $60k (single):

IRA Deduction Limits
(click the link on this page for 2014 limits)

Keep in mind he could adjust his 401k contribution percentage to contribute the entire $10k to a 401k, living off the current $10k until the 401k contributions are complete. However that can mess up the employer contributions if he doesn't contribute enough each pay period.


401k limit is $17.5k
Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits

IRA contribution limit is $5.5k + $1k if over 50.
Retirement Topics - IRA Contribution Limits

The 401k has some legal benefits and sometimes a retire after 55 and withdraw without penalty benefit. The only real drawback off the top of my head is that the investment choices could be limited to expensive funds you might not like.