Getting outside the 401k comfort zone - advice needed

[AboutThere]

My wife and I are maxing out our 401k/403b contributions at work and have some funds available to invest outside of those. Currently only a small percentage of our 401/403 (15%) is in a Roth 401k.

So, can we each open a Roth IRA and contribute to that? I am a bit confused as to whether the Roth maximums include my current Roth 401k or whether I can contribute the annual max to a Roth IRA.

We are both in our 50s to I assume we each can contribute 7,000 to a Roth, is that right?

Finally, as someone who was never educated on this stuff, I enter into expanding beyond employer-handled stuff with some trepidation - when I start these Roth IRAs, which company might be best for someone who really has a lot of basic questions?

 

[Vacation4us]

If you both contribute to your 401k/403b and you modified AGI falls below the max ( something like 197,000k, I haven't checked in awhile) then you both can contribute to the max Roth IRA.

If your contributing to a Roth 401k and want to contribute to a Roth IRA I don't believe that's allowed. You would have to check with an expert on that.

When I was single I maxed out the 401k which lowered my income enough to make me eligible to contribute the max to my Roth IRA, now that I am married I am no longer able to contribute due to the income limits.

You can open a ROth at any institution Ameritrade, vanguard, Fidelity, even your bank has an option.

 

[gwraigty]

If your contributing to a Roth 401k and want to contribute to a Roth IRA I don't believe that's allowed. You would have to check with an expert on that.

Why do you think that? It is allowed. My husband contributes to a Roth 401k and we both contribute the max allowed to our Roth IRAs.

ETA: For an expert, see the IRS FAQ:

https://www.irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts#7

Can I contribute the maximum, including catch-up contributions, to both a designated Roth account and a Roth IRA in the same year?
Yes. if you are age 50 or older, you can make a contribution of up to $24,500 to your 401(k), 403(b) or governmental 457(b) plan ($18,500 regular and $6,000 catch-up contributions) and $6,500 to a Roth IRA ($5,500 regular and $1,000 catch-up IRA contributions) for a total of $31,000 for 2018. Income limits apply to Roth IRA contributions, however.

For 2019, if you are age 50 or older, you can make a contribution of up to $25,000 to your 401(k), 403(b) or governmental 457(b) plan ($19,000 regular and $6,000 catch-up contributions) and $7,000 to a Roth IRA ($6,000 regular and $1,000 catch-up IRA contributions) for a total of $32,000. Income limits apply to Roth IRA contributions, however.

 

[dadu007]

Yes, it is allowed.
You can max out your 401k to the limit, made up of any combo of before-tax (regular 401k) and Roth 401k contributions, but not to exceed the limit for your age.
While doing this you can still contribute to your Roth IRA (your income and age determine how much).

 

[bada bing]

Even if you exceed the mAGI limits for a direct Roth contribution ($193K MFJ - $122K single in 2019) you can still do a simple and legal backdoor Roth.

You should spend a little time researching IRA rules and limits. They aren't that daunting but require a little time. You should also run a simple simulation for your expected tax rates now and in retirement. For most people, traditional pre-tax contributions are most appropriate unless income limits make (backdoor) Roth the only choice.

 

[pjigar]

It is best to NOT contribute into Roth 401K but rather use Roth IRA, backdoor Roth IRA or mega backdoor Roth to fill the Roth bucket. Use the traditional 401K to maximize pre-tax contribution limit. This advise is applicable only if you want to save into Roth bucket beyond 401k pre-tax limit which seem to be the case here.

Note: mega backdoor Roth = post-tax contribution to your 401k account

 

[AboutThere]

thanks all

With regard to backdoor Roth IRA - I expect to go part time in 3 years, is it better to wait until then to do a backdoor Roth (I'm assuming that's a taxable event, and I'll be in a lower bracket then)?

I am (just) under the mAGI limit

 

[pjigar]

Backdoor IRA can be done anytime without taxable event. Follow these steps:
1. Just transfer all your assets from traditional/rollover IRAs into your 401K. i.e. IRA balance should be zero.
2. Make a "non-deductible" contribution to a traditional IRA.
3. Transfer the balance of traditional IRA to Roth IRA.

Repeat 2 and 3 every taxable year and maintain zero balance in traditional IRA most of the time.

 

[AboutThere]

^ Ah, okay it's after-tax dollars that are being used.

It can sound like a magic no-tax situation to the uninitiated

 

[pjigar]

Roth is ALWAYS after tax contribution.

 

[gwraigty]

It is best to NOT contribute into Roth 401K but rather use Roth IRA, backdoor Roth IRA or mega backdoor Roth to fill the Roth bucket. Use the traditional 401K to maximize pre-tax contribution limit. This advise is applicable only if you want to save into Roth bucket beyond 401k pre-tax limit which seem to be the case here.

Note: mega backdoor Roth = post-tax contribution to your 401k account

It depends on your tax situation. That advice would be terrible for people who expect to be in a higher tax bracket when RMDs hit and/or a spouse is no longer with them.

 

[pjigar]

It depends on your tax situation. That advice would be terrible for people who expect to be in a higher tax bracket when RMDs hit and/or a spouse is no longer with them.

Correct. But OP wants to contribute to Roth.

 

[gwraigty]

It is best to NOT contribute into Roth 401K but rather use Roth IRA, backdoor Roth IRA or mega backdoor Roth to fill the Roth bucket. Use the traditional 401K to maximize pre-tax contribution limit. This advise is applicable only if you want to save into Roth bucket beyond 401k pre-tax limit which seem to be the case here.

Note: mega backdoor Roth = post-tax contribution to your 401k account

It depends on your tax situation. That advice would be terrible for people who expect to be in a higher tax bracket when RMDs hit and/or a spouse is no longer with them.

Correct. But OP wants to contribute to Roth.

I know that. I thought you were advising against contributing to a Roth 401k under any circumstance. Apologies if I misinterpreted your intent.

 

[pjigar]

I know that. I thought you were advising against contributing to a Roth 401k under any circumstance. Apologies if I misinterpreted your intent.

My point is, if you want to contribute to Roth bucket then you better off using backdoor Roth rather than Roth 401k. Because Roth 401k shares the contribution limit with traditional 401k. Better to use 401k contribution limit to do pretax contributions to the traditional 401k.

 

[Spock]

After the dust settles, roll any Roth 401k into a Roth IRA.
Roth 401Ks are subject to RMDs but Roth IRA's are not.

 

[Perryinva]

My point is, if you want to contribute to Roth bucket then you better off using backdoor Roth rather than Roth 401k. Because Roth 401k shares the contribution limit with traditional 401k. Better to use 401k contribution limit to do pretax contributions to the traditional 401k.

Not necessarily. You are assuming that everyone wants to maximize pre tax contributions. That is totally dependent on where their tax brackets are now vs in retirement. It makes zero sense to max pre tax if taxable income in retirement is more or even the same as while working. If the OP has substantial pretax investments now, they may be setting themselves up for paying at a higher tax rate when withdrawn after 70 than if they went after tax today. I found myself in that exact situation, and until Roth conversions became legal, I was regretting not following my future incomes more closely, tax wise. I had not counted on my pension and SS being as large as it turned out to be, nor married to someone also with a pension & decent SS. I switched to 100% after tax 401k for years before retirement and did a simple transfer to a Roth IRA each year in addition to my Roth contribution.

This year though, I found I had to go back to pretax 401k in order to get my taxable income back in to the 22% bracket.

 

[gwraigty]

After the dust settles, roll any Roth 401k into a Roth IRA.
Roth 401Ks are subject to RMDs but Roth IRA's are not.

+1

 

[PhrugalPhan]

Not necessarily. You are assuming that everyone wants to maximize pre tax contributions. That is totally dependent on where their tax brackets are now vs in retirement. It makes zero sense to max pre tax if taxable income in retirement is more or even the same as while working. If the OP has substantial pretax investments now, they may be setting themselves up for paying at a higher tax rate when withdrawn after 70 than if they went after tax today. I found myself in that exact situation, and until Roth conversions became legal, I was regretting not following my future incomes more closely, tax wise. I had not counted on my pension and SS being as large as it turned out to be, nor married to someone also with a pension & decent SS. I switched to 100% after tax 401k for years before retirement and did a simple transfer to a Roth IRA each year in addition to my Roth contribution.

This year though, I found I had to go back to pretax 401k in order to get my taxable income back in to the 22% bracket.

Your situation sounds identical to mine. This week I estimated my future RMD of pre-tax funds from my 457 plan as well as what I expect from SSI & pension and found I am already at the point it will push me to a higher tax bracket than today. However if I do 100% Roth for 457 contributions I will start to go above the 22% bracket today. Looks like with my good pension I won't be able to convert enough until 70 to Roth to avoid a higher tax rate with RMDs. And now I have a GF who is retired with a good pension too and a very high TSP balance - but all pre-tax.

I may not be able to get ahead of the tax problem, at least I can minimize the damage.

 

[Perryinva]

Exactly as described. I also can only minimize the tax “damage”, by converting as much tIRA funds to Roth while I delay filing SS and stay in the now 22% bracket. Because of severance incentives I can’t start conversions until 2021, and through 2025 while the rates are still lower, and it will not be possible to convert all pretax tIRA funds by then. I wish I had paid more attention to tax information, when I was younger, like RMDs and LTCGs advantages, instead of assuming the standard advice of delay paying now because of the lower tax rate when retired. I didn’t even learn about RMDs until I was already 50. By 2025 I will be 67, and will see where I stand. I cannot complain, its not a bad problem to have. It just could have been managed better.