Questions about limits surrounding ROTH IRA, SEP IRA and ROTH 401k

[RockSplat]

I have a couple of questions for you experts. I am married filing jointly and contributing to ROTH IRA for myself and my wife at $5K each. I am also contributing about $10K to my 401(k). I am contributing about $5K to my SEP IRA.

I just want to make sure I am not going over limits anywhere. Can someone help me with my questions below?

Q: Does 401(k) limit the amount you can contribute to ROTH IRA? (Also in regards to phase out range -- combined income is around $160,000)

Q: Does Roth 401(k) limit the amount you can contribute to SEP IRA or ROTH IRA? (Also in regards to phase out)

My employer is starting to offer ROTH 401K so should I move to it or will it mess up my limits with ROTH IRA or SEP IRA?

Thanks!!

 

[Martha]

The 401k is fine and no problem if you want to make all or part a Roth 401k. The 401k does not limit your Roth IRA, but your income will. For 2009, those who are married filing jointly each can contribute $5,000 ($6,000 if 50 or older) to a Roth IRA if their modified adjusted gross income (MAGI) is below $166,000. If their MAGI is between $166,000 and $176,000, then they can contribute some amount less than their full limit. If their income exceeds $176,000, they are not eligible to contribute to a Roth IRA for 2009. http://www.irs.gov/publications/p590/ch02.html#en_US_publink10006480

The SEP IRA requires self employment income. The "employer" elective deferals part of the SEP contribution is not effected by the ROTH contribution. However, you can make "regular" IRA contributions to a SEP, if you do that those contributions will have to be aggregated with the ROTH contributions so you don't go over the $5000 limit ($6,000 if over 50).

For details see:

Publication 590 (2008), Individual Retirement Arrangements (IRAs)

You also might want to read publication 575. http://www.irs.gov/publications/p575/

See my signature.

 

[RockSplat]

I work full time ($95K) and have a side business ($45-50K). I contribute to my employers match in my 401(K) and then plan to invest $5K in my ROTH IRA and $5K in my wife's ROTH IRA.

I also plan to invest at least $5K in my SEP IRA that I have set up for my self employment income.

My modified adjusted gross income is about $165,000 (including my wife -- married filing jointly).

Hopefully I am not violating anything even if I consider ROTH 401(K) at these dollar amounts. Thanks.

 

[LOL!]

Why would you even want to contribute to a Roth 401k? You will end up paying more in taxes than you need to. Please read: Bogleheads :: View topic - Traditional 401k vs Roth IRA

So contribute $16,500 to your 401k, $5000 each to your Roths, then also make the maximum employer contribution to your SEP-IRA (you won't be able to make employee contribution).

Forget about the Roth 401k.

 

[RockSplat]

Thank you for the information. I was thinking my priority should be as follows but I could be wrong and I am open to suggestions (thanks in advance!):

1) Match 401(k) up to point of employer match ~ $9K a year
2) Invest $5000 in ROTH for myself and my wife
3) Put remaining retirement allocation in my SEP IRA.

Should I put more emphasis on tax deferred accounts such as SEP and 401(k) rather than ROTH IRA? I believe I can put 25% of my self employment income into the SEP account which would be about $11,000.

Our income estimated is as follows (~$165K - 28% tax bracket, married filing jointly):
Full time / employee: $95K
Wife's income: $23K
Self employee income: $45-$50K

 

[LOL!]

Do you do your own taxes?

 

[RockSplat]

Yes but I meet with a tax adviser when I have questions like this. Thought I'd try this forum first.

 

[LOL!]

In order to decide whether to use a traditional 401k now or a Roth 401k, you need to know about taxes. Specifically, you need to know how withdrawals from a traditional 401k will be taxed in your retirement. See the links in my previous post and the links in those links which have many tax tips.

It looks like contributions to a Roth 401k would be taxed at 28% to 33% for you. I can tell you that my withdrawals of my 401k will be taxed at 0% to 15%. The same may go for you or it may not. You have to figure it out, but from what you've stated here, your tax rate in retirement will likely be less than 15%.

 

[RockSplat]

Thanks for the information.

I like the idea of delaying my payment to Uncle Sam. I am sold on the tax deferred route.

My side business is an LLC. I will have an income in this LLC of $42-47K. Considering this I will need to figure my max contribution. I believe this would be 25% ($10,500-11,750).

I live a simple life now with not much expenses and I am sure I will live on less in the future so I would imagine my tax rate would be lower. By the way I am 33 years old. I would like to retire by 50 or somewhere around that age.

It sounds like my priorities should be as follows:

1) Max out 401(k) or at least 15%.
2) Max out SEP IRA.
3) Put remainder of retirement savings into ROTH IRA.

Thanks.

 

[LOL!]

And
4) Invest in a taxable account
as well. Without a pension, you are probably gonna need to save/invest half your income each year in order to be able to retire around 50.

 

[target2019]

Max your SEP-IRA. You can go 20% of your profit from self-employment. It will lower your income and self-employment taxes a great deal.

You do need to look at your entire tax situation, and play some what-if. That is the advantage of having your own tax software.

I max my 401(k) and SEP-IRA. Then I go Roth.

 

[Finance Dave]

Why would you even want to contribute to a Roth 401k? You will end up paying more in taxes than you need to. Please read: Bogleheads :: View topic - Traditional 401k vs Roth IRA

So contribute $16,500 to your 401k, $5000 each to your Roths, then also make the maximum employer contribution to your SEP-IRA (you won't be able to make employee contribution).

Forget about the Roth 401k.

For some people who have made modest incomes and either saved long and hard or had an inheritence, their taxes may be higher in retirement than while working...thus the Roth may be a better choice.

 

[LOL!]

For some people who have made modest incomes and either saved long and hard or had an inheritence, their taxes may be higher in retirement than while working...thus the Roth may be a better choice.

Please explain further with examples and details. I can see how to have those situations and still have lower taxes if one does tax efficient investing.

 

[eridanus]

My side business is an LLC. I will have an income in this LLC of $42-47K. Considering this I will need to figure my max contribution. I believe this would be 25% ($10,500-11,750).

Is your LLC a pass-through or a corporation? You can contribute 25% if it's the latter. Otherwise, 20% is the maximum.

 

[bank5]

It sounds like my priorities should be as follows:

1) Max out 401(k) or at least 15%.
2) Max out SEP IRA.
3) Put remainder of retirement savings into ROTH IRA.

Thanks.

I make a bit less but am in a similar situation. I'm going to wait to until the end of the year to max out my SEP IRA. That way I'll know exactly what my net SE income is.

Also, as Martha pointed out -- you're AGI is right around the limit for contributing to a Roth IRA.
Maybe it would be a good idea to wait until the end of the year because if you make over $176k you won't be able to contribute to your Roth IRA.